Appraisal Rule Amendment May Slow Reverse Mortgage Process
A reverse mortgage allows homeowners 62 and older to borrow against their home’s equity without having to sell it, give up the title or take on new payments. Home Equity Conversion Mortgage (HECM) loans are federally insured reverse mortgages. Most of the reverse mortgages made in the market today are HECMs.
Reverse mortgages first became a financial product in 1961. The first government insured HECM loan was made in 1989. The amount of seniors entering into reverse mortgages was relatively low through the late 1990’s. The number of reverse mortgages began to pick up in the early 2000’s and exploded around 2007. While the amount of HECM loans has moderated, they are still a popular way for seniors to supplement their income.
To qualify for a reverse mortgage, borrowers must have completely or mostly paid off the mortgage on their home. If there is still a mortgage on the home, the reverse mortgage becomes the first lien and is used to pay the remainder of the existing mortgage. The home must be the seniors’ primary residence and they must have no other federal debt. The home must be either a single family, 2-4 unit dwelling, HUD-approved condo or a manufactured home that meets FHA requirements. If it is a multi-unit, the borrower must reside in one of the units.
Where Do Appraisals Come In?
Appraisals are an integral part of the HECM process because they comprise one of the two major factors in determining the amount of money a borrower is eligible to receive. The other major factor is the age of the borrower(s). An appraiser uses the home’s information, comparable properties and recent area home sale values to come up with a valuation amount. Due to Federal Housing Authority (FHA) rules that mandate the isolation of those with financial interests in a mortgage loan transaction from appraiser selection and retention, homeowners and mortgage originators are not allowed to choose the appraiser that creates the opinion of value. Usually originators designate an Appraisal Management Company (AMC) to make this choice, though some banks have separate departments that fulfill the function.
The CFPB’s New Appraisal Rules
The Consumer Financial Protection Bureau recently amended some rules concerning the appraisal of properties up for loans. The rules regarding appraisals are known as “Regulation B”. Regulation B states that creditors are now required to provide loan applicants with free copies of all appraisals and other written valuations made in connection with the loan they are securing. Creditors are also required to notify applicants that they will receive all documentation in a timely fashion.
These new rules will create additional paperwork for the lender which may cause delays in the loan process. AMCs are building electronic document delivery modules into their software, but there may be a learning curve associated with it. Borrowers may also slow the process by raising questions and concerns regarding the appraisal and stated value of their homes.