What’s Stopping the Reverse Mortgage for Purchase Market?

While lenders agree there is potential for Home Equity Conversion Mortgage for purchase (H4P) demand to grow in the coming years, there could be one significant barrier standing in the way: the approach.

“Our loan originators who are the best when it comes to sitting with grandparents, children and attorneys don’t always know how to speak with a Realtor,” Michael Banner, founder of American C.E. Institute, tells RMD. “They don’t understand the moving truck is coming on the 28th. Most reverse mortgage people don’t have that state of urgency.”

And a lack of understanding about the H4P product among those outside the industry who work with seniors poses a significant challenge as well. That’s why educating Realtors, elder care attorneys and the average consumer is key to increasing use of the H4P, he says.

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“The main challenge is still the world’s negative view of the words reverse mortgage,” he says. “A close second is they don’t know an H4P exists.”

American C.E. Institute hosts classes on reverse mortgage products, including the H4P. More than 3,000 realtors and 7,000 financial advisors have taken courses to-date, Banner says, adding that those numbers have contributed to increased business in the space.

Some lenders are seeing the potential for the product to drive future business growth. Reverse Mortgage Funding, a relative reverse mortgage newcomer, now counts 165 employees since having just 20 in February of this year. And retail loan officers who were focused on the East Coast are now expanding into the West Coast.

“Our focus is, ‘How do we grow the overall market?’” says David Peskin, president of Reverse Mortgage Funding. “That’s the key. We want to really help make people aware of H4P because that’s where we think the future is.”

But the numbers show very little traction for the product; a problem the C.E. Instituted has set out to address. H4Ps have averaged 154 endorsements over the full 13 month period from September 2013 through September 2014, and has a stronger seasonal pattern than other HECM endorsements, says  Reverse Market Insight President John Lunde.

“We’ve seen declines since the product was introduced, which mainly coincided with exits from Wells Fargo and Metlife, each of which were the leading HECM Purchase originators at the time they exited,” Lunde says.

Reverse Market Insight research indicates that there are about 280,000 purchase mortgage transactions each year in the United States by age eligible households.

“So, there is enormous potential for growth in this area if we can present the advantages of this product effectively through those distribution channels,” Lunde says.

RMD_h4pchart

The dream home is no longer a dream.

Every year about 350,000 seniors are “right sizing,” Peskin says, noting that while maybe half pay for the new home in full, the rest of those seniors who choose to move are getting a mortgage.

But the qualifying mortgage rule is making getting a forward mortgage more challenging.

“It makes sense that beyond [the number of seniors moving] there are people just sitting on their homes — they don’t want to sell because they feel like they’re going to have to downsize,” Peskin says. “Now, with the H4P, they don’t have to downsize. They can buy the home of their dreams and not have to make any monthly payments.”

While most Baby Boomers plan to age in place, 37% have plans to move from their current home, according to the latest research from The Demand Institute. And 47% of those looking to move are looking for nicer homes and more space. In fact, boomers will spend $1.9 trillion on new home purchases and $500 billion on rent in the next five years, according to the findings.

Better understanding leads to increased use.

Helping real estate agents understand how a H4P is of value to them is crucial to garner increased use of the product, Banner says.

Create the “a-ha” moment for Realtors, he says.

For example, a couple may be told not to spend more than $300,000 by their financial advisor for a new home, but they don’t like the options in that price range, he says. With a H4P, they can put up $200,000 for a $400,000 home that is newer and has more amenities.

“This is the a-ha moment,” he says. “When the buyers met the the Realtor they were going to spend $300,000. Now, the Realtor has met their goal of no payments in retirement. They can put money back in the bank. And, this is the a-ha – the Realtor just increased his commission 33%.”

And it’s not just real estate agents who benefit from knowledge about H4P. Financial planners, independent advisors and elder law attorneys can help spread the word about the product as well.

“When the financial planner sees the latest regulatory changes of 2013, showing when the client is drawing less than 60% of the UPB and the MIP is reduced drastically from 2.5% to .5% — they’re seeing an 80% reduction in the cost of the loan,” Banner says. “The combination of not allowing equity stripping and the new lower, upfront costs has opened most financial advisors’ eyes to the reverse mortgage being more of a mainstream retirement tool. That’s the financial advisors’ a-ha moment.”

Written by Cassandra Dowell

Additional reporting by Elizabeth Ecker and John Yedinak 

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  • For years H4P has been touted as the sleeping giant, overlooked, hidden, and similar terms. In those years we have heard that history means nothing and H4Ps are expanding and in no time we will see it in their numbers.

    Well, in fiscal 2012 per HUD, H4P was 3% of the endorsements for that year. In fiscal 2013, H4P rose to 3.5%. Last fiscal year it was 3.5% once again. Yet that means that in fiscal 2013, total H4Ps were about 2,100 and in fiscal 2014, they fell by about 300 endorsements to about 1,800. Does that sound like a product that is making a difference and turning things around? Why are we paying so much attention to a product that produces less than 2,000 endorsements?

    Statistically the impact of H4Ps on endorsement totals is insignificant since there are other means for seniors to have a HECM in place within months of purchasing a different principal residence.

    As lenders and originators redirect their marketing dollars, is a significant investment in H4P marketing and training activities a good investment? Even if those dollars do result in more endorsements, would those dollars be better invested in reaching out to the financial community with well developed information about how HECMs can improve the cash flow of their clients?

    I am NOT suggesting we should be abandoning H4Ps but neither should we be expecting much more out of them than great marketing tools and attention getters. They will not invigorate the industry or turn it around. As to increased endorsement numbers, they are marginal at best. Yet it seems by offering and presenting them, there is room to discuss how such activities actually improve traditional endorsements.

    What is of greater concern is the ethics of H4P selling. When we begin promoting them as a means for Realtors to increase their commissions, one has to wonder if we have encouraged Realtors to find the best home for the senior during their retirement years or enticed the Realtor to sell based on the size of the commission? The same is true of financial advisers, most of whom, have no licensing, training, or formal education in cash flow and debt management. Are we encouraging those managing assets of others to increase the size of those assets by the use of H4Ps or are we helping borrowers increase their overall estates and getting them better cash flow and debt management?

  • I’ve been in the business for over 10 years and I have completed 7 H2P transactions. However, you can have all the A-Ha moments you want. There are three critical and built in road blocks that prevent the H4P from being a real estate friendly product.

    Unless and until these are effectively modified, the loan program will never be more than a sprinkling in of business in our indsutry:

    1. No Seller Credits Allowed – Zip,Zero, and Nada. Sorry but Real estate transactions are all about negotiations and Seller Credits are a critical part of process. No one in the real estate
    community understands why FHA insists on this rule.

    2. Archaic and Draconian verification of the Down Payment funds – Seriously, publicly funded professional Sports Teams Stadiums
    have easier fund verification standards.

    3. Turn Times – As the author clearly states early in the article “Time Is Of The Essence” is paramount in real estate and that is just something our industry has not been able to grasp. Now that FA is joining the partly good luck.

    • Well said FIR. HECM for purchases are about 9% of my business since their creation in ’09. While I agree with you on point number one, you and I differ on the other two. I don’t know if you are a lender or a broker, but my experience as a broker is that some lenders in this business know how to move HECM for purchases through their pipelines. That includes simple verification of downpayment funds and closing loans in as little as three weeks from the case number being pulled.

      Several years ago I experienced the other side of the coin before I found the lenders that know what they are doing. What a difference! Too bad it’s all getting set to change on March 2nd.

      Here are my main issues with the HECM for purchase rules –

      1) No seller credits – I don’t necessarily care about the fact that the seller can’t pay closing costs, although I don’t understand it when the borrower is putting 30%+ down. Why can’t discounts and other language that new home builders use in their contracts every day be allowed by HUD? Having to rewrite contracts to avoid the strict “no concessions” rule turns builders off to the product. They are stuck in their ways.

      2) No application until a CO is issued – is this really necessary? Why delay the transaction 30-60 days when a builder could already be late and borrowers might be renting while waiting to close? This should be a prior-to-close requirement.

      3) Property issues – This is a two-fold problem. In my market, condos are a significant percentage of senior housing. The current condo approval rules are absurd. The second part is the condition of the property needing to be up to FHA code prior to closing. While I understand the marketability risk of having a property with repair issues, it is a sticking point. What percentage of properties are listed as-is?

      Besides the structural issues of the HECM for purchase program, the other main hurdle is that realtors aren’t likely to discuss the product with their clients. I think that’s because 1) they are used to looking at RM’s as competitors to their service – selling a home 2) the stigma of RMs 3) hearing about or experiencing a botched RM transaction (too many people originate RMs part time…or poorly).

      P.S. – I wish those that take this business seriously, such as yourself, would start using their real names on this website.

    • Forward in Reverse,

      You need to add a fourth item. State governments, including California, are starting to add cool down periods which borrowers cannot wave. This practically means that application must follow counseling and must be dated seven days after counseling. This effectively means that a case number cannot be assigned and services which will be charged to borrowers cannot be started until the case number has been assigned.

  • The real estate business is based on re selling the clients and quick turn of multiple transactions. A reverse mortgage is a dead end transaction. Realtors are only mildy interested. Also, in a lot of markets, it’s impossible to find an afforable home–or approved condo!– to downsize into. If you use this transaction to up sell the client, you will deplete the cash retention advantage and possibly sell the senior into something the can’t afford-taxes, insurance, and HOA. Unless there’s an inventory of affordable homes and approved condos in your market, you’re wasting your time marketing this to realtors. And realtors are the key to purchase transactions.

  • The primary obstacle I’ve encountered is the Residential Purchase Agreement having to be written for 45 days, minimally. A Forward Mortgage Direct Lender can get it done in 21 days, but my minimal timeframe is 45 … twice as long, and I’m a Direct Lender too.

  • I originate HECM’s in the San Francisco Bay area and the H4P has been useless since the 2.5% MIP was implemented, and it has nothing to do with Realtors. My experience is that downsizing seniors in this area, who sell, end up with lots of cash, $500k or more. When I explain that they can purchase a new home with less cash down they get interested. But when they see the $15,300 MIP on a $625k purchase they says, I’ll pay cash and do the reverse mortgage later.

    And when they complete the purchase they don’t originate the reverse mortgage because they don’t need it. This is my experience.

    I did 10 H4P’s during the first 14 months after the product was
    introduced. I have done ZERO in the last 12 months. The 2.5% MIP is a killer. Add to this the fact that San Francisco, San Mateo and Santa Clara (to a lesser degree) counties, which are my core markets, are basically cash purchase markets. We are seeing multiple cash offers hundreds of thousands over asking. Winning a deal with a traditional mortgage is extremely difficult. Again the H4P does not stand a chance.

    Also the decline in FHA approved condominiums has been a real killer as well. Of the 10 H4P’s I did in the first 14 months, 50% downsized to condos; which of course is the logical path for a downsizing senior. Approved condo projects have declined by over 50% in the last three years.

    FHA has killed the H4P.

    • Dave,

      It is my perception that even if HUD changed the items you point to in a manner that you found acceptable, H4P might have ended up with 20% more endorsements than it did. The problem is not the product but is in how we target seniors and in how we are reaching out to Realtors.

      When it comes to marketing the product, all I have heard in the last six years are excuses including complaints about lazy originators, stubborn Realtors, and the ineptitude of the product to meet the criteria needed in a sales transaction. Yet what I see is the same old tried and tired methods of marketing this product resulting in the same failed results. I call this H4P insanity or as Einstein said about insanity: “… doing the same thing over and over again and expecting different results.”

      So my question to you is why is there so much H4P insanity?

  • As Wealthone said, “What’s stopping the R4P market, “REALTORS”! Wealthone is right to a point but the R4P program is different and must be marketed differently.

    I feel there is a lot of potential with the program. Take the realtor as an example. The secret is to reach them, get them drooling over the program. To do this, you have to treat the realtor differently than your normal reverse mortgage borrower.

    First off, get to the broker, introduce the broker to the program with printed literature. Show the broker how he or she’s company is missing out on a major market. Once you have the broker interested, jump in and get an educational work shop set up with all the agents of the firm.

    Make it an impressive workshop, make sure you have all your marketing material in place and be prepared to show them the sales they are missing out on, and believe me, they are! The secret is the educational workshop to the entire sales staff of the company.

    Don’t forget the builder, this is another good avenue to go down. Many builders have inventory to get rid of, the R4P program is a great way for them to get activity going.

    I believe in the program but I also realize it is a different product that needs to be marketed differently than any other reverse mortgage program.

    John A. Smaldone

    • John,

      You are not by yourself. That is the deceit of it all. All of this attention and yet look how little traction. No one is drooling. It is a dream full of smoke and mirrors and so far not much more. The product does not match the banter.

      • Well finally an article on the merits on H4P. I never see anything in the media on this,
        only desperate seniors trying to find a way to support retirement and reverse
        mortgage is the last resort.

        I am not in your industry, but planning to move to a 55+ community in FL. I consider myself to be a savvy money and financial manager when it comes to my personal finances. I was planning to put down 50% on a $250,000 new home and take out a mortgage on the rest before I found out about the H4P. So H4P is no-brainer for me. But the community I want to live in is not aware of H4P, I am having problems getting them to understand and accept this
        mortgage. When I utter the words “reverse
        mortgage” they want to run away.

        You guys really have an image and marketing problem. As the article stated, it appears the growth for reverse mortgage is in the H4P, but that is not where I see you putting your marketing dollars. How about marketing to the 55+ communities?

        Calvin Eakins

      • Hi Calvin,
        I don’t know if you are buying a resale or new construction. But if it is new construction, then there are a couple of reasons that many builders of 55+ communities are not educated. First many of the big ones have their own mortgage companies that all their clients go to first. Some have done a reverse or two but don’t push them. The biggest thing with the builders however is the business model they use to increase prices. They generally want to keep the sales price high and offer undisclosed (to future borrowers) incentives. They do this so that they can sell the next home at a price higher than the previous one and keep jacking the prices up. With the reverse there are no incentives allowed per HUD, so they end up lowering the price instead of offering the incentives, which then affects their ability to run up prices on future homes. In addition you may have read in other comments already that we as originators cannot process a loan until the home has a certificate of occupancy, which slows down the process by 30-60 days. That being said we have set up some relationships with builders that are open to rethinking their model to get more homes sold and it seems to be working.

  • Wow…You want to know why the H4P is such a failure? Just
    read the comments on this post. Unbelievable…

    The problem is Realtors!!! Realtors closed on more than 2.2
    million (That’s MILLION) purchases last year and stats prove at least one out of five of those clients were 62 years old and above. We better stay away from them huh???

    The verification process of the down payment needs to be
    updated? Are you kidding me? Its the exact same process as the forward loan world. (2 months bank statements and source of funds for any large deposits, and/or the closing statement from their previous home) Have you ever been in the forward mortgage world????

    You can’t close the loan in 45 days? Then you either are
    taking a bad application without the needed supporting documentation or you need to switch wholesalers!

    Reverse mortgages are a “dead end transaction”?
    What does that even mean????

    “Now that FA is here??? Every mortgage in the forward
    world has FA, and they closed 12 million mortgages last year!!!
    Do you have any real mortgage experience???

    I’ve said it before and I’ll keep saying it: “this
    industry is its own worst enemy!”

    Just one of you needs to actually see or speak with about a
    hundred real estate agents a month for 3 – 6 months and then grace us all with your results.

    Until then….lead, follow or get out of the way…

    • Michael, perhaps you missed the most important and telling statement in the above article. The part where numbers don’t lie?
      Here, I’ve copied it for you:

      “But the numbers show very little traction for the product; a problem the C.E. Instituted has set out to address. H4Ps have averaged 154 endorsements over the full 13 month period from September 2013 through September 2014”

      That’s 154 H4P Endorsements over a 13 month period, that’s less than 12 a month! Total!

      You go right ahead and spend your time, energy and resources on H4P and be sure to give us an update on your P&L in March.

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