Lender Finds Creative Fix for HECM for Purchase Hurdle

Frustrated by regulations that can slow the Home Equity Conversion Mortgage for Purchase program, one Iowa lender decided to employ a unique end-around to help borrowers buy a new-construction home with a reverse mortgage.

Fidelity Bank, based in West Des Moines, Iowa, announced the completion of a “forward” home equity line of credit-to-HECM purchase transaction this week, which allowed the homebuyers to move in as soon as the certificate of occupancy was issued — instead of having to wait for that document just to apply for a HECM.

“The reverse world needs change,” said Cecilia Delgado, director of Fidelity Bank’s reverse mortgage division. “They need innovative thinkers.”

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The buyers made a 50% down payment on the newly built $450,000 home and took out a HELOC for the rest, according to Delgado. Then, as soon as the certificate of occupancy was issued, Fidelity paid off the builders and allowed the buyers to move into the home. A little less than two months later, Fidelity arranged for a refinance of the existing loan into a HECM, essentially completing the HECM for Purchase transaction.

Fidelity senior vice president Rick Davis came up with the plan, Delgado said, as a way to innovate the occasionally vexing H4P program. The industry has long called on the Department of Housing and Urban Development to change the rules regarding H4P transactions, which currently prevent borrowers from submitting paperwork until after a certificate of occupancy has been issued for a new property — a factor that has made real estate agents, builders, and buyers skeptical of the process.

“The reverse world is just a little antiquated,” Delgado said. “They do things a little behind the times. We really need innovative thinkers and people that think out of the box.”

Delgado also speculated that the more “manual” nature of the reverse mortgage process may be behind the lack of HECM for Purchase traction, noting that seniors can’t use e-signing tools and face more stringent vetting.

Fidelity already has four more of these HELOC for Purchase transactions in the works, including one where the buyers are receiving a significant portion of their down payment from family members — something that Delgado said would be far harder to document under the regular H4P process.

“It’s a win-win situation for everybody, but most importantly, the borrower is able to move in right away,” Delgado said. “We’ve now opened it up.”

Written by Alex Spanko

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  • I don’t get it … seems this strategy would have worked prior to ML 14-21. But that ML says Credit Lines with more then $500.00 cash to the Mortgagor within the first 12 months don’t qualify for a HECM. How can they do it 2 months later?

      • Hey Robin,

        Good to see you again.

        If a sales contract is not an unrecorded lien in escrow, what is it? If the purchase escrow closed without buyer pay off but under a land contract (seller carryback mortgage) wouldn’t that become a lien, especially if a trust deed was filed?

        I am not an attorney but as a real estate broker in California it is my belief that the purchase contract of the collateral is a de facto unfiled lien against the property, while it is in escrow.

      • That seasoning exception doesn’t exist in the Mortgagee Letter. The letter says “Mortgagees may only permit the payoff of existing non-HECM liens using HECM proceeds if the liens have been in place longer for 12 months or resulted in less then $500.00 cash to the Mortgagor, whether at closing or through cumulative draws (ie: as with a Home Equity Line of Credit prior to the date of the initial HECM loan application.”

      • Raymond,

        There is more than one Mortgagee Letter on point. You are right that Mortgagee Letter 2014-21 is one and so is Mortgagee Letter 2015-02.

        The issue is when a payment is made directly to acquire the collateral related to a HECM application, is that payment, a payment to the mortgagor as described by the cited Mortgagee Letters? It would seem HUD COULD provide an exception for payouts made directly to acquire the collateral for a HECM.

        Then the next question is whether the loan described above meets the technical definition of a HELOC as contemplated in the previously cited Mortgagee Letters? The last two questions are for someone above my pay grade since HUD pays me NOTHING and I am NOT employed by HUD.

    • The lender finances 50 percent of the purchase. This is like a “bridge loan”. After the occupancy cert is issued and the Borrowers take residence? The Lender opens a HECM REFI. 45 days later, the refi closes and pays the balance fronted by the original loan.

  • While this is an answer to the H4P slower process, it is not a H4P transaction. It is a traditional HECM with some duplicative upfront costs. The industry was using techniques like this long before there was H4P. How sad if we take steps backward.

    HUD, take notice. Remember the rational for capping the origination fee? It was due to expected high H4P volume which has never materialized. So now the industry is reverted back to traditional HECM origination rather than H4P.

  • An interesting strategy that would certainly work for the typically ‘better heeled’ H4P customer. Use of the HELOC up front eliminates the qualifying advantages that the HECM has over the HELOC, and the customer is also faced with two sets of closing costs. This is really just a reversion to the pre-H4P days, and seems a bit onerous to gain a couple of weeks on occupancy. Perhaps a solution to a builder who insists on a closing immediately following issuance of the CO.

      • I see your point, but a rent-back on the departure home solves the double-move problem.

        I DON’T see your point re closing costs. In my market (VA) the borrower will have significant costs associated with the HELOC that will be duplicated with the HECM, with the possible exception of a only requiring a ‘bring-down’ on the title policy for the HECM.

  • I suppose this might be helpful for lenders that take forever to close a H4P but if you can take a H4P from app to close in 10 days after the CO is issued then whats the point? This option appears to be for inefficient lenders that don’t mind giving their clients more paperwork and costing them more time and money.

    • A little more time, but not more money. HELOC’s don’t cost much to obtain, saving the Homeowner a small fortune, since the Buyer must pay 100% of costs … the 2.5% IMIP with a purchase is painful. In my area total costs are around 24k. I’m able to contribute towards costs with a HECM refinance, and a full 2% is saved on the IMIP, so the strategy makes good sense.

      I just don’t see how the strategy is compatible with ML 14-21.

      • Raymond,

        In a purchase transaction, the purchase price is an unfiled lien. Where there is a sales contract signed by buyer and seller, any amount not paid by the buyer at closing and not in conflict with the terms of the contract is a valid and fileable lien against the property. Such debt is informally known as carryback.

        I am not an attorney but as a real estate broker, that is how I would argue the legal grounds under ML 2014-21.

    • BC,

      Sometimes, it is not a seller or builder who is demanding a speedier close but a buyer who is anxious about the move for any number of reasons. They are simply tired of the time process.

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