Feature: Selling the HECM for Purchase

Written by Jessica Linn Guerin & Michael Banner

The HECM for Purchase allows seniors to finance a portion of a new home using a reverse mortgage. It can be a valuable tool for someone who is looking to downsize or move closer to relatives, but who has limited funds to support this transition.

In light of the dismal statistics regarding the boomer generation’s lack of retirement security, the HECM for Purchase has considerable potential and could thrive as a useful product for those who want to maintain liquidity and still purchase a new home. But despite the obvious appeal of a product that allows you to do this without taking on a monthly mortgage payment, sales of the seemingly promising product have waned, with industrywide numbers trickling downward and settling in a rather disappointing slump.

Still, reverse professionals remain hopeful about the product’s potential, and many say they believe that with a focus on education and a little elbow grease, the Purchase product can become more dominant in the HECM marketplace.

The Purchase Appeal
The HECM for Purchase was established in July 2008 when the Housing Economic Recovery Act was signed into law and the FHA was granted the authority to create this variation of the traditional reverse mortgage. A HUD Mortgagee Letter followed in October that officially implemented the program.

Many characteristics of the HECM for Purchase are the same as a traditional HECM, with the same loan-to-value calculations involved, but there are some unique aspects of the transaction. For example, a borrower must move into the new home within 60 days of closing, and if they own other properties, they must make the new home their primary residence and provide verification of their personal income and funds. Purchase borrowers must have a considerable down payment in order to meet the loan-to-value ratio requirements.

The premise of the HECM for Purchase—or H4P, as some call it—makes sense for seniors facing a common transition in their retirement years. As a special-purpose loan, it’s designed to accommodate a specific borrower, one who wants to buy a new principal residence and obtain a reverse mortgage in a single transaction. By selecting this option, the borrower can accomplish both tasks at once with only one set of settlement costs, effectively streamlining the process.

A Slow Start
The Purchase product has been slow to catch on. In 2009, its first full year in action, the H4P comprised just 560 of the 114,691 HECMs closed. In 2010, as more people became familiar with the option, this number more than doubled to 1,389, with most of the loans closing in California, Florida and Arizona. The percentage of Purchase versus Standard or Saver HECMs is minimal. According to the CFPB, Purchase loans comprised just 1.8 percent of all HECMs originated in fiscal year 2010, a number that rose only slightly the following year to 2.3 percent.

The numbers are disappointing to many in the industry who believe the product could help thousands of struggling seniors across the country. At a Texas Mortgage Bankers Association conference last year, John Lunde of Reverse Market Insight (RMI) estimated the potential Purchase market to be roughly 70,000 seniors annually, considering statistics on senior homeownership and relocation, and factoring in the existence of other mortgage options.

So why is H4P volume so low?
For starters, the recent exit of big banks from the reverse mortgage industry hasn’t helped any. Wells Fargo, Bank of America and MetLife once topped the charts with the highest HECM for Purchase volume, and all three have left the reverse space in the past two years. Since then, Security One Lending and Cherry Creek have picked up the slack, but neither has been able to achieve the numbers we saw the big banks bring in.

“We have seen

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a few big success stories,” Lunde said, “but nationally we’ve been disappointed by the low volumes.” Still, Lunde said he and his team at RMI remain hopeful that lenders will learn to better market the product to a wide base of potential consumers. “We think lenders will eventually see a lot more success with the product and continue to believe it can double or triple the current HECM volume, but it will take time for lenders to establish the right distribution channels and work with a whole new set of partners for this to work. Builders, developers and Realtors have been almost nonexistent in the HECM market before Purchase was introduced, so most lenders weren’t set up to address the Purchase opportunity when it was announced.”

Education and Outreach
Indeed, some lenders have caught on, learning to successfully sell the product by connecting with Realtors and developers. One notable success story comes out of St. George, Utah, where Cherry Creek Mortgage partnered with a local builder/developer in 2011 to assist seniors looking to buy into the development through the use of a Purchase loan. Cherry Creek closed about 100 transactions in St. George that year, prompting RMI to laud its creative sales tactics. “Single companies with an innovative approach to the customer, product and/or market can change the shape of the industry in a city, state or even nationally,” the company wrote in its newsletter.

Other reverse professionals are taking a different approach, reaching out to the Realtor community in the hopes of establishing a referral base with active real estate agents in their areas. Many have found that in order to establish this connection, they will first have to educate Realtors about the H4P, as most seem to be wholly unaware of the existence of this niche HECM.

The National Association of Realtors (NAR) does offer members some information about HECMs in general, including a “Field Guide to Reverse Mortgages,” but it fails to mention anything about the HECM for Purchase. The association does, however, proclaim its support for the product: “The [HECM for Purchase] will streamline the process for seniors who wish to sell their home and purchase another, while receiving the benefits of income from a reverse mortgage. Currently such a process would take three transactions, with three sets of closing and origination fees. The new product would entail only two transactions—the sale and purchase, streamlining the process and saving seniors money.”

Judy Burke, a Realtor based in Westlake Village, Calif., was introduced to the H4P by a local loan officer who was teaching classes in her area about the program. Once she learned about the benefits, Burke said she became a big supporter of the product. “I realized that it could be a great thing for people whose retirements didn’t turn out like they had wanted,” Burke said. “It could solve a lot of problems.”

Burke also said she thinks the H4P is not just a nice option for the right buyer, but can be ideal for a seller too, making a point that might be useful for reverse professionals looking to approach Realtors. “It provides the buyer with a position of strength, because we’re in a competitive market… and so if I can say my buyer is using a reverse Purchase, coming in with roughly 40 percent down and with no credit report requirement for the loan, that’s a good deal. I think it puts them second to a cash buyer.”

Burke said that she believes more Realtors will come around to this idea, but it will require a serious effort to educate. “I think education is the key for Realtors to realize that it’s not all about how to build the most equity as fast as you can. For me, it’s just one more thing that will help the homeowner,” she said. “Loan officers need to educate the Realtor community so we can really understand the positives and negatives. We’re the ones interfacing with the [potential homeowners], and we should be able to offer them a variety of choices.”

Gay White, a Realtor in Walnut Creek, Calif., agreed. White said she also learned about the H4P from a reverse professional. Martha Echols, a reverse mortgage specialist with Security One Lending, attended a marketing meeting for Realtors involved in selling homes in a senior development, where she met White.

White said that before meeting Echols, she and most of her colleagues were unaware of the product. “Everybody was very surprised that a program like this even existed,” White said, echoing Burke’s comment that lenders need to work on educating Realtors. “If there’s not education by the lender, [Realtors] are not going to know to look into it. I think that your challenge is to educate the agents rather than the general public,” she said.

White also predicts that more of her colleagues will embrace the product if lenders really focus on educating the Realtor community, adding that some of her colleagues are already catching on. “More agents are putting it in their arsenal of weapons,” she said. “I can’t say enough about it. I refer almost everybody to the HECM program to find out if in their particular situation, it would work for them.”

Since meeting Echols, White said she has facilitated three H4P transactions, and she credits Echols with her success. “It was all because of Martha. She was down-to-earth and her presentation allayed my fears about reverse mortgages right away,” White said. “She was persistent and knowledgeable.”

White stressed the importance of meeting with Echols face to face. “The trust was there right away, because she wasn’t just a name, she wasn’t just emailing information. She was on hand to talk it through and showed she was dedicated to the program.”

For her part, Echols said she did her due diligence, attending hourlong marketing meetings once a week to talk with Realtors, and that all her hard work paid off. “Forty percent of my business in the last year has been from Realtors,” Echols said.

Echols recommends that reverse specialists looking to connect with Realtors in their communities put in the time. “Consistently go to the meetings, and make sure you handle each transaction with utmost care. Handling a transaction poorly can damage your referral base,” she said. “Every time I get a referral, I circle back right away and follow up [with the source].” Echols said this consistent communication helps build an essential level of trust, but she admits that it’s a tough process. “Handling a Purchase transaction is not for the faint-hearted loan officer,” she said. “You have to be totally committed and it takes a lot of work.”

The Future of H4P
While the current housing slump may be an inarguable barrier preventing the H4P from reaching any truly outstanding numbers, there are hardworking reverse professionals out there who have proved that with considerable effort and a little creativity, it is possible to sell the product in this environment. It seems that the key is to adjust marketing efforts to focus on building relationships with developers and Realtors. By educating them about the possibilities afforded by this specialized product, it might be possible to reach a greater number of consumers. If this concept becomes our mission, we may see the H4P play a bigger role in the HECM marketplace in years to come.

 

Let’s Awaken This Sleeping Giant
By Michael Banner

Is the HECM for Purchase the “sleeping giant” of the senior real estate market?No one knows, but the product’s past performance certainly suggests that it’s not, which leaves me to wonder: Has the product failed us, or as an industry, have we failed it?

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seniors in all income brackets across this great nation are experiencing the perfect storm in regard to retirement planning. This is a fact that is hard to dispute. The recession has affected people of all ages, especially seniors, who are left with few options to support their retirement. A record low rate of return on CDs, annuities and savings (vehicles once relied upon by many seniors to support retirement), coupled with record portfolio losses and declining home values, have put seniors at a loss. Now, seniors all over this country are left to fret over their limited options, many likely thinking, “Maybe retirement is not going to be what I once thought it was.”

So I will ask my question again, but I’ll rephrase: Why isn’t the H4P the sleeping giant of the senior real estate market? Why isn’t a mortgage product that allows clients age 62 and older to forgo monthly principal and interest payments for as long as they live in their home the sharpest arrow in a Realtor’s quiver?

The Public Perception Problem
Although it has been around since late 2008, the HECM for Purchase has garnered little interest. In the past few years, I have taught classes on the H4P to more than 2,000 real estate agents across the nation, and I believe my unique experience can shed light on why it has been so difficult for Realtors, and consumers, to accept this program.

One main reason that this great product has not flourished is obvious. The traditional reverse mortgage has had so much negative press surrounding it for so many years now that we first must overcome that hurdle before any real estate agent will endorse the product. It has long been portrayed as a needs-based product or one of last resort. 8

A response to the suggestion that a senior homeowner consider a HECM for Purchase tends to sound something like this:

“Come on, I’m purchasing a $500,000 home and you are talking to me about a reverse mortgage?”

“Reverse mortgages are for poor people!”

“Maybe I should find another real estate agent.”

Hearing this from a potential client is your average real estate agent’s biggest fear!

Because of the current economic climate, the traditional reverse mortgage has risen from relative obscurity in the beginning of this decade, becoming a common topic of discussion in practically all aspects of retirement planning. Despite the uptick in discussion, a tremendous amount of misinformation and half-truths still surround the product. And unfortunately, at times our detractors seem to have much louder voices than our advocates. This is no easy hurdle.

It’s All About the Effort
Aside from the obvious need to enhance the public’s perception of the product, there is another, greater reason that the H4P is being overlooked. (And I know I will be getting a fair amount of grief about this—bring it on!)

Here it is: The great majority of reverse mortgage professionals have no idea how to deal with Realtors. And of the few that do, many do not want to put forth the effort. Building a referral base of Realtors that can actually produce for you is very hard work. Teaching real estate agents a totally new way of thinking—especially about a product that has gotten so much negative press—is even harder.

Make no mistake about it: This is a commitment that involves some serious time and dedication. It requires you to get up every day and “get to work.” You need to see a certain number of new agents every day, and you should visit the ones you have already identified as strong potential referral sources (Realtors tend to forget you if you don’t stay in front of them fairly often). All of this needs to be done while taking care of your existing clients—you’ve got to earn a living while building that referral base!

Oh, and please don’t let me forget this little tidbit: The great majority of real estate agents in this nation don’t even make a living selling real estate. Many of them are part-timers who will probably never send you a lead. So, please add to your list of things to do “separating the time stealers from the real professionals.” These are the ones who truly make a living from their chosen profession and who have the most incentive to learn about H4P and the benefits of promoting the program to their clients. So, you see? This just ain’t easy, people!

This is about relationships. And guess what? Your prime relationship is with your Realtor. That’s right, that Realtor is your primary client! Take good care of him or her and hopefully you will receive many referrals for years to come.

Now, before anyone starts writing about their absolute dissatisfaction with me for actually putting into print the notion that we would consider anyone but our client to be our top priority, please understand that is not exactly what I meant. By saying that you should consider your source of business to be your “primary client,” I am in no way suggesting that we are not putting the needs and desires of our senior client first and foremost. NRMLA’s Code of Ethics comes first! Our client comes first when it comes to their individual needs. But your client will probably be in your life for 30-60 days, and you and your referral source will be cultivating a relationship for years.

Rise and Shine!
So, is connecting with a Realtor in the hopes of gaining a referral source worth your time and effort? Let’s take a look at the numbers.

The reverse mortgage industry will close barely 60,000 units this year. The forward mortgage industry is on track to close 4 million-plus, and more than 2 million will be purchase mortgages. It is estimated that as many as 20 percent of those 2 million will be buyers over the age of 62.

I don’t know about you, but I like their numbers better!

As the national education director for Security One Lending, I have been very fortunate to work with many professionals in this industry who have committed to this very difficult but financially rewarding model. And I can tell you this: The more Realtors we educate, the more H4Ps we write.

So, let’s awaken this sleeping giant. Let’s help Realtors all over the country sell more homes and, most importantly, let’s help as many seniors as possible obtain the highest quality of life possible during their retirement years!

 

  • James_E_Veale_CPA_MBT

    Mr. Banner,

    You laid it all out very well.  Your statistical presentation reminds me of the presentation I made to the branch managers at Security One Lending just over 4 years ago.  The stats are certainly with you.

    You are hitting on exactly the right theme: It CAN be done through the additional efforts of originators. BUT you failed to point out, although it should be obvious, the benefits in having a referral base.  Referral sources can result in lower (even low) marketing costs as well as the strategic advantage of working warm to hot leads and, as point out later, more potential referral sources than with Traditional HECMs.  Those benefits alone should drive more HECM originators to find referral sources in the Realtor community.

    I disagree with your depiction of the relationship the HECM originator should have with a prospect and the Realtor.  Until the prospect becomes a customer or client (of the HECM originator), depending on the legal relationship of the parties, the Realtor should be treated no differently than the originator would want to be treated if the originator had brought the Realtor the prospect.  Once the relationship with the prospect changes so does the relationship with the Realtor with the stipulation that the originator should take additional steps to make sure that the referral has as pleasant an experience as possible; after all, the originator is looking to at least four potential sources for referred business in the future: the buyer, the seller, the listing Realtor, and the buyer’s agent.  

    As to ethical standards, NRMLA is not high on my list even though I strongly support NRMLA and its ethical standards.  Legally as a NMLS licensee providing mortgages in California under the California Department of Real Estate, I owe a fiduciary standard to my mortgage clients.  That same standard does not apply to NMLS licensees who provide mortgages in California under the authority of the Department of Corporations, NMLS registrants, or even NRMLA members.  It is only when NRMLA ethical standards exceed those under which I am bound under state law that NRMLA ethical standards come into play.  Some originators are not bound by NRMLA standards since their employers are not NRMLA members.   

    Finally, 60,000 HECMs is in line with my prediction in June 2011 for fiscal 2012 but unfortunately, even I was wildly optimistic.  Total endorsements for fiscal 2012 were only 54,822 and the total for the calendar year 2012 will most likely be even less.  As of the end of November, total endorsements for this calendar year just crossed the 49,000 threshold.  For the calendar year total to equal the fiscal year total will require over 5,700 endorsements this month, December.  We have not seen a monthly total close to 5,700 since August 2011.  To get to 60,000 endorsements for the calendar year 2012 would require almost 11,000 endorsements for December, a highly improbable result.  

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