Housing Groups Debate The Second Appraisal Rule For Hecms

Earlier this week, the Appraisal Institute told the U.S. Department of Housing and Urban Development (HUD) that it supports the current requirement for a second appraisal on certain federally insured reverse mortgage transactions.

The comments came in response to HUD’s recent request for information (RFI) that sought public feedback on potential improvements to the Home Equity Conversion Mortgage (HECM) and HECM Mortgage-Backed Securities (HMBS) programs.

In a letter dated Dec. 1, Appraisal Institute officials Scott DiBiasio and Brian Rodgers called the second appraisal rule a “critical safeguard” for originating HECM loans that involve potentially overinflated home values.

“The second appraisal provides an essential check against overvaluation risk, which is particularly important in HECM lending where repayment depends on collateral value many years after origination,” the letter stated. “Removing this safeguard would increase risk to the Mutual Mortgage Insurance Fund and diminish protections for senior homeowners.”

The rule has been in place since October 2018, when the Federal Housing Administration (FHA) began requiring lenders to conduct a collateral risk assessment on a property before a HECM loan can be closed. In cases where the initial appraisal is determined to have been overvalued, a second appraisal is needed.

Lenders are required to use the lower of the two appraised values, and the costs associated with the second appraisal are rolling into the closing costs of the loan.

DiBiasio and Rodgers also believe there are benefits for secondary market participants in the HMBS program.

“Investor confidence in HMBS relies heavily on accurate and consistent valuations,” they wrote. “The second appraisal requirement strengthens collateral certainty and helps maintain liquidity in this specialized market. Eliminating it could introduce volatility and weaken issuer participation.”

While more recent data on the share of HECM loans that require a second appraisal isn’t available, former FHA Commissioner Brian Montgomery told HousingWire‘s Reverse Mortgage Daily in 2019 that roughly 20% did. Montgomery also noted at the time that inflated home values were “extremely high” in the wake of the housing crisis, but they had dropped to a more typical range of 4% to 8%.

Based on the roughly 28,000 HECMs endorsed in fiscal year 2025, that would equate to about 5,600 loans that needed a second appraisal.

In forward mortgage transactions, data shows that overvaluations are common. A report released in January 2025 by Corporate Settlement Solutions (CSS) found that across the 19 states the company operates in, appraised values were higher than sale prices on 57% of transactions during the second half of 2024.

CSS deemed an appraisal overvalued if it exceeded the sale price by at least $2,500.

“Senior-owned homes frequently exhibit deferred maintenance and condition issues that can
create wider variance in valuation,” the Appraisal Institute wrote. “A second appraisal helps identify outliers and ensures those conditions are reflected appropriately.

“Any potential additional time and cost associated with a second appraisal are relatively small compared to the program risks it mitigates. Seniors ultimately benefit from valuations that are accurate and defensible.”

The Mortgage Bankers Association (MBA) took a different stance on the issue when it released a response this week to HUD’s RFI.

Pete Mills, the MBA’s senior vice president of residential policy and strategic industry engagement, said in a letter that the trade group supports a modernized approach to collateral risk assessments.

It wants the FHA to promote the use of automated valuation models (AVMs) and a “broad range” of data sources to “streamline the loan processing workflow and provide more accurate, less costly, and timely property valuations.”

Mills went on to say that this approach will allow reverse mortgage lenders to “identify higher-risk properties earlier in the process.” The MBA also urged HUD and FHA to push for an expansion of qualified appraisers, which would “make the process more convenient, reduce delays, and improve borrower satisfaction.

Minor revisions to the second appraisal requirement were issued by HUD in May 2024. The department included new language that refers to “a potential violation of fair housing laws or professionals standards related to nondiscrimination” as reasons for initiating a second appraisal.