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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