On Friday, September 28th , the Federal Housing Administration (FHA) announced it will require a second appraisal on Home Equity Conversion Mortgages (HECM) that have been flagged by the agency as having the potential for an inflated property valuation (appraisal). Beginning on October 1st, lenders will have to submit all appraisals that have an FHA case number of October 1, 2018 or later, to undergo a “collateral risk assessment” conducted by FHA.
In a call with reporters, FHA Commissioner Brian Montgomery said that of the estimated 134,000 appraisals reviewed, approximately 50,000 (37%) were inaccurate by at least 3%.
The Mortgagee Letter from HUD states, “For all HECM’s, FHA will perform a collateral risk assessment of the appraisal submitted for use in the HECM origination. Based on the outcome of the assessment, FHA may require a second appraisal be obtained prior to approving the HECM.” The Letter continues, “Where a second appraisal is required by FHA and provides a lower value, the mortgagee must use the lower value of the two appraisals in originating the HECM.”
There is no time frame for how much time the assessment will add to the loan process, but some lenders are saying it should take an additional three days to complete the assessment. If a second appraisal is required, it could cost the borrowers $600 or more and add an additional 7-10 days for the second appraisal. FHA hopes to have the process fully automated by December 1, 2018.
The lender is required to use the lower of the two appraisals.
Last year at this time, FHA made changes to the principal limit factors and interest rate floor resulting in dramatically lower loan amounts to borrowers, but this latest change shows that FHA is not finished tweeking the HECM program.
In addition, while Montgomery said putting an appraisal review process in place was the least disruptive of the potential HECM policy changes the agency considered, he also said the agency is looking at issuing another HECM program change soon but failed to elaborate on the details.
Stay tuned for updates.