How do we effectively expand markets and increase profits? That’s a common question for most businesses. For a growing cohort of reverse mortgage practitioners, the answer lies in the HECM for Purchase (H4P) program, and the case for including H4P in your marketing efforts is now stronger than it has been in the history of the program. This is why many in our industry are redoubling efforts to both train and market H4P as we gear up for what we see as a huge opportunity in the coming years.
It’s hard to believe that it has already been six years since Congress passed the Housing and Economic Recovery Act of 2008 (HERA). Among other things, HERA authorized HUD to develop a HECM product that could be used for purchase money transactions. Within a few months of the law’s passage, FHA had issued its initial guidance in the form of Mortgagee Letter 2008-33. Some tweaks were needed, so FHA followed up the next spring with Mortgagee Letter 2009-11.
Before 2008, borrowers who were interested in using a reverse mortgage to finance a purchase had few options. Proprietary loans, such as Fannie Mae’s Home Keeper program, could be used as a purchase money mortgage. However, the product never realized wide market acceptance and was dropped during the credit crisis. Meanwhile, the HECM was being leveraged by older Americans who wished to move and wanted a reverse mortgage. Borrowers had to first buy the new property with a purchase money loan or cash, then refinance using the HECM. But this two-step process was cumbersome and expensive. Fortunately, Congress recognized this burden and made the H4P program available.
The social benefits of the H4P program are clear to see. We have millions of seniors in or nearing retirement in this country. Many are in homes that are larger than they need and that are not suited to aging in place. What Congress did when it passed HERA was bridge the gap and make the already very flexible HECM financial planning tool even more flexible and even more valuable for those older American homeowners who want to downsize, but who need an alternative way to finance their relocation.
Over the past six years, a number of reverse mortgage companies and loan officers have carved out a niche for themselves specializing in the H4P product. But the program has not lived up to its potential and we’re still far behind the projections made in 2008. This stunted development is mostly due to the housing and credit crises. It is also due, however, to a product that is still largely unknown outside of our industry. I believe this is about to change.
Background
If you’ve never worked with the H4P program, it can be a bit daunting at first. The good news is, with some exceptions, the guidelines are not much different from the traditional HECM refinance business. And there are excellent resources available to train both sales and operations staff on the program.
One of the main adjustments for many HECM originators, especially those who have not written purchase loans in the past, is the multiple parties to the transaction. Most of the time, a Realtor will be involved in the transaction in addition to the buyer and seller. And in some cases, if your borrower is buying new construction, there might be a builder involved in the process. All of these additional parties, each with a vested interest in the transaction, will increase the demands on the originator. It is critically important that the originator set reasonable timeframes and expectations at the outset.
Documenting an H4P is a bit different than a HECM refinance and there are some pitfalls that originators need to be aware of. Things like FHA purchase contracts, restrictions on seller concessions, restrictions around certificates of occupancy, and proper sourcing of funds are all critically important to understand and can be pitfalls for the unprepared. But these pitfalls are manageable if you are willing to put in the work upfront and attend training.
Marketing
The H4P program is something you are going to want to pitch directly to real estate agents, builders and other financial professions. When trained on the program, real estate agents should quickly grasp that the borrower who was planning on buying a new home with cash will be able to buy more house when he or she uses the H4P, and still have no mortgage payment. This, of course, means higher commissions.
Builders, meanwhile, will find the H4P allows their buyers to afford a new home with more upgrades. Since upgrades are where builders make their largest margins, you will want to hone in on this point early on in the conversation. Developments catering to the 55-plus age group are natural targets for H4P business and many originators have successfully penetrated this market.
Since you are (hopefully) in their offices already, don’t forget to educate your financial planners, CPAs and elder law attorneys as well. A large percentage of pre-retirees and retirees are planning on moving at least one more time during their lifetimes, and many are planning on paying cash for their new homes. Not only does paying all cash for a new home deplete savings at a critical juncture, but it also shrinks the portfolios of their planners. Show a financial planner a way to assist their clients with their new home purchase, while at the same time preserving their assets under management, and you will have a great new referral source.
Why is now a very good time to be familiarizing yourself with the H4P program?
From the start, H4P loans have been great business for a lot of reasons. These are, by in large, higher-dollar loans made on higher-value homes. We are also dealing with fewer property repair issues, since most of these homes were fixed up prior to being listed, or are new construction. For those that need repairs, the H4P program requires that the seller complete the work before closing.
In my experience, the H4P transaction is more like a business decision and can be far less emotional than refinancing the home where a borrower might have lived most of his or her life and raised a family. I know this is generalizing, but H4P borrowers seem more comfortable leveraging their equity and less concerned about leaving the home as a legacy to their children.
Early in 2014, something happened that gave H4P business an unexpected boost. The ATR and QM rules went into effect in January and, overnight, these guidelines made it harder for lots of people to qualify for purchase loans, especially those on fixed incomes. This tightening of credit has left many seniors, who had planned on purchasing a home with traditional financing, unable to qualify for a conventional mortgage. Ask any H4P practitioner and you will probably find they have had at least one, if not several, H4P closings already this year that were for borrowers who had not originally planned on utilizing a reverse mortgage. It is likely that ATR and QM will continue to push business in our direction. We have to make sure that real estate professionals know we are here with a tool that can help.
Not to be overlooked, the new HECM 60 structure makes the H4P business more attractive for the originator. By definition, mandatory obligations in an H4P transaction are 100 percent. So, at a time when average principal limit utilizations have fallen dramatically, H4P business continues to see very high utilization rates. This, of course, means higher margins for originators. And the recent increase in PLFs, along with continued home price appreciation, paints a brighter future for the pogram.
Conclusion
An estimated 300,000 retirees are buying homes every year. If we could tap just 10 percent of this market, it would increase the current HECM volumes by 60 percent on a unit basis, even more on a UPB basis. Several top investors in the HECM space recognize the opportunity here and are pouring unprecedented resources into marketing and training for the business. If you are so inclined, this would be a very good time to think about leveraging this opportunity by adding H4P to your lineup. For those of you already making the loans, keep up the good work. The rest of the real estate industry is on the cusp of finding out what you already know about this great product.
