On Monday, the Federal Housing Administration (FHA) and FHA Commisioner Brian Montgomery hosted a conference call addressing efforts to reduce "appraisal inflation" on reverse mortgages in the Home Equity Conversion Mortgage (HECM) Program.
Recently, the FHA announced that it will begin requiring lenders originating new Home Equity Conversion Mortgages (HECMs), also known as reverse mortgages, to provide a second property appraisal under certain circumstances. According to the FHA, lenders must now provide a second independent property appraisal in cases where the Administration determines there may be inflated property valuations.
“The HECM program has been historically volatile, especially in recent years, and continues to present financial risk to the FHA and the mutual mortgage insurance fund” said Montgomery.
“The financial challenges we’re experiencing with the HECM program have been clear for some time, and we’ve been very public about them,” Montgomery continued.
The FHA notes that the financial soundness of FHA’s reverse mortgage program is contingent on an accurate determination of a property’s value and condition. The property value is used to determine the amount of equity that is available to the borrower and it is also used by FHA to determine the amount of insurance benefits paid to a mortgagee.
We know that appraisal bias, particularly inflated appraisal values on HECM properties, was more common than we initially thought,” said Montgomery.
“We are going to look at all HECM appraisals submitted, and will require a second appraisal if our review shows that there is or may be an inflated value,” Montgomery continued. “We do know that our policy changes are going to be challenging initially for some of our vendors. But the reality is that the HECM appraisal mission and assessment changes are the least impactful of other options that were on the table.”
Additionally, Montgomery cites the Department of Housing and Urban Development (HUD) paper titled “Reverse Mortgage Collateral: Undermaintenance or Overappraisal?” notes that the higher-than-expected losses in the HECM program can be attributed to optimistic estimates of collateral value driven by exaggerated property appraisals when the loan was originated.