Despite Latest HUD Ruling, H4P Hurdles Remain

Editor’s note: A previous version of this article misidentified Rob Cooper of Reverse Mortgage Funding as Jeff Cooper. RMD regrets the error. 

In the eight years since it was first offered under the Home Equity Conversion Mortgage program, the HECM for Purchase (H4P) has failed to gain traction, despite the fact that many believe it could be critical to alleviating a housing problem for a great number of aging boomers. Some in the industry claim that originators haven’t worked hard enough to spread the word about the H4P, while others point to product flaws that make it unmarketable.

Recently, HUD made strides to address problematic H4P requirements that many say have hampered the product’s success. But its ruling failed to address one important issue and left the industry seeking clarification regarding another. Industry commentators say that while HUD’s acknowledgement of the issues is a positive step, there are still significant barriers in place that are preventing the H4P from gaining momentum.


Seller Concessions

One of the biggest roadblocks hampering the H4P’s success is HUD’s ban on seller concessions. Unlike forward purchase transactions, where sellers pay fees and closing costs associated with a home purchase, H4P buyers must alone shoulder these expenses, which can include property surveys, attorney’s fees, transfer taxes and recording fees, among others. This is particularly problematic because H4P buyers have to put down 50 percent of the purchase price.

For years, NRMLA lobbied HUD to reconsider its rule, which it called “the largest obstacle preventing the HECM for Purchase program from attaining market acceptance” and asserted the practice was in direct conflict with some state laws.

In its recent ruling, HUD acknowledged industry protestations and revised its position, mandating that it will now allow for “fees customarily paid by a seller in the subject property locality to be a permissible interested party contribution.”

While many in the reverse space are relieved that HUD has finally addressed the issue, some say the language is too vague.

Michael Banner, a longtime H4P proponent and owner of Florida brokerage firm Professional Mortgage Alliance, says further advisement from HUD is needed. “The wording is a little more ambiguous than I had hoped,” Banner says. “If the seller paying for the owner’s title policy and recording fees is customary—which it is in my area—it seems that this would be allowed by HUD. If that’s the case, then this is great news….The question remains, what if the seller paying 3% or 5% of the closing costs is customary in your area? Will HUD be open to that as well?”

Rob Cooper, national director of Reverse Mortgage Funding’s H4P program, also questions HUD’s open-ended language.

“Do seller concessions include any kind of lender credits? That is a big one for the large national builders, because in my opinion, they are the ones who are going to take this to the next level. That’s where penetration rates have been,” says Cooper.

It seems these questions will linger, though, until further policy guidance is released. HUD’s ruling states that flexibility will be granted to the commissioner to determine what specific contributions will be permissible, and that details may be revealed in a future notice.

Certificate of Occupancy

Another challenge holding back the H4P is a Certificate of Occupancy (CO) requirement, which specifies that a loan application cannot be issued until this certificate is in hand. For seniors looking to purchase a new build with an H4P loan, this is especially problematic.

“In the forward world, you need to have a Certificate of Occupancy before you close the loan. For the H4P, you have to have a CO before you can even take an application,” Banner says. “It makes no sense whatsoever.”

Some say the CO requirement prevents builders from embracing the product. “The builder has to carry a finished house on his books for the next four to six weeks because we aren’t even allowed to take an application until we have a CO. Now if you were a builder, would you want to put up with that?” Banner says. “The builder CO situation is very serious. Why would a builder want to keep hundreds of thousands of dollars tied up because of a special mortgage?”

Cooper agrees. “If we didn’t have the CO issue, I’m pretty confident that builders would be promoting it quite a bit,” he says. “Why wouldn’t they? They can capture customers they wouldn’t capture without this program.”

H4P proponents are especially vocal about the unfairness of this rule, as new construction built to accommodate seniors financed by a reverse mortgage could play an important role in addressing the housing needs of this growing demographic.

While HUD’s latest ruling acknowledged commentary regarding the CO issue—specifically that it restricts consumers’ access to the program—it declined to issue a ruling on the matter, stating that “the timing for taking the initial loan application will be addressed in future policy guidance.”

NRMLA spokesperson Jenny Werwa says the association is working to push the issue. “NRMLA continues to advocate for changes to the CO policy and is working with HUD to resolve the matter before the final rule is implemented on September 19, 2017,” she says.

Apathy and Education

Although H4P requirements do raise serious concerns, some say we can’t simply blame HUD for the product’s failure. Originators, some claim, have not worked hard enough to promote the H4P.

Banner has been vocal about his belief that the industry has failed the product, claiming a lazy sales force is the H4P’s biggest hindrance.

“People just want to be given leads,” he says. “We don’t have an army of salespeople, we have an army of order takers. And we wonder why endorsements keep going down and down and down.”

From January through November last year, there were just 2,082 H4P endorsements, down from 2,461 in 2015. The numbers are bleak considering the estimated size of the potential market. According to the National Association of Realtors, 5.1 million homes were sold in 2015, and 14%—or 700,000—of those sales involved homeowners 62 and older.

Cooper says it’s all about education.

“I believe that we as an industry need to have more people who really understand how to position and manage these accounts,” he says. “It’s a highly consultative sale and it’s new to everyone… I think it’s really important moving forward that we have representatives who focus on nothing but the HECM for Purchase product.”

“Do I look at it as a failure on the part of the industry? Apathy? Maybe. Or maybe it’s more about education. Maybe we really need to dig in and take our production education to the next level so can we effectively communicate what this product can do.”

This edition of the RMD Report is sponsored by national appraisal management company Landmark Network.

Written by Jessica Guerin

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  • There are a number of odd claims in the article. If the HECM has an expected interest rate of 5.06% or less, generally the only way that the down payment is 50% is if borrowers are under 65. If the senior were 90, the down payment would be about 30%.

    Then there is the very odd claim that in some areas, “a seller paying 3% or 5% of the closing costs is customary.” Based on the quotation, if the purchaser’s closing costs are $20,000 on a $400,000 purchase, the most that could be paid by the seller of the buyer’s closing costs is $600 to $1,000 of those costs. No doubt the interviewee has little experience in real estate transactions, where the 3% to 5% is of the purchase price of the home (not its closing costs) so that on a purchase of a $400,000 home, the seller in those communities might customarily pay up to between $12,000 and $20,000 of the closing costs of the purchaser. Far too often a lack of education and experience in real estate finance shows up in discussions by mortgage loan officers on aspects of the purchase of a home, especially when they are not also real estate licensees. In my area, sellers customarily pay few (and only specified) costs of the purchaser’s closing costs, normally coming in at a total of under $2,000.

    While the CO issue is interesting, isn’t the result of forcing the application after issuance of the CO a matter of forcing the speculative nature of building on the builder rather than HUD? Here in California tracks built on speculation are not uncommon. Why should HUD take the risk of speculation away from the builder? The issue seems more a matter of risk and the risk assessment group at HUD than simply a matter of convenience for the builder. As an insurer, HUD’s pricing is based on equal risk from a purchase or a traditional or refinanced HECM. Risk should be equal or the upfront MIP on a H4P raised from 0.5% to 1.25% (and from 2.25% to 3%) of the total purchase price (with no cap) leaving the rate on traditional and refinance at 0.5% and 2.25% of the MCA. That would leave the purchaser bearing the risk which should not be the case where the home already has a CO at the time of H4P application and the home is new as defined under state law; in the latter case the upfront MIP on those H4Ps should remain at 0.5% and 2.25% of the MCA.

    Then we come to being lazy. (Actually those who cry out about 3% to 5% of closing costs need to work harder to understand the basic purchase transaction.)

    I have not met one of these naysayers who have done as much work in personally originating H4Ps as they espouse others do. (Normally those who fly around the country introducing H4P are being compensated in ways other than being the originator on a H4P.) A name fits such people and hypocrite seems close.

    • Cynic,
      I do not understand what you are trying to say here.
      “While the CO issue is interesting, isn’t the result of forcing the application after issuance of the CO a matter of forcing the speculative nature of building on the builder rather than HUD? Here in California tracks built on speculation are not uncommon. Why should HUD take the risk of speculation away from the builder?
      Although I have done several H4P none have been new construction. Being able to take an application and start the loan process before the CO is issued does not seem to put any risk on HUD as it would be a condition that would have to be cleared before the loan could close. There is no loan funding until this would happen, where is the risk?

      • EricSD,

        Your point is well taken if your assumption is that closing will get it right. With so many different CO designations and approval forms, HUD as the insurer is simply taking the safest position. In the simplest of terms, when CO is required at application, the builder bears the risk and there is less pressure for an improper closing.

        If you do not understand the problem of dealing with an impatient builder/general contractor, just listen to and watch our President in action.

      • Cynic,
        Not trying to be argumentative but how is requiring the CO at application guaranteeing that closing will get it right? It has to be right regardless of when it is required. If it is wrong then the loan does not close, whether the builder is impatient or not does not matter. In fact, if the loan has been processed and is ready to close but the CO is wrong that would only put pressure and a sense of urgency on the builder to get it right because he is the one holding up the closing. The only risk to HUD is when the loan is closed and if the closer got it wrong then that is on the lender, not HUD and again that can happen regardless of when the CO is required.
        I was in the trades for many years when I was young and am very aware of the builder mentality. Give them a reason to make this loan a good option and they would welcome it as they just want to get paid as fast as possible which is understandable.

      • EricSD,

        Builders are already incorporating H4Ps as financing they “offer” despite the CO requirement. There is one originator in the Midwest who has been doing business with a builder for years now with that builder treating her as its preferred financing source for seniors. There is also a similar story regarding a builder near St. George, Utah. And there are others.

        The CO barrier is not a matter of education but salesmanship with the builder. It sounds as if the builders that are being complained about do not see the H4P as a means to gain more sales buying more amenities and even larger units than senior buyers might be able to buy right now.

        Some see the CO as a barrier while others see it as an objection that must be overcome.

        Now as to your points about the CO needing to be right no matter when it comes, who can argue with that? One can argue when the CO issue is the easiest to manage and ensure that DE underwriting reviews the docs with the time needed to clear all issues.

        While I see the CO issue and the reluctance of builders to meet HUD requirements as a salesmanship issue; you see it as a barrier that HUD must remove. We can argue but it will be difficult to change either of our minds.

        But the issue remains, why were H4P endorsements down last fiscal year? Why have there been less than 14,200 endorsements through November 30, 2016, the date of the latest info HUD has given us at 3/2/2107 at 3 PM EST when the H4P was made legal on 7/31/2008?

        We were told back in November 2008 that long before now, H4P endorsements would be 50% of annual HECM endorsements. One Florida broker is still living off and selling that concept to his staff.

      • All good points Cynic, except that I am not arguing about the CO being a barrier needed to be removed, and salesmanship has nothing to do with it. My question is and always has been, Why? There is still know clear reason as to why it is required prior to application. There is no more risk to HUD than on a forward FHA loan which only requires the CO to be issued before closing, it is that simple. Why can’t the guildlines be the same for RM as they are for Forward FHA loans which also allow the seller to pay closing costs? I do not think you can honestly say that H4P numbers would not be drastically different (for the better) if these barriers where removed. All our industry has asked for is to be treated the same which we are clearly not.

      • EricSD,

        Why keep arguing with me? Whether I see risk or not, the only counter of risk that matters is HUD, period.

        Why not negotiate with HUD? If they see risk, offer a mitigating factor like a new but higher upfront MIP rate like I previously suggested. Forget your sense of equity and understand HUD has its own sense and they are protecting US tax dollars; get the originations, not equity.

        If there were no risk to getting the CO why doesn’t the builder do it? You talk about costs but the costs are exactly the same. The CO merely starts certain payments that the builder can negotiate as part of its construction loan on a one property and by one property basis. Understand the construction lender wants the property out of their hair as much as the builder.

        If you think the costs go up for the builder, please explain why? In most cases there may be a change in the interest but the real problem is potential cash outflow for the builder BEFORE title transfers.

        It remains my view that the CO issue is a matter of selling the builder on the idea that with H4Ps seniors are empowered to get more house with more amenities. Builders are sellers, not educators. Give them a vision of reasonable risk for a higher reward and they will listen.

        While we need to give the builder a limited education on H4Ps, we need to sell them on the advantages they can find by working with seniors by get a H4P.

        I am sorry but what I am hearing is there is a barrier and we need HUD to remove it. Many in my generation believe that if they run into a barrier, government should change it for them. There is a work around and why not use it or negotiate with HUD? Me, I can’t do a stinking thing to change the problem.

      • Cynic,
        I am arguing that the guildline does not make sense! Whether it is with you or HUD is not the point. Forward FHA loans do not require the CO to be issued before the application so why should it be on RM’s? And why would we negotiate a higher MIP? We both DO agree that neither one of us can change the problem, so we can agree to disagree!

      • EricSD,

        The more you argue with the wrong parties, the more you are wasting time and perhaps even missing the opportunity with decision makers in moments of reconsideration.

        You have two cases. One with builders and the other with HUD. Focus where the solution and potential income lie and that ain’t me.

  • This is a great article written by Jessica. It points out many great points and what Mike Banner had quoted is right on when he said, further advisement from HUD is needed. “The wording is a little more ambiguous than he had hoped, which I agree with Mike on that.

    It is a great step in the right direction that HUD does recognize the problems with the H4P program.

    However, as the article stated, “There are still significant barriers in place that are preventing the H4P from gaining momentum”

    One thing is for sure is that a greater percentage of our industries loan originators are either not going after this market or they are having a problem knowing how to approach the real-estate Broker properly.

    The market is out their, seniors are buying homes, either by down sizing or re-locating to be closer to relatives. We need to work with the real-estate professional and show them how the H4P program can increase their sales!

    John A. Smaldone

    • John,

      As to your observations about the article you have done a great job of gleaning its better points.

      As to your points about RE brokers, is it really all that hard? As a RE broker, I have never had much trouble relating to them. BUT when the broker is the office manager, getting them to allow access to their staff especially when they have a forward mortgage unit attached to their company is difficult at best.

      I have attended open houses but trying to speak to the salesperson there is next to impossible. Going to the office meetings is difficult because the salespeople are committed for a period of time and if other matters run over, you are left with 8 minutes to describe how a H4P works even though you provided coffee and donuts.

      While free CE courses on H4P can be practically done in the mornings or afternoons at many RE offices, follow up can be quite difficult. This is why as of 11/30/2016 (the latest data on H4P HUD has posted), there have been less than 14,200 H4Ps endorsed since 7/31/2008, the date that HERA was enacted which is a little over five H4Ps endorsed per day.

      While H4P is a delight to discuss with Realtors, they usually end up being more interested in traditional HECMs. Even with Realtors, H4P seems more marketing tool than answering a need for seniors looking for homes.

  • Adjustable rate Savers need to be restored as they were on 9/29/2013 more than H4Ps changed.

    We hear again and again about the importance of H4P to the industry. Yet since becoming part of HECM law on 8/31/2008, there have only been H4P 14,150 endorsements through November 30, 2016 (the latest info on H4Ps as of 7 PM EST this evening). HECM Savers which were only around between October 4, 2010 and September 29, 2013 (inclusively) had 14,662 endorsements.

    We had complaints about Savers from originators claiming they did not know who to target with them. Yet Savers had more endorsements in less than half the time that H4P has been in the law.

    Look at the fight for H4P and the lack of fight for Savers. Has our fight for the one but not for the other really made sense?

    Let us be clear, Michael Kitces and other financial advisors were touting Savers while Savers were around but were turned off when HUD terminated and replaced Savers with what some still call after almost 42 months, the NEW HECM.

    If we were smart, we would be putting in the effort into restoring the adjustable rate Saver as it existed on 9/29/2013 as we have on changing H4Ps.

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