A couple of weeks back I attended the Western Reginal Meeting for the National Reverse Mortgage Lenders Association (NRMLA) in California.
One of the topics at this meeting was an update of the Collateral Risk Assessment program that FHA instituted last October. In case you don’t recall me discussing this, you can read it here on my blog, but in case you’re short on time, here is a brief overview.
Last September, HUD issued Mortgagee Letter (ML 2018-06), stating the following:
“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.”
What this means is that all Home Equity Conversion Mortgages (HECM) will have the appraisal reviewed by FHA. They have a computer system called an Automated Valuation Model (AVM), that reviews the appraisal. This is similar to what Zillow and other on-line valuation web-sites use. If the actual appraisal falls outside of certain data points (we don’t know what these are), FHA will require a second appraisal.
NRMLA has been collecting data on the number, styles of homes and areas that have required a second appraisal and presented this information at the conference.
Second Appraisal Values Compared to Frist Appraisal
Over the last five months (October 2017 – February 2018), they reviewed 5,700 loans. Of these loans, 1460 (25.6%), required a 2nd appraisal. Of all the second appraisals, 39% came in at a higher value than the first appraisal, 56% came in lower, and 5% came in at the same value.
22% of the 2nd appraisals came in lower than the first by more than 10%. This is disturbing because 10% is a big variance from one appraisal to the next. Of the appraisals that came back higher than the first, 10% were more than 10% higher. In my mind, these differences in values show just how subjective appraisals can be. Appraisals are simply educated opinions of value. Is the lower value actually better? FHA seems to think so. On average, the second appraisals were 2.6% lower than the first appraisal.
- 92% of the 5,700 files reviewed were single family residences.
- 1.4% were 2-4 unit property types and of that number, 83% required a second appraisal.
- 2.3% were mobile homes with 58% of these requiring a second appraisal.
- Almost 2/3 of the files reviewed were in suburban locations.
- 14% were rural locations, and of these, 45% required a second appraisal.
- NOTE – 11.7% of the loan did not identify property type.
Loan Purpose/Product Type
- 86% of the files were traditional HECM reverse mortgages with 25% of these requiring a second appraisal.
- About 2.5% of the loans were used to purchase a home (called the HECM for Purchase), 36% of these files required a second appraisal.
Kentucky (55%), Kansas, (55%) and Louisiana (44%) were the states with the highest percentage of second appraisals required. The reason is probably because they have a more rural population and my guess is that they probably have more manufactured housing in these states as well.
Unfortunately, the speakers did not provide a list of all the states and I did not have a chance to talk with them after the session, so I didn’t get a good picture of where Colorado stands on the percentage of second appraisals required. I do keep my own numbers, which are limited, but currently, through March, 21% of the loans I’ve originated have required a second appraisal with exactly half coming in lower and half higher. The largest variance I’ve seen for my loans has been $10,000.
The way I approach the whole issue of the second appraisal with my customers is to let them know up front, either before the application or at the application, they have about a one-in-four chance of being required to have a second appraisal on their home. If one is required, it can add about a week to the processing time and they will not be charged for the appraisal. Overall, this is not usually a big deal. It can be a big deal though for someone who needs as much money as possible to pay off an existing mortgage. If the first appraisal comes in at the needed value but the second appraisal comes in much lower, it could mean the difference of getting the reverse mortgage or not. Luckily, that hasn’t happened to any of my customers. I’ll keep you updated to any changes to this policy as FHA is supposed to review it after it’s been in place for nine months.