FHA to Require Second Appraisals For HECMs Where Valuation is Suspect

In an effort to stem further losses to its Mutual Mortgage Insurance Fund (MMIF), the Federal Housing Administration (FHA) is now requiring mortgage lenders offering Home Equity Conversion Mortgages (HECMs) to provide a second appraisal in cases where the agency determines there may be inflated property valuations.

Over the next year, the FHA will be performing risk assessments for appraisals submitted for all new HECM originations, the agency says in a release.

Based on the outcome of an assessment, the agency may require a second appraisal be obtained prior to approving the reverse mortgage for an insurance endorsement.

Under the new policy, lenders must not approve or close a HECM before FHA has performed the collateral risk assessment and, if required, a second appraisal is obtained.

Further, where a second appraisal is required, lenders must use the lower value of the two appraisals.

In a 2017 evaluation, the U.S. Department of Housing and Urban Development (HUD) found higher-than-expected losses in the HECM program could be attributed in part to “optimistic estimates of collateral value driven by exaggerated property appraisals when the loan was originated.”

The FHA is addressing the accuracy of appraised property values due to continuing volatility in the HECM program.

Last year, FHA’s Annual Report to Congress found the agency’s reverse mortgage portfolio had a negative capital ratio of 19.84% and a negative net worth of $14.5 billion.

To begin to address the financial solvency of the program, FHA instituted several reforms to the HECM program to improve its financial health and to ensure reverse mortgages remain a resource to allow senior borrowers to remain in their homes and age in place.

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