Under the new requirement, homeowners will have to provide a second property appraisal before receiving a Home Equity Conversion Mortgage (HECM), commonly referred to as a reverse mortgage, if the FHA suspects the home’s value of being inflated. The requirement will take effect for cases assigned on or after October 1.
“The appraisal validation policy announced today will further reduce risks to FHA’s Mutual Mortgage Insurance Fund and protect the health of the HECM program,” the agency stated in a press release. “The financial soundness of FHA’s reverse mortgage program is contingent on an accurate determination of a property’s value and condition. The property value is used to determine the amount of equity that is available to the borrower and it is also used by FHA to determine the amount of insurance benefits paid to a mortgagee.”
A 2017 study of FHA’s Mutual Mortgage Insurance Fund – which provides insurance on FHA-guaranteed mortgages – found higher-than-expected loses, which the agency attributed in part to “optimistic estimates of collateral value driven by exaggerated property appraisals when the loan was originated.”
In FHA’s fiscal year 2018 annual report to Congress, the agency revealed its reverse mortgage portfolio had a negative capital ratio of 19.84 percent and a negative net worth of $14.5 billion.
FHA, as part of this reform, will perform a risk assessment of all appraisals submitted for reverse mortgage originations for FHA-guaranteed mortgages. If the agency determines a second appraisal is required, the lender must use the lower value of the two appraisals.
The changes will run through September 30, 2019, however FHA will periodically review this guidance and may renew may renew these requirements beyond fiscal year 2019.