Wall St. Journal - "inflated Home Appraisals Drain Billions From Government Insurance Fund"

[J Grant]

Thanks Marion, for the recognition, appreciated

However, appraisers are not the ones who get to decide whether to accept AVM's as accurate, the lenders and entities are...problem is even they know AVM's are not "accurate", just a different form of valuation. But if they accept that alt valuation as better...well really, how likely is that, since AVM alone is not accepted for any lending work, has to be upgraded to at least an evaluation...unless you are Fannie! Then you can waive an appraisal and use a proprietary program ( because they have enough appraisal on file to make tha program reliable. Still, anyone can can use an AVM as a review tool or benchmark comparison. The problem is always, as in appraisals, accurate compared to what? What is the benchmark...median prices?

Unfortunately, as you well know, appraisals and appraisers never became insulated on lending end against value pressure , which would mean a complete . but rather simple to accomplish change in ordering for tax payer backed lender work. They dont even need to put appraisers on govt panels which would be more complex, given the # of appraisers. All they need to do is scrap the current AMC system, and have the third party or AMC be a real firewall by having the AMC 's compete for govt contracts with compensation to AMC;s 100% divorced from lender clients and selection /quality control of AMC panels 100% divorced from it as well, with random govt agency review of appraisals and performance of the contracted AMC;s. A lot easier for govt entities to monitor 10 or 20 govt run AMC's vs thousands of appraisers on panels.

 

[Denita Neuenhaus]

Quote: "As far as why the Rev mortgage segment is more troubled than other segments, the program needs changing. One option is for FHA to reduce the $ % relative to equity for borrowers, since now if an owner lives long enough and or home over valued, it can end up in a negative equity situatin for FHA. Other option is put aside a reserve of $ from the loan for ongoing maintenance with owner to allow an inspection ever 5 years or so. But lower loan levels would decrease profits to lenders. FHA/Fannie can't decide if they are public trust programs or lender profit advocate programs. The hijacking of public trust or consumer protection programs ( seen in appraisals with corrupt AMC system ), repeat that in any of American life where duped citizens manipulated into believing protection of their interests is "Socialism", while protection of business interests is "free market"...

^I have only sold one home with a reverse mortgage and the criteria used to qualify the borrower is completely different from a normal FHA mortgage. The LTV is approx 50% of the appraised value. Could be as high as 60% from what I have seen, but I don't know all the in's and out's. Age plays a big factor in LTV. The older the borrower, the greater the allowed LTV but it is nowhere near a high LTV at all. I don't know what the max LTV allowed is by age. I just know it is age based. What would you reduce it to - 30%? 40%? The lower the LTV the more attractive it is for FHA to foreclose rather than allow the family to refi out or sell when the borrower passes away. The fees to the lender and LO are huge. Insane fees to the borrower. And yes, from what I can determine, it appears the program is designed to take the house when the borrower passes away rather than have the heirs refinance it or sell it.
I have sold a number of the reverse mortgage foreclosures. They also are a nightmare. The condition of the property when foreclosed is horrendous IME. The borrower just doesn't have the ability to maintain the property on their, usually, very low income. Again, this is just my experience.

 

[J Grant]

Denita, I appreciate your posts on the board, great perspective and you impress me as far more knowledable and caring than the avg RE agent or broker.

I could be wrong, but in a Rev mortgage, isn't the property eligible for foreclosure from lender only after the borrower /owner has passed away? Otherwise lenders would be foreclosing at any time, point of the program is that the borrower can remain in the home until death,. I don't know how delinquent taxes or HOA fees are handled in terms of forcing a home into foreclosure though, or if the FHA program sets aside funds to pay taxes/HOA fees annually, or leaves it up to borrower. The loan % of equity can be used up rather fast, and faster still if the value was inflated. As you note the origination fees are crazy high and instantly eat into equity. And then of course equity is further eroded if market drops and or no maintenance or upgrading to the property.

Whatever the program consists of , the appraiser job at eff date of appraisal is to do a good job of the appraisal...you seem astute about the effects of profit driven selection of appraisers, perhaps a few concerned RE agents such as yourself with a few appraisers can make a website or other means to raise awareness about the issue, since regulators are MIA about a public trust mission except as lip service.

 

[Denita Neuenhaus]

Denita, I appreciate your posts on the board, great perspective and you impress me as far more knowledable and caring than the avg RE agent or broker.

I could be wrong, but in a Rev mortgage, isn't the property eligible for foreclosure from lender only after the borrower /owner has passed away? Otherwise lenders would be foreclosing at any time, point of the program is that the borrower can remain in the home until death,. I don't know how delinquent taxes or HOA fees are handled in terms of forcing a home into foreclosure though, or if the FHA program sets aside funds to pay taxes/HOA fees annually, or leaves it up to borrower.

Whatever the program consists of , the appraiser job at eff date of appraisal is to do a good job of the appraisal...you seem astute about the effects of profit driven selection of appraisers, perhaps a few concerned RE agents such as yourself with a few appraisers can make a website or other means to raise awareness about the issue, since regulators are MIA about a public trust mission except as lip service.

-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
I am a proponent of actual skilled appraisers and not AVM's (except in extremely limited circumstances).
I don't like the fact that AMC's take a huge chunk of your fees for their own profit. Frankly I don't like AMC's at all and I'm not saying it because I'm on an appraisal forum. To introduce a third party into the mix (AMC's) just to pad the pockets of lenders seems to be contrary to the original intent of establishing AMC's.

In the one reverse mortgage purchase that I sold (recent sale) the lender leaves the real estate taxes, property insurance and HOA fees payable by the borrower. Naturally these fees are calculated in the DTI but when the property closes, there is no escrow. The lender only charges principal and interest plus a HUGE MIP fee to the borrower monthly. That 'payment' is added to the loan and reduces the equity monthly rather than have the borrower actually pay it. If the taxes or the HOA fees go unpaid, then the lender can foreclose on the property. At least, according to the loan paperwork on that sale made in July 2018. When the borrower passes, the heirs have (apparently) 12 months to refi out of the mortgage or sell the property.

The profit is in the monthly MIP fee charged by the lender. This fee is many times the MIP charged on a regular FHA loan. This one that closed in July 2018 the MIP fee was more than 3.38% of the loan amount. The whole program is a money grab by the lender and the government IMO. Of course, it is difficult to make a general assumption with only one sale. I can see a very limited use for reverse mortgages, but in general think they are a very bad idea.

 

[ucbruin]

Quote: "As far as why the Rev mortgage segment is more troubled than other segments, the program needs changing. One option is for FHA to reduce the $ % relative to equity for borrowers, since now if an owner lives long enough and or home over valued, it can end up in a negative equity situatin for FHA. Other option is put aside a reserve of $ from the loan for ongoing maintenance with owner to allow an inspection ever 5 years or so. But lower loan levels would decrease profits to lenders. FHA/Fannie can't decide if they are public trust programs or lender profit advocate programs. The hijacking of public trust or consumer protection programs ( seen in appraisals with corrupt AMC system ), repeat that in any of American life where duped citizens manipulated into believing protection of their interests is "Socialism", while protection of business interests is "free market"...

^I have only sold one home with a reverse mortgage and the criteria used to qualify the borrower is completely different from a normal FHA mortgage. The LTV is approx 50% of the appraised value. Could be as high as 60% from what I have seen, but I don't know all the in's and out's. Age plays a big factor in LTV. The older the borrower, the greater the allowed LTV but it is nowhere near a high LTV at all. I don't know what the max LTV allowed is by age. I just know it is age based. What would you reduce it to - 30%? 40%? The lower the LTV the more attractive it is for FHA to foreclose rather than allow the family to refi out or sell when the borrower passes away. The fees to the lender and LO are huge. Insane fees to the borrower. And yes, from what I can determine, it appears the program is designed to take the house when the borrower passes away rather than have the heirs refinance it or sell it.
I have sold a number of the reverse mortgage foreclosures. They also are a nightmare. The condition of the property when foreclosed is horrendous IME. The borrower just doesn't have the ability to maintain the property on their, usually, very low income. Again, this is just my experience.

"The borrower just doesn't have the ability to maintain the property on their, usually, very low income. Again, this is just my experience."

I've never appraised rev mortgage and I'm too lazy to read the article...
As usual this won't stop me from posting....

Before Denita's post my thoughts were the appraisal wasn't bad but rather the program was flawed....
Think about it and it seems obvious that the homeowners' are cash poor and will probably out live their loan money and the property will deteriorate....

I take Denita's post to confirm this scenario....

 

[J Grant]

Denita, I can't say what level FHA would reduce rev mortgage payout % to...but perhaps a reverse mortgage could be a smaller sum of supplemental income to a senior rather than a huge lump sum or higher monthly amounts. If they can't afford to stay in the home with a more modest supplemental income from rev mortgage , then perhaps it is the reality they can't afford to stay in current residence and need to sell the home and scale down.

While its nice for people to remain in their home, what we can end up with is seniors stripped of home equity, and trapped into staying in a larger, older home they can't afford to maintain., crumbling around them. And in worse scenarios, greedy relatives or con artists take the rev mortgage lump sum or monthly payments since they are so nice and high.

Maybe if the great American debt machine had stopped at equity stripping seniors in the guise of "helping them" remain in a home they can't afford ....Maybe the owners would have moved to a smaller, affordable villa ( for example ).When they passed on, their heirs would inherit the worth of a villa at time of death rather than inherit nothing from a rev mortgage equity stripped house.

 

[George Hatch]

Getting back to the appraisals, if the lenders are taking in over valued appraisals then that's where that problem is occurring. We've heard enough stories about appraisers being blacklisted or otherwise harassed for not hitting values to know that is a thing. Now that all the volume is being handled by the lenders and AMCs there's no way for either to obscure their pattern of conduct - whether good or bad - by dispersal. They might have been able to slough the blame off on the outside loan originators before but that's over. Now there will be a very limited number of potential suspects - perhaps less than a handful in each lender/AMC relationship - involved in formulating the effective appraisal policy at each lender and (for those lenders that use them) each AMC.

If someone at a lender is pressing someone at an AMC for more hits not only will the results reflect that due to the sheer volumes involved, but anyone coming in later will be able to identify who at the AMC took those instructions and promulgated them at the AMC end and who at the lender originated that pressure on the AMC in the first place.

If an AMC is initiating that policy on their own - and actually is victimizing the lender - then that will be apparent as well.

 

[Deleted member 128537]

When I did FHA Reverse mortgage appraisals (no longer do them), I was always conservative on my value. I knew if I wasn’t I could be putting the homeowner in a terrible position in the future.

Having said that a 3% difference is negligible. When I did RElO work if 2 appraisers came within 5% we were good! In fact the RELO company basis was that our appraisal should be within 5% of the actual sale price. That was the standard! And that was the basis for our scoring if we were to be used on a consistent basis.

So as far as I’m concerned this WSJ article is idiotic.

 

[Andrei Fin]

If the FHA public relations arm is preemptively blaming appraisers for their next crisis, what do you think their legal department is working on right now?

 

[J Grant]

Getting back to the appraisals, if the lenders are taking in over valued appraisals then that's where that problem is occurring. We've heard enough stories about appraisers being blacklisted or otherwise harassed for not hitting values to know that is a thing. Now that all the volume is being handled by the lenders and AMCs there's no way for either to obscure their pattern of conduct - whether good or bad - by dispersal. They might have been able to slough the blame off on the outside loan originators before but that's over. Now there will be a very limited number of potential suspects - perhaps less than a handful in each lender/AMC relationship - involved in formulating the effective appraisal policy at each lender and (for those lenders that use them) each AMC.

If someone at a lender is pressing someone at an AMC for more hits not only will the results reflect that due to the sheer volumes involved, but anyone coming in later will be able to identify who at the AMC took those instructions and promulgated them at the AMC end and who at the lender originated that pressure on the AMC in the first place.

If an AMC is initiating that policy on their own - and actually is victimizing the lender - then that will be apparent as well.

Above as you describe, is still not a prevention, merely a slightly better way to clean up afterward. If there is found to be over valuations/investors suffering losses, then there will be fewer AMC;s or lenders to take the blame vs more mortgage brokers. Not much of an improvement, since it can mean billions in losses and thousands of good appraisers lost their livelihoods to allow the perspective of past time to see the fallout..

Why not take preventative measures, and make AMCs function as govt contract companies, let them bid for the contracts and no longer operate on a business model tied in to lender clients and appraisal fees/appraiser selection for greater profit to them or keep client happy result to lender.