FHA will require second appraisal for some reverse mortgages

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WASHINGTON — The Federal Housing Administration will now require lenders originating certain new reverse mortgages to offer a second property appraisal in cases where property valuations may be inflated.

The agency says that the additional appraisal validation policy will reduce risks to the mutual mortgage insurance fund and protect home equity conversion mortgages, also known as reverse mortgages.

“The financial soundness of FHA’s reverse mortgage program is contingent on an accurate determination of a property’s value or condition,” the agency said in a press release.

The property value is used to decide the amount of equity that is available to the borrower, and is also used by the FHA to determine the amount of insurance benefits paid to a borrower.

FHA Commissioner Brian Montgomery told reporters in July that the agency was trying to determine the direct cause of losses to its reverse mortgage program. In the agency’s 2017 report to Congress, it was revealed that losses from the program drove the capital reserve ratio down to 2.09% from 2.35% a year earlier. The FHA is required by law to maintain a 2% capital reserve buffer to cover projected losses.

The agency is addressing the accuracy of appraised property values due to "continuing volatility" in the reverse mortgage program, it said in the release.

Starting with case numbers assigned Oct. 1 through Sept. 30, 2019, the FHA will perform a risk assessment of appraisals submitted for use in new reverse mortgage originations. Depending on the outcome of the assessment, the agency might decide to require a second appraisal before approving the reverse mortgage for an insurance endorsement.

The new policy will prohibit lenders from approving or closing a reverse mortgage until FHA has performed an initial risk assessment and, if required, a second appraisal.

“This is a step that has become necessary due to HUD's analysis of appraisals on properties subject to a HECM,” Peter Bell, president and CEO of the National Reverse Mortgage Lenders Association, said in a statement. “It is a logical step to address the concerns they've identified. We appreciate that they've chosen to implement this, while avoiding any decrease in principal limit factors or increase in mortgage insurance premiums.”

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Reverse mortgages Appraisals Minimum capital requirements Brian D. Montgomery FHA