HUD announced today that reverse mortgage lenders could not close loans to be insured under the HECM program unless they have the appraisal submitted and approved by FHA in advance. Note that this does not say until HUD does something, it says that the loans cannot be closed unless HUD does something on the loan before the loan is approved or closed. This was a huge announcement. For the first time, HUD is stepping into the origination process of the loans and requiring lenders to submit a loan or a portion of the loan to them for approval before the loan can be approved or closed.
HUD has always stated that they are not part of the lending process, that they insure the loans that lenders close, but this puts them squarely in the middle of the process and the decision to lend. HUD states these actions are pursuant to the authority granted in the Reverse Mortgage Stabilization Act of 2013 in the Requirement to Validate Collateral. They go on to state that changes made to the program in 2017 did not mitigate the projected losses to the mortgage insurance fund sufficiently and that these new procedures are needed to further mitigate anticipated losses and protect the financial soundness of the program.
Possibility of a Second Appraisal
HUD announced in their Mortgagee Letter 2018-06 that HUD through FHA will now do a collateral assessment on all appraisals submitted for use in originations of HECM loans starting with all case numbers assigned on October 1, 2018. If FHA feels that the appraisal is not adequate or the value is over-stated, they will require that the lender obtain a second appraisal from a different appraiser working for a different company – prior to approving the loan. HUD specifically states that the HECM lender may not approve or close the loan before FHA does their assessment on the appraisal and has obtained the second appraisal if one is required. If the second appraised value is lower, the lower value must be used.
We applaud HUD for being proactive to be sure that the reverse mortgage program is available to seniors for years to come but question the methodology of this new change. This new procedure requires lenders to log the appraisal into the FHA Electronic Appraisal Delivery (EAD) portal just as we do now, but then we must also send an email to a second HUD address to inform them that the appraisal is complete and ready for assessment.
Each appraisal notification must be sent under separate email. No one wants to be skeptical without giving HUD a chance to perform, but one has to wonder what it will be like when they start receiving thousands of appraisal requests and how lenders will follow up if the answers do not appear on the FHA Resource Center site in a timely manner? HUD feels that there will be a fully automated process by December 1, 2018 which should eliminate the propensity for all the manual input as well as the possibility for lost or overlooked requests at FHA and that would most certainly help.
What do borrowers need to know regarding this change? That the timeframe will almost certainly be affected, especially if your appraisal is one of the ones that FHA identifies as needing a second appraisal. Even if your value is not contested, it will cause some delay in the processing for all HECM loans. Your lender will have even less ability to contest a value that borrowers feel was understated, again especially if the FHA revue comes back as requiring a second appraisal.
The HUD Mortgagee Letter has no mention of a rebuttal process if you do not agree with the value. All lenders have been severely limited on the degree to which they could become involved in the valuation process since the Appraiser Independence Laws were passed almost 10 years ago now, but this will most certainly take all but the correction of the most egregious mistakes away from the lender/borrower to complete. We are not faulting HUD for ensuring the future of the program and that the financial status of the Mutual Mortgage Insurance Fund remains stable, we just want borrowers to know and understand the ramifications of these changes and what they mean to lenders and borrowers alike.
Alert from NRMLA:
As part of its ongoing efforts to reduce risks to the Mutual Mortgage Insurance Fund (MMIF) and protect the health of the Home Equity Conversion Mortgage program, the Federal Housing Administration announced today that it will require lenders to provide a second property appraisal in cases where FHA determines there may be inflated property valuations.
Mortgagee Letter (ML) 2018-06, Home Equity Conversion Mortgage (HECM) Program — Changes to Appraisal Submission and Assessment for All HECM Originations specifies that FHA will perform risk assessments of all appraisals for case numbers assigned on or after October 1, 2018.
Basedon the outcome of that assessment, FHA may require a second appraisal be obtained prior to approving the reverse mortgage for insurance endorsement. Under the new policy, mortgagees must not approve or close a HECM before FHA has performed the collateral risk assessment and, if required, a second appraisal is obtained.
If FHA communicates that a second appraisal is required, the mortgagee must use the lower of the two appraisal values to underwrite the loan. The cost of the second appraisal, if required, is then eligible to be financed as part of the HECM closing costs.
This policy becomes effective for all HECM originations with FHA case numbers assigned on or after October 1, 2018, through September 30, 2019. FHA will renew the requirements beyond Fiscal Year 2019 pending an evaluation of these program changes at 6 and 9 months to determine if the goals of the guidance have been met.
ML 2018-06 also describes the interim procedures that will be in place beginning October 1, until the fully automated protocols become operational on or before December 1, 2018. If the automated protocols are in place prior to December 1, FHA will communicate this updated information to its stakeholders through its standard communications channels.
“This is a step that has become necessary due to HUD’s analysis of appraisals on properties subject to a HECM,” said Peter Bell, President and CEO, National Reverse Mortgage Lenders Association. “It is a logical step to address the concerns they’ve identified. We appreciate that they’ve chosen to implement this, while avoiding any decrease in Principal Limit Factors or increase in Mortgage Insurance Premiums.”
Latest Update from HUD:
HECM Second Appraisal Protocols Become Automated Effective November 30
Today, the Federal Housing Administration announced in FHA Info #18-47 that effective tomorrow, Friday, November 30, 2018, the protocols that had been in place on an interim basis for the HECM second appraisal requirement will become fully automated.
FHA published FHA Info #18-47 as a reminder for appraisal logging guidance, along with the effective date for the automation of the HECM second appraisal protocols. For additional information, refer to the Fully-Automated Protocols outlined on page five of Mortgagee Letter 18-06.
- All appraisals logged in FHA Connection (FHAC) through today, Thursday, November 29, 2018, will continue to be processed using the Interim Protocols as described in Mortgagee Letter 18-06. The Interim Protocols must be followed on these cases throughout the entire process.
- Initial appraisals logged in FHAC for the first time, beginning tomorrow, Friday, November 30 and thereafter, will be processed under the Fully-Automated Protocols as described in Mortgagee Letter 18-06. The new protocol is effective even if the initial appraisal was uploaded into the Electronic Appraisal Delivery (EAD) system prior to Friday, November 30, but not logged in FHAC until November 30, or thereafter.
- For appraisals processed under the Fully-Automated Protocols (initial appraisal logged in FHAC November 30, 2018, and thereafter), once the appraisal logging is completed, a lender will immediately receive one of the following messages on the FHAC Logging Screen
- A: SECOND APPRAISAL IS NOT REQUIRED
- B: PROPERTY SUBJECT TO HECM APPRAISAL RULE SECOND APPRAISAL REQUIRED (see Fully-Automated Protocols in Mortgagee Letter 18-06)
Depending on the message received, the lender should proceed accordingly. No further action is required if message A is received. However, if message B is received, the lender must obtain and upload a second appraisal into the Appraisal Slot 2 position.
- When a second appraisal is needed under the Fully-Automated Protocols, it must always be uploaded into the EAD in Appraisal Slot 2, regardless if the new value is equal to, more than, or less than the initial appraisal. FHAC will automatically calculate the lowest value to be used for insuring.
- Under no circumstances should a second appraisal be uploaded into the EAD in Appraisal Slot 1; it must be uploaded into Appraisal Slot 2.
For questions or additional information about FHA’s new automated appraisal logging procedures for HECMs, contact the FHA Resource Center.