New Rules Improve the HECM for Purchase, But Challenges Remain

Recent changes to the reverse mortgage program that reduced principal limits and amended ongoing insurance premiums have many originators expecting a slump in business. But some say the Home Equity Conversion Mortgage for Purchase is greatly improved under the new guidelines, and they plan to double down on their efforts to promote the product in 2018.

In addition, new guidance released in October lifted the much-contested requirement that a certificate of occupancy be issued before the application process can begin.

Rob Cooper, national director of Reverse Mortgage Funding’s H4P program, says the changes have made the product much more appealing.

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“Looking at all the changes, I think the HECM for Purchase buyer came out looking pretty good. Interest rates have come down; they’ve become a lot more competitive, which is great for the customer,” Cooper says.

“They’re retaining a lot more equity; the annual MIP has gone down; plus, the total cost of the loan has gone down dramatically for a HECM for Purchase customer. If you add all of that together, you can see that the value proposition is much greater for a potential homebuyer.”

Chris Bruser with Retirement Funding Solutions agrees. “I think all the changes they made are positive for HECM for Purchase,” he says. “They make it more in line with traditional FHA financing, which is a great thing.”

Cooper says that removing the CO requirement has enhanced the product’s appeal to builders, and he’s already noticed an uptick in interest.

“Once the CO requirement went away, a lot of the larger builder opportunities have been coming to fruition. For many of the people I’ve been talking to, that was a really big hurdle. Now, I’ve been seeing a lot more interest,” Cooper says. “I’ve gotten two to three times more calls than I was getting before. People are now understanding the value proposition with the purchase product, and they want to incorporate it into their businesses and learn more about it. That wasn’t happening before.”

But while many agree that the H4P is improved by recent changes, there are lingering issues that some would like to see the Department of Housing and Urban Development address.

Some say it’s unclear whether HUD will allow an appraisal to be ordered until a certificate of occupancy is issued. H4P proponents argue that an appraisal should be allowed based on the plans and specifications; a final inspection would then complete the process.

“We’re hoping that gets clarified,” Bruser says.

Others are not so sure about the explosive potential of H4P under current market conditions. Michael Banner, a longtime H4P proponent and owner of Florida brokerage firm Professional Mortgage Alliance, says that while the changes are great, the product isn’t going to advance until the industry can get Realtors on board.

“Do I think that the new CO rule is great? Absolutely. Do I think that that’s going to help builders come to the table? Absolutely. But the breakout for the HECM for Purchase, the gold mine, is in the Realtor world — not the builder world,” GMRgold says.

Banner says a massive, industry-wide push to educate Realtors is the only way the product can realize its full potential.

Bruser agrees. “The Realtor community is vital, there’s no getting around that,” he says. “It’s going to take all of us being good stewards of the industry — not being too salesy, but making sure they understand this is not just another financing tool. This can literally change a person’s retirement.”

Written by Jessica Guerin

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  • Hey Jessica,

    There are a few corrections to your first sentence which need incorporation. First, the lending limit on all HECMs was increased for all HECMs on 1/1/2018 with case numbers assigned after 12/31/2017. Principal limit factors were lowered, initial MIP was changed to just one rate of 2%, and ongoing MIP was reduced to 0.5% for all HECMs with case numbers assigned after 10/1/2017.

    Mike Banner has it right. While those focusing on builders may find less resistance and more acceptance to H4P, nothing has been done to help those who focus on Realtors. IF H4P has a substantial role to play in our industry, Realtors must be part of the picture. Otherwise HECMs for Purchase will be the little impact product it has always been.

    Mike’s push is interesting but seems as futile as all such efforts in the past have been when it comes to H4P.

    • The post has been updated to reflect the difference between lending and principal limits; the point about changes to initial/ongoing insurance premiums doesn’t need to be explained in the lead in that much detail.

      • Alex,

        With a 0.75% reduction to ongoing MIP (a 60% drop in this cost), there should be more business not less.

        It is the change to initial MIP, a flat 2%, that is a problem. Borrowers with HECM case numbers assigned after 10/1/2017, no longer can obtain an initial MIP of just 0.5% by having 60% or less of the initial principal limit in disbursements during the first year of origination; they are now paying 400% times that upfront cost compared to that same cost for HECM borrowers with case numbers assigned after 9/29/2013 but before 10/2/2017.

        The change to initial MIP is an initial upfront cost change that is once again reviving the old HECMs are too costly debate for borrowers with first year disbursements of less than 60% of the initial principal limit. The drop in ongoing MIP is a selling point for the average originator.

        On the hand for those who do qualify for more than 60% of the initial principal limit in the first year of origination and have HECM case numbers assigned after 10/1/2017, the initial MIP has dropped 20% (from 2.5% to 2%) but they also enjoy a lower MIP of 0.5%.

        Perhaps I am missing your point. How is lower ongoing MIP hurting new origination at all? Obviously those who are saying that do not understand the economic impact of the MIP changes for most borrowers.

      • >>a flat 2%, that is a problem.

        It wouldn’t be a problem if I could still pay it. Reducing the floor to 3.06 has resulted in me not being able to pay the fees anymore.

      • Mr. Denton,

        Those who do not understand that problem have either never originated or it has been far too long since they have.

        We clearly see the effects in the very poor number of case number assignments in October and November 2017 (the lastest months that HUD has posted case number assignment information). The case number assignments for October 2017 was only 2,750 and for November 2017, just 3,575. That is less than the endorsements for those months.

        While the article states upfront that “…some say the Home Equity Conversion Mortgage for Purchase is greatly improved under the new guidelines, and they plan to double down on their efforts to promote the product in 2018,” let us hope we see at least some evidence of that doubling down in the number of future case number assignments.

  • For all of the positive response shown above, new applications are not reflecting those responses. We have seen a lot of optimism expressed about H4P with little growth. The total endorsements for H4P for fiscal 2017 were the highest they have EVER been but are still less than 2,900 and were about 5.2% of all endorsements.

    If there are the equivalent of 6,000 full-time HECM originators, then this production level would only require about 312 originators.

    Although we generally disagree on H4P, it seems Mike Banner has summarized the H4P situation very well. Without more Realtor participation, builders will improve HECM endorsements to some degree but will NOT do what Realtor referrals can. Perhaps something like the Extreme Summit needs to be downsized and focused strictly on Realtor education and referral production. Without full industry participation and support to create interest from Realtors with their rich vein of referrals, H4P will only be a shadow of what it can be.

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