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.
“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.
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