It might be a bit more challenging for seniors to qualify for some reverse mortgages now that the Federal Housing Administration has enacted its second-appraisal rule. This doesn't mean, though, that seniors who want to tap the equity in their homes should panic: The new rule, which applies to the FHA's Home Equity Conversion Mortgage (HECM) program, hasn't yet impacted many reverse mortgage applications.
The second-appraisal rule went into effect Oct. 1. It requires mortgage lenders to submit appraisals on HECM reverse mortgages to the FHA for what is called a collateral risk assessment. During this assessment, the FHA will study the appraisals to make sure appraisers haven't over-valued homes.
If the FHA does find evidence that an appraiser might have overvalued a home, lenders must order a second appraisal before the reverse mortgage can move forward.
This rule could scuttle the reverse mortgages made through the FHA's HECM program. And that's important: This program is the most popular source of reverse mortgages.
A limited impact
So far, though, the impact of the new rule has been minimal. HousingWire, reporting on the Oct. 29 annual meeting of the National Reverse Mortgage Lenders Association, said that only 20 percent of HECM appraisals have been flagged for having overinflated values and have required a second appraisal.
What does this mean for seniors applying for reverse mortgages? They might worry a bit more about the appraisal process, but they shouldn't let fears of the second-appraisal rule keep them from applying for a reverse mortgage.
What are reverse mortgages?
Reverse mortgages have long been a way for older homeowners to access their home equity without having to make monthly mortgage payments. Reverse mortgages made through the HECM program are insured by the FHA. They allow homeowners who are 62 or older to tap their equity.
A reverse mortgage gives you several options. You can borrow a lump sum of cash, set up a line of credit to borrow against as you wish or even receive a series of fixed monthly payments for the rest of your life. In any event, you don't have to repay the loan as long as you're in the home; the loan is designed to be repaid with the proceeds from the sale of the home after you pass away or otherwise vacate the property.
How much you can borrow depends on the amount of equity you have in the home. Equity is the difference between what you owe on your home and what it is worth. Say you owe $50,000 on your home and it is worth $250,000, you now have $200,000 equity in your home.
Why the new rules?
Brian Montgomery, commissioner of the FHA, said in a call with reporters on Sept. 28 that the FHA reviewed 134,000 HECM appraisals and found that 37 percent, or about 50,000, were inaccurate by at least 3 percent.
These figures prompted the FHA to impose its second-appraisal rule.
In a statement, the National Reverse Mortgage Lenders Association said that it welcomed the new rule.
The second-appraisal approach is preferable to changes in either the principal limit factor, which determines how much money is available to those taking out a reverse mortgage, or an increase in mortgage insurance premiums on reverse mortgages, said Peter Bell, the association's president and chief executive officer, in a written statement.
"This is a step that has become necessary due to HUD's analysis of appraisals," Bell said. "It is a logical step to address the concerns they've identified."
Too many changes?
Bruce Simmons, reverse mortgage manager with Denver's American Liberty Mortgage, said that the frequent rules changes that the FHA has imposed on reverse mortgages are proving challenging to loan officers.
Simmons said that the FHA has enacted rules changes to its HECM program on a steady basis since 2013. This means that the FHA hasn't allowed enough time to see if its previous rules changes will have any effect before the agency makes additional changes, Simons said.
"What is maddening from a loan officer point of view is that it is very difficult to do business when the rules are constantly changing," Simmons said.
There is a bright spot, though: Simmons said that the frequent rules changes might inspire more lenders to offer their own proprietary reverse mortgage programs that don't rely on FHA insurance. This would, in turn, provide more options for homeowners looking for reverse mortgages, Simmons said.
A bigger impact on home purchases
Simmons said that the second-appraisal rule could potentially have a greater impact on home purchases. Since 2008, the FHA has allowed homeowners who are 62 or older to use its HECM reverse mortgage program to buy a home.
This program is designed for seniors who want to move out of their current home and move into one that better fits their needs. Maybe they live in a two-story home and they'd rather live in a smaller, single-story residence. Under the HECM for Purchase program, owners sell their homes and then use the proceeds from this sale as a down payment on a new home.
The equity that owners earn on their new home through this down payment and the new home's value determines how large of a reverse mortgage borrowers can get. As with a standard HECM reverse mortgage, the borrowers don't have to repay their reverse mortgage until they move out of their new home or until they die.
Simmons said that the FHA's second-appraisal rule could have a greater impact on the HECM for Purchase program than it might have on standard reverse mortgages. He said that a second appraisal could add five to seven days to a closing.
"I understand that we can be working on the other conditions during that time, but there will still be some sort of a delay in addition to the cost," Simmons said.
A second appraisal could scuttle a possible sale, too, if it comes in too low. Say the new home you want to buy through the HECM for Purchase program is listed for $150,000, but a second appraiser values it at just $120,000. This could ruin your real estate deal because lenders won’t loan you more than what a home is worth.
Low appraisals have long been something for home buyers to fear. Keith Robinson, chief strategy officer of Pleasanton, California-based NextHome, said that buyers do have some options when an appraisal comes in too low. They're not overly pleasant, though.
Sometimes a home's seller might reduce the asking price. If sellers aren't willing to do this, buyers can make up the difference by bringing cash to the table to make up the difference between the appraised value and sales price. Buyers might also try to contest the appraisal, Robinson said.
Fortunately, low appraisals are a relatively rare occurrence, Robinson said. And buyers can avoid these by working with real estate professionals who can spot an overpriced home before their clients make an offer on them, Robinson said.
"The key is professionalism," Robinson said. "If you work with professionals across the board, this will be a rare occurrence."
Jennifer McAloon, a real estate agent with RE/MAX Dallas Suburbs in Plano, Texas, said that real estate agents and lenders can file an appeal with the appraiser if they think their appraisal has come in too low.
Getting a new appraisal, though, isn't always easy. Agents and lenders will need to present the appraiser with comparable home sales that are different than the ones originally used by the appraiser, McAloon said.
"When providing new comps, the appeals needs to explain why these comps are better than the ones originally used," McAloon said.
Agents and lenders can also present the appraiser with what McAloon calls "fact" mistakes. Maybe the appraiser missed a bathroom when valuing a home or used an incorrect square footage.
McAloon says that appraisers usually have 48 hours to review and decide on the appeal.