Valuations are the No. 1 problem facing the reverse mortgage lending community, much in the same way they are impacting the forward mortgage business, the head of the nation's largest mortgage cooperative warned.
Scott Stern, the chief executive of Lenders One, noted that underwriting a reverse mortgage loan is 100% dependent upon the borrower's equity, unlike the forward loan which could also be impacted by borrower's credit, among other items.
“Until the appraisal comes back, you don't know if there is any deal. If there is any deal, you don't know how much equity the borrower might have and how much money could be lent in the transaction.
“When the appraisal comes back, many deals die because of a lack of equity,” Stern explained.
The valuation issue is actually keeping people from applying for these loans, he said. The typical reverse mortgage applicant, plus his family members, financial planners, accountants and/or other advisors are very cautious. “Nobody wants to get into a transaction that may not close or where they think they are spending money where there may not be a positive result,” Stern continued.
They are not even willing to spend the money for an appraisal to see if there is enough equity. Then again, many reverse mortgage borrowers are tight on money to begin with and can't afford to spend the fees necessary to get a loan only to see the deal blow up because of a lack of equity.
Stefan Lamanna, the chief appraiser at Global DMS, said stories about valuations coming in low are being heard in all sectors of the mortgage business. Values have declined and that is affecting all loans.
But these kind of complaints have been heard even when the market was doing well, Lamanna said. “Are we hearing about them more because of the decline in values? One hundred percent.”
There is no middle ground on this issue. Appraisers do not make the market, they just report on what is happening in the market. He said, “If the appraisal is done properly, the value is the value.” The estimate has to be in a reasonable range for the area.
But the problem is that lenders are looking for numbers well outside of that range and that is where the conflict with appraisers begins. It is almost never that the deal died because of a $5,000 difference.
Lamanna said the appraisal issues have not affected the reverse mortgage business any differently than they have the forward business. The Federal Housing Administration insures almost all reverse mortgages made today and appraisals have to comply with agency standards.
“There really is no variance between a reverse mortgage appraisal and a forward mortgage appraisal. There is variance in the theory of appraising, there is no variance in how you view the property,” he said.
With lower home values and the resulting loss in equity, banks are now looking at reverse mortgage borrowers who are using the loan to refinance out of a traditional first mortgage as not having enough equity left to pay off that loan.
While he does not have figures to quantify, anecdotally, Stern said reverse mortgage activity among Lenders One members is as light as he has seen in a couple of years.
But there are other issues besides appraisals that have hurt the reverse mortgage business. Second, said Stern, is that the heavy refinance activity in the forward market is tying up reverse mortgage origination capacity as an issue impacting volume.
Third, is the withdrawal from the market by some of the largest buyers of these loans, which is related to the fourth issue, the concern in the marketplace over the borrower's abilities to pay taxes and insurance payments so the loan doesn't go into default.
But, there is a caveat to the secondary market issue, Stern added, for whatever loans are being made, there are buyers for them.
The need for reverse mortgages still exists. “I still think the reverse mortgage market's best days are ahead of it,” he declared.
