Appraisal Changes could hurt Reverse Mortgages

Admin     12/7/09 8:06pm

reverse mortgage update 2009

The rules are changing. Soon the days of borrowers going to a lender or a broker and the local lender or the broker ordering the appraisal from the appraiser of their choice will be gone. HUD is now going to require that lenders require brokers to follow a similar procedure as the conventional investors (FNMA, FHLMC) do under the HVCC provisions (Home Valuation Conduct Code) which basically requires that brokers and lenders' production staff go through the lenders non-production personnel and an Appraisal Management Companies (AMC) set up by the lenders to order home appraisals.

The thought behind the move is that if all staff which has an interest in (in other words is paid on) the closing of the loans is removed from the appraisal ordering process, then appraisers would be more free to give an unbiased opinion as they would not be unduly pressured to come back with a value which makes the loan work. Brokers must contact the lender who will determine the AMC and then the AMC will contact an appraiser and will order an appraisal on the borrower's property (usually chosen on a rotating basis from a list) so that the appraiser will not be influenced by the production person at the broker's or lender's office to deliver a set value.

Sounds like it might be a fair quality control measure, right? Well, that is until you actually realize what you just did to all the borrowers who rely on the services.

Firstly, the AMC's are nationwide companies who farm out the appraisals to local appraisers and the AMC might be located in New York or Indianapolis and "managing" appraisers in California. Also, the AMC keeps a good portion of the appraisal fee even though they are not doing any work on the appraisal. Appraisers are compensated at a much lower rate for their work making it difficult for experienced appraisers to be able to make a living doing quality work. Lenders and brokers historically have worked with different appraisers after years of experience in different markets and a smart originator will not associate with an appraiser whose values are constantly cut at review or who does sloppy work and constantly requires additional follow up.

Under the new guidelines, the originators now get whoever is assigned by the AMC and if the work is poor and things are missed, it is like pulling teeth to get the appraiser to address the deficiencies, let alone get a timely response. Because the AMC's typically pull names from a rotation, we have ended up with appraisers who are not familiar with the markets in which the properties are located, pulling comparable sales from completely incompatible areas solely because they looked good on the map.

Now that reverse mortgages are going to have to follow the same procedures, senior borrowers will be adversely affected even more. In a recent conference call we attended, the payment method was not certain with regard to how the AMC's will accept payment. Brokers and lenders will not want to front appraisals in any but the most obvious cases (i.e. where the home is free and clear and the borrowers intend to proceed with the transaction regardless at what value the property comes in). Our experience with the AMC's and the appraisers on the loans where they have been required prior to now leads us to believe that the appraisers working for the AMC's are definitely looking to be as conservative as possible, not to work hard to bring in a solid value.

We are primarily a reverse mortgage broker and do very few forward mortgages but we have done 3 loans that required us to use AMC's. All three loans had problems with the lenders that we had to address; two of the three were obviously brought in at a low value and on one, the appraiser ignored 3 more recent and closer comparable sales which supported a higher value than he assigned.

The appraiser also ignored the fact that the borrower had a permitted addition which did not show on the appraiser's paperwork (but would obviously be apparent if the appraiser did his job and taped the home and checked county records) and simply used the inaccurate numbers and farther comps to lower the value. The Loan to Value was 76% even at his lower value so he felt he was ok with his efforts, but what he didn't know is that there was a very stiff add to the pricing (1.25% in fee) for this loan program for loan to values over 75%!

This new procedure is going to increase the amount of time it takes to complete a reverse mortgage loan. In the case of borrowers in foreclosure, that is not good news. We have saved multiple borrowers literally the day before or within just days before their property went to foreclosure auction. It took a monumental effort on the part of everyone, including the appraiser to do this. Any time we cannot discuss the appraisals, comps and issues directly with the appraisers there is a breakdown and going through the lender and then the lender's third party AMC will add considerably to the time it takes to process a reverse mortgage.

Finally, if the quality we have seen on the forward mortgages is any indication, then reverse mortgage borrowers may well be in for a rude awakening with low values, excessive timeframes and strange conditions due to poor appraisals. Like many originators, we currently keep our pricing to borrowers well below the HUD allowed maximums.

With the added delays and the fallout that is likely to occur, originators may be forced to rethink their pricing strategies and again, the borrowers lose. If HVCC meant better quality, it would be hard to argue against. So far, our experience has been only delays, no communication, poorer quality work and borrowers have been hurt in the name of "Quality Control", which has only succeeded in controlling a worse quality product at a higher price with a longer delivery time!

What do you think? Please share your comments with us below...

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3 Comment(s)
Elio from Texas
12/8/09 11:20am
All Reverse, I was just reading a report that indicated that the Reverse Mortgage volume fell by 12% in November and it is now the lowest since 2007. I'm sure that you are also troubled by this information and I was wondering if you have any insight as to where things are going. It appears that the 10% decrease in the principal limit amount coupled with the low appraisals have done the most damage. I am reading horror stories that appraisers are being hired to appraise houses that they do not have a clue as to what the subdivision or the neighborhood is worth. That is like asking a blind man to be a judge in a beauty contest. I have a pretty good idea what the houses in my subdivision are worth since I know the various builders and can see how the houses are maintained, but someone coming from a completely different part of town is really clueless. Am I correct that I as the originator of a RM must pay the fee for an appraisal prior to getting a RM? If so who is the person/organization who actually chooses an appraisal firm or the specific appraisal? If I am not able to choose the person, do I have the opportunity to scrutinize their qualifications and either accept or reject that individual? Someone like you and others must scream at the top of your lungs to stop this lunacy, or your entire industry will be kicked to the curb by the feds and congress. I would like to have some names of officials that we as prospective users of a RM could write to stop the stupidity, and be more concerned about Seniors. It appears that the AARP does not care. Have a great week.
Wolf Leonard
12/15/09 7:05am
"Someone like you and others must scream at the top of your lungs to stop this lunacy, or your entire industry will be kicked to the curb by the feds and congress." I think we're already in the street gutter. I've watched and experienced HUD's slow, methodical degradation of the Reverse Mortgage program over the past year. One minute you have a viable Reverse Mortgage scenario, wait one week, a month, and some parameter has changed to make it not doable. The RM program suffers because you can't "lock" a loan in as with conventional mortgages. It's like playing a game with the rules changing as you go. It's a shame too because it's another program that could help a lot of people, but the qualifications are becoming overly restrictive. I hate having to go back to Borrowers telling them their loan is not viable anymore because HUD has made this or that change. It's typical of what's happening in the U.S. economy and welfare programs overall.
All Reverse Mortgage
12/22/09 6:29pm
HUD is delaying Mortgagee Letter 2009-28, Appraiser Independence until February 15, 2010. Mortgagee Letter 2009-28 was originally planned for January 1, 2010. The original Mortgagee Letter has two parts: a) prohibition of mortgage brokers and commission-based lender staff from the appraisal process, and b) appraiser selection in FHA Connection. The effective date for both sections of this Mortgagee Letter will now take effect for all case number assigned on or after February 15, 2010. This extention will provide FHA and lenders additional time to adjust systems to accommodate the changes. Detailed instructions on changes to FHA Connection will be issued in a new Mortgagee Letter. In addition, HUD is delaying Mortgagee Letter 2009-51 which adopts the Appraisal Update and/or Completion Reports. The effective date will now apply to all case numbers assigned on or after February 15, 2010.

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