Inflated Appraisals May Force FHA to Raise Borrowing Costs

November 19, 2018

Inflated home appraisals are partly responsible for what the Federal Housing Administration expects to be a $14.4 billion loss in mortgage insurance over the next few years—a cost that likely will be passed on to borrowers, according to an agency analysis. If the losses continue, the FHA may be forced to raise insurance premiums on its mortgages, The Wall Street Journal reports. The FHA insures about 11 percent of single-family residential mortgage debt.

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The issue of inflated appraisals first surfaced in the reverse mortgage market. Homeowners use reverse mortgages to borrow against the value of their homes, and their lenders are repaid when the properties sell. But an inflated appraisal could result in the lender not recouping the entire value of the loan. In that case, the FHA is responsible for coming up with the difference.

Brian Montgomery, head of the FHA, says a review of 134,000 mortgages insured by the agency found that at least 37 percent of the properties were overvalued by 3 percent or more. Reverse mortgages make up about 6 percent of the FHA’s insurance portfolio.

The FHA says it has initiated a new process in which all appraisals submitted under its reverse mortgage program must be reviewed before lenders can close on a loan. Under this new process, the FHA will order a second appraisal if it believes a home has been overvalued.

Inflated appraisals were blamed for the housing bubble a decade ago. They decreased in frequency in subsequent years, but now they’re resurfacing as home prices skyrocket, housing officials say. “Appraisers seeking future business have little incentive in jeopardizing a loan closing by underestimating the collateral value,” according to a 2017 study by housing officials. That study prompted the FHA to do further investigation into the issue.

Source: 
Inflated Home Appraisals Drain Billions From Government Insurance Fund,” The Wall Street Journal (Nov. 16, 2018) [Log-in required.]