New Guidance Releases HECM-for-Purchase Market Handcuffs

In what’s been a recurring theme this year, the announcement from the Federal Housing Administration took reverse mortgage professionals by surprise: Lenders could now take applications for new-construction loans prior to the receipt of a certificate of occupancy.

It’s an issue that has bedeviled proponents of the Home Equity Conversion Mortgage for Purchase program for years, as it delayed the process for buyers, lenders, and builders alike. Various coping methods sprang up, including a unique workaround involving a forward-to-reverse refinance and a new-construction-only division of a prominent national reverse mortgage appraisal firm.

But all that disappeared with the release late last month of FHA INFO #17-44, which updated the agency’s FAQ on H4P transactions. 


“Properties are eligible for FHA insurance under the HECM for Purchase program when construction is completed and the property is habitable, as evidenced by the issuance of the ceritficate of occupancy, or its equivalent, by the local jurisdiction,” the notice reads. “The certificate of occupancy is required to be included in the case binder. Mortgagees may obtain the certificate of occupancy at any time prior to submission for endorsement.”

That last sentence changed the H4P landscape in one fell swoop, and could potentially provide a solution for a program that’s always seemed as though it was perpetually on the cusp of gaining popularity. For years, industry players described the transactions as a “sleeping giant,” just waiting for the right formula to convince key stakeholders that it’s a good solution for some seniors.

“I see it as very positive,” Dan Harder, vice president of 1st Reverse Mortgage USA, told RMD. “It’s something that I believe is going to allow the H4P to be viewed as a product that’s equal to the 203(b) and the 203(k) program.”

The Lakewood, Colo.-based firm has managed to generate 20% of its HECM business through H4Ps, but the road hasn’t been easy. In the past, Harder said, builders had been far more familiar with those two FHA-backed programs, which allow homeowners to purchase or upgrade homes with traditional forward mortgages, respectively. But the stumbling block had always been the certificate of occupancy issue, which simply confused builders.

“Over the course of eight years I think that we’ve had more builders turn down the invite, if you will of understanding this than not,” Harder said, adding that up to 75% of builders declined to work with H4P loans. “The CO really had the builder and the lender handcuffed.” 

Like many other firms, 1st Reverse Mortgage USA had to develop its own internal systems to shepherd buyers and builders through the process, eventually reaching an application-to-close timeframe of about 22 days. But all that has changed, and Harder — along with Cherry Creek Mortgage, 1st Reverse Mortgage USA’s corporate parent — is set to embark on a major outreach program to educate builders, real estate agents, and consumers about the new process.

“I think we’re going to have to go into a full-court press of education,” Harder said. “To…put this in their suite of products that they offer, it gives them a well-rounded product list for a builder or Realtor.”

Harder also applauded the FHA and the Department of Housing and Urban Development for making the change, which had long been sought by lenders, originators, and the National Reverse Mortgage Lenders Association.

“I think it absolutely simplifies it, and quite honestly, kudos to HUD to look at this product for what it’s intended to do, and to give us the flexibility to give our seniors a way to use this product for its intended use — and that’s right-sizing,” Harder said.

Written by Alex Spanko

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  • Let us spend a little time looking at the immaterial increase we have seen in H4P in the last 8 years. For the first time, fiscal 2017 may see more than 2,500 endorsements!! (Yes, just 2,500.)

    Now let us look at the claims of H4P expertise just in California and the so called education success that some have claimed which is not insignificant. Now let us look at the number of California real estate licensees which is over 400,000. There are over 100,000 CPAs in California and only about 7,000 to 8,000 CFPs which about one-fourth of the number of California real estate licensees.

    Now imagine if just 10% of the California real estate licenses gave out just on one referral each in fiscal 2018 and we were able to close on just 10% of those. That would mean H4P endorsements of 4,000 in just one fiscal year. So why don’t we see that sort of success after so many years of “successful” education campaigns (and this is just one state of 50 plus US territories and DC)?

    Again H4P is a great marketing tool. Yes, this change will help the builder segment of H4P but here in California south of Goleta, CA or in the Bay Area, except in the interior of California, we cannot expect much help since new home construction is so limited.

    While education seems to help with builders, education is very limited at least here in California on its impact in the resale home market arena. In fact it is disillusion.

    • IMO, the reason that H4P gets little traction in the resale market is because it’s best application is as an alternative to an all-cash transaction, and NO Realtor wants to put ANY unnecessary hurdles – least of all an FHA appraisal – between a contract and a closing.

      • REVGUYJIM,

        I am not about to engage in a debate about the cause but clearly the endorsement numbers do NOT support and may I say, will not justify the effort and money that has gone into the “education” effort.

    • The most underrated reason for a slow endorsement rate, or utilizing H4P for that matter, would seem to be unqualified borrowers.

      You criticize each and every attempt of researchers who strive to find solutions and offer theory for ways to improve the situation, but you never seem to be able quite put your finger on the “why” part of, “they’re wrong again;” just that you think that they’re wrong again and cite “too many real estate agents” or something equally obfuscating.

      With the financial crisis, many would-be borrowers just plain lost their HECM qualifying-equity, and are only now making significant recovery. With coming pro-growth economic policies and already underlying recovery in housing value, these discussed solutions, including the H4P program may very well improve along with the economy in general (just as they say it can).

  • I would like to see a schematic on just how the H4P will mirror a true “Construction to perm loan”?

    I still can’t get it through my head how the H4P will interact with the construction loan as a true CP product. I am probably being thick headed, we all have that opportunity to have those once in a while:)

    What gaurentee does a builder or borrower have that the HECM will be in place for them when the home is completed?

    Help me out, am I looking at this all wrong????

    John A. Smaldone

    • John,

      Looking at the stats on H4P versus total endorsements, the modified annualized conversion rate for fiscal 2017 for HECMs generally was 67.7% which is the highest fiscal year rate we have seen since fiscal 2011, when it was over 69%.

      BUT the modified annualized conversion rate for H4P as of July 31, 2017 was a whopping 86.9% (July 2017 is the latest data HUD has publicly issued on H4P). That is a difference of 19.2% which is incredible. Based on limited H4P data, it is also the highest such rate the industry has seen for H4P; however, it has never been close to the 99.7% rate we saw for HECMs generally as of July 2007. A conversion rate of 99.7% means that for an entire twelve month period (August 2006 to July 2007), hardly any applications that reached case number assignment did not close; even though I was part of the industry back then, that percentage is hard to swallow but it is what it is.

      So in speaking about H4P, they are very likely to close once they reach case number assignment. But that is not the same as a guaranteed close so your point is well taken even if we can provide somewhat comforting stats about H4Ps.

      • John Smaldone’s question was, quote:
        “What guarantee does a builder or borrower have that the HECM will be in place for them when the home is completed?”

        How many of those 2007 “closed” H4P contracts that you cite were for existing homes, and how many closed for under-construction homes?

    • >>The most underrated reason for a slow endorsement rate, or utilizing H4P for that matter, would seem to be unqualified borrowers.

      That hasn’t been my experience, Ed. H4P Borrowers are the most qualified Borrowers I’ve met.

      • Raymond,

        You have replied to the wrong person. You wanted to reply to Ed, not John.

        HOWEVER, I agree with your point.

      • No, you read it wrong. The way it should be understood is that the unqualified can’t become borrowers in the first place.

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