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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