By all accounts, the HECM for Purchase product is underutilized. Since it first launched in 2009, lenders have simply failed in their attempts to market the H4P and inform Realtors about its potential, inciting some to claim that, as an industry, we have failed the product. But despite its limited success to date, the H4P is a tremendously valuable tool that can help seniors purchase a new home using their existing equity, possibly downsizing into residences that better suit their needs as they age. The premise makes sense, and as more and more baby boomers reach retirement age in the coming years, there could be a sizable demand for this product. The question is: How do we better educate the Realtor and builder communities and spread the word about the power of the H4P? How can we help this product realize its true potential?
The Facts In July 2008, President George Bush signed the Housing and Economic Recovery Act into law, granting FHA the authority to issue HECM for Purchase loans. With this new type of HECM, borrowers could purchase a primary residence and obtain a reverse mortgage in a single transaction, incurring only one set of settlement costs.
In its first year, 560 H4P loans were made, comprising just under 0.5 percent of all HECMs issued in 2009. In 2010, the momentum picked up and the number of H4Ps more than doubled. But since then, volume has been less than promising.
John Lunde, president and founder of Reverse Market Insight, notes several reasons for the H4P’s lackluster performance. “First, 2009-2013 was the worst housing market nationally in decades, so home purchase transaction volumes were lower across the board and not just in the HECM for Purchase corner. We’ve also heard several product design/requirements issues, but mostly it seems to revolve around Certificate of Occupancy challenges that make for a tricky and unfamiliar closing process, particularly on new construction transactions,” Lunde says. “I think these two issues have fed into a lack of sustained effort and resources into this niche by many in our industry given the lack of initial success in generating volume.”
RMI data shows that H4P totals have increased year-over-year since 2009, but the increase is minimal and the volume unimpressive when you consider the potential size of the market.
According to data from the National Association of Realtors, the market could be sizable. A 2014 survey revealed that 5.1 million homes were sold by licensed real estate agents that year, and that 14 percent of those sales involved homeowners 62 and older. That means 700,000 seniors purchased homes that year, and one would assume that a number of them might have considered the H4P had they been aware of the program. But only 2,006 H4P loans were closed in 2014, highlighting the fact that much of that market was untapped.
Michael Banner, a longtime H4P proponent and owner of Florida brokerage firm Professional Mortgage Alliance, heralds the product’s potential. “About 700,000 people—that’s not even a niche, that’s a market. And every day you’ve got 10,000 people turning 62 for the next 18 years.”
But Banner says the abysmal adoption rates prove that we have a long way to go before this potential is realized. “Penetration is amazingly pathetic. The industry is just dropping the ball.”
The Roadblocks Has the industry really dropped the ball, or are there product glitches that are hindering the H4P’s use? Perhaps the answer is a mix of both.
Certainly, there are a few obstacles that have plagued the product, and the industry has yet to find a way around them. As Lunde mentioned, the Certificate of Occupancy requirement has dampened the H4P’s appeal for some. FHA requires a borrower to have a CO before the application process can begin. For builders saddled with the carrying costs of a finished house as they wait out the application process with a borrower, this is a problem.
Chris Bruser, a Florida-based HECM specialist with Retirement Funding Solutions who primarily works with builders to sell the H4P, says this is the biggest issue hindering the product. “Not allowing us to do an application is harmful in several ways. It creates too much stress at the end of the process, especially from a builder’s standpoint,” Bruser says.
Bruser says it’s hard to explain the CO requirement to the builders he works with. “I tell them it’s a small price to pay if they’re going to sell more homes with this program, but for builders who don’t really understand it, it’s a tough sell. They say, ‘We’re going to build a home for you and at the end we’re not even sure you’re going to qualify? We build the house and then we’re going to process your application?’ You can see why that would make them a little bit uneasy.”
Ann Marie Harrison, another H4P-focused originator with Retirement Funding Solutions, echoes Bruser’s comments. “No builder likes to delay their closings. I understand we can’t close until the CO is issued, but we certainly should be able to order services so we’re not holding the builder up an extra couple of weeks. It would go a long way to advancing our ability to work with the builder market.”
Harrison, who has been focused on the H4P for seven years, works with 15 builders in the suburbs of Columbus, Ohio. She says conditional COs are also problematic. In cold weather, builders are often unable to lay sod or pave the driveway, she explains, and when an appraiser assesses the property, they sometimes leave the report “subject to” the completion of these final tasks. “We can’t close a HECM for Purchase with a ‘subject to’ appraisal. But I think this should be allowed, as long as the builder has funds set aside to complete the work when weather permits.”
Another issue is HUD’s prohibition on seller concessions, which means the seller cannot contribute to the closing costs in an H4P deal. In the past, NRMLA has appealed to HUD to reconsider its position, but the plea was met with silence.
David Cook, a reverse mortgage consultant with Finance of America Reverse who focuses on training referral partners on the H4P, says the ban on seller concessions often complicates the process. “It’s confusing for a real estate professional to remember they should negotiate a lower price to make up for the fact that the buyer must pay for what would customarily be a cost to the seller,” he says, explaining that things like home warranty, property survey and owner’s title policy—all things a seller typically pays for in a forward transaction—become the buyer’s responsibility in an H4P deal.
“We need to continue working with FHA to institute changes that make sense and align us with forward lending transactions. The more we can align the two, the less confusion there will be for all parties to the Purchase transaction. A forward originator has no problem originating a forward purchase. It should be just as easy to make this transition with the H4P.”
Finally, some have been vocal about their opinion that it is the industry itself that has been holding the product back. Industry-wide apathy, they say, is perhaps the H4P’s biggest problem.
Many of the originators Banner talks to say they prefer to be given leads. “They don’t want to do the work. ‘Talking to Realtors is like herding cats’— that’s a big one that I hear a lot. Or, ‘I didn’t get into this industry to solicit Realtors all day.’ As long as the industry maintains that attitude, the H4P will never go anywhere,” says Banner. “Industry laziness is the biggest problem.”
The Solution So perhaps there are some program issues that could use refinement. And maybe the industry isn’t as vocal as it could be about the product. But the H4P still offers seniors a unique option that presents real value, and that reason alone should inspire originators to pursue this type of business. There are thousands of seniors who could benefit from this loan—if they only knew it existed.
Banner says he’d like to see a marketing push from the industry’s top lenders. A TV campaign, he says, would go a long way to educate the public. “I wish some big company would start promoting it. Why don’t we see a Remax commercial with a red-and-white balloon with a Realtor saying, ‘I can’t believe you can buy a house and make no payments!’? We would get a thousand calls in the next hour. Where’s the push?”
Bruser agrees. “Industry leaders need to be talking about it more,” he says. “People always ask, ‘Why aren’t more people talking about this?’ That’s a hard question to answer. I don’t know why! It seems like everyone should be talking about it. Is it right for everybody? No, nothing is right for everybody, but it’s got to be part of the conversation.”
Bruser says originators can do their part by being active in their communities. To sell the product, he says, you have to get out there. “This is a grassroots, face-to-face, boots-to-the-ground conversation that has to be had. We have to get out of our comfort zones a little bit. You can’t sit in your office and expect the phone to ring,” he says. “You’ve got to be networking, going to Realtor meetings, calling on people, walking into offices.”
Harrison agrees, suggesting that originators looking to expand their H4P business pursue builders in their communities. “Start regional. Start with people who don’t have a lender in house. Do some fact-finding and learn about the builder. What type of houses are they building? Is it conducive to the 62-plus buyer? Is it a condo community? Is FHA approval of the condo community going to come into play? Know your client before you walk in there.”
“Put yourself in a position where you’re able to share the power of the HECM for Purchase program with Realtors and builders. You’re not going to do it from your home on your phone. You have to get dressed up and get out there every day. “
Cook also stresses the need to build relationships with referral partners. “Originators should focus on marketing to, training and establishing a true relationship with real estate professionals that have the Senior Real Estate Specialist (SRES) designation, and those that are only buyers agents, if at all possible,” he says. “You have to be a trusted resource to all referral sources, but especially to real estate professionals first and builders second if you want to be successful with H4P. Real estate professionals come first because you will get to the builders through those relationships.”
The Future Those who make their living selling the H4P are adamant about its potential. Inspired by the response they get from consumers when they learn about the loan, these originators are vocal about the product’s tremendous value.
“The interesting thing is once people find out about it—and once I have a chance to explain it to their financial planner or to their attorney—the No. 1 comment I hear from their advisors is: ‘I cannot see the reason why you would not want to consider this,’” Bruser says.
“I think we’re giving people a chance to better their retirement years by keeping more money in their pockets as opposed to having it tied up in home equity in that stage of life. I’ve got to believe that it makes sense from a financial planning perspective, and that it’s going to make sense to more people in the future.”
Lunde is equally optimistic about the future of the H4P. “The good news is that 2014 and 2015 have shown increased volumes of HECM for Purchase transactions and there’s plenty of additional potential there. Several companies have shown some consistent focus and are reaping an outsize share of volume, with rebounding property markets and overall real estate transaction counts increasing,” Lunde says. “The success by RMS/Security One, Cherry Creek, RMF and now Reverse Funding Solutions in this area points the way for others to follow their example and substantially grow the HECM for Purchase volume for the industry overall.”
Harrison says the key to growing H4P volume is spreading the word. “The only reason more people aren’t using it is because they don’t know about it. Part of that is something that’s going to come over time, but another part of it is that we in the field have to be talking more about it.”
Cook agrees. “The more real estate professionals who see this, the more likely they are to begin considering the H4P as a viable option they should offer to senior buyers and a solution to buying for many seniors,” he says. “We are still a very long way from mainstream, but as we buy into H4P more as an industry, so will our referral partners, and their clients.”
Banner says it bluntly. “The H4P is out there. The potential is there. Does our industry want to work for it?”
