Reverse mortgages in general are seen as something of a niche financial product, with a low penetration rate compared to the traditional, forward mortgage world. Adding to the niche status of reverse mortgages could be the plethora of different product options available, including the prevalent Home Equity Conversion Mortgage (HECM), a growing variety of proprietary “jumbo” options, and new product offerings that aim to combine a traditional mortgage with some qualities of a reverse mortgage.
Another option which remains little-used is the HECM for Purchase (H4P), which gives qualifying seniors the ability to purchase a new home using the proceeds of a reverse mortgage loan. Uptake of H4P options remains minimal, though some regional lenders have seen a degree of promise by devoting some of their operations to H4P business, observing meaningful growth in some cases.
To check in on the way H4P business is progressing in 2021, RMD checked in with several major lenders as well as a reverse mortgage industry analyst to see what is happening with the H4P business segment, and how lenders are perceiving the opportunities it could present.
Lender thoughts: why H4P is lagging behind traditional HECM
Major lenders who use the H4P product have a variety of thoughts about why this specific variation has yet to catch on in the broader reverse mortgage marketplace. One opinion is that for reverse mortgage loan officers, the H4P option is still relatively new in comparison with other kinds of reverse mortgages, especially HECMs.
“[I think] the product is relatively new out there in the marketplace from an availability point-of-view,” says Jesse Allen, executive vice president of alternative distribution at American Advisors Group (AAG). “So, there’s definitely an ‘awareness opportunity’ as it relates to consumers, adult children, Realtors, builders, and loan officers.”
Another potential impediment to using H4P could potentially be tracked to a lack of enough familiarity with the ways in which purchase transactions work in relation to reverse mortgages specifically, Allen says.
“The other thing I think that holds the industry back a little bit [and keeps us] underutilizing the product is just the sales force’s general awareness and subject matter expertise with the [H4P option],” Allen explains. “We have a sales force, as an industry, who just aren’t historically as comfortable working with Realtors or builders [or] understanding purchase. It hasn’t historically been a product that the reverse mortgage originator has worked with. And so, A) it’s a new product, and B) it’s an acquired skill set on many fronts with the industry sales force.”
Another lender describes that while expanding H4P business is a substantive priority, building out important sales relationships will be key to expanding the penetration rate of H4P both in an originator’s primary lender, as well as industry-wide.
“While there is a knowledge gap around HECM for Purchase, we believe affinity relationships can help create a powerful product awareness platform,” says Rob Cooper, national sales leader of the purchase program at Reverse Mortgage Funding (RMF). “To better facilitate these relationships, RMF is expanding its corporate marketing purchase lead generation programs and investing in a team dedicated to building strategic business alliances.”
Allen adds that lenders need to go to where the customers are, and a compelling data point from the National Association of Realtors (NAR) Research Group study, “The 2019 Home Buyers and Sellers Generational Trends Report,” helps to further emphasize where an increasing segment of seniors are going.
“You can’t ignore the fact that nearly 39% of all home purchases – not just new construction, but including existing homes – are made by baby boomers,” Allen says, citing the report. “Boomers are active in the home purchase market, and we also know that a lot of this activity is going on because maybe only 4% of the homes that they currently own are equipped for limited mobility. So, they have these issues in the homes that they own, and not all of them want to age in place.”
Aging in place is, of course, a longstanding selling point in the reverse mortgage market, but if an increasing share of the target demographic is looking to relocate into a newer home for one of what can often be a variety of reasons, then the reverse mortgage industry needs to make a concerted effort to meet those seniors where they are if they’re ready to make a purchase, Allen says.
“[Our audience is] telling us they’re active, and some of them want to move to different communities,” he says. “They want to buy a new retirement home, they want to maybe move near where they have a higher quality of life, or for reasons related to family, health care or transportation. If their existing home is simply not set up for the limited mobility and healthcare needs that come with aging, then this may be a viable option for them.”
The data: how H4P is lagging behind
According to HECM endorsement data over the past couple of years, overall levels of H4P endorsements seem to be diminishing. Data compiled by Reverse Market Insight (RMI) and shared with RMD shows that in 2019, there were 2,305 H4P endorsements in a year which had a total of 34,420 overall HECM endorsements leading to an H4P penetration rate of 6.7%.
The following year in 2020, when the reverse mortgage industry saw a notable uptick in general interest during the COVID-19 coronavirus pandemic, the overall HECM endorsement count increased by roughly 10,000 loans but saw only marginal increase in the rate of H4P endorsements. Out of 44,418 HECM endorsements in 2020, 2,493 of them were H4P loans, coming out to a penetration rate of 5.6%, a drop of more than one full percentage point even though the raw numbers were higher.
Thus far in 2021 – with 16,984 HECMs endorsed between January and April – there have been 822 H4P endorsements, coming out to a penetration rate of 4.8% in the first four months of the year. If that trend continues through to December, then the rate of H4P loans in comparison with broader HECM volume will have diminished at nearly the same pace that it did last year.
“The industry is clearly trending downward in terms of H4P share of endorsements,” said John Lunde, president of RMI. “But that’s mainly because other areas of the industry are growing much faster than H4P, especially refinances.”
Look out for additional H4P perspectives on RMD in the coming days.