Leveraging the Home Equity Conversion Mortgage for Purchase Program in Today’s Market: A Strategic Business Move for IMBs

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The author, John McMullen, AMP, is Senior Policy Specialist, Residential Policy and Strategic Industry Engagement at the Mortgage Bankers Association.

John McMullen

A New Path for Seniors and Lenders

Imagine a widow wanting to relocate to a cozy, manageable home for her golden years. With today’s higher mortgage rates and the high cost of living, her dream can feel out of reach. But what if there was a way to make it easier?

The Challenge for IMBs

Since 2022, Independent Mortgage Banks (IMBs) have faced severe profitability challenges. According to the Mortgage Bankers Association’s Quarterly Performance Report, the sector has suffered net production losses for the last eight quarters. This is primarily attributed to sustained high mortgage rates, low inventory and declining housing affordability. The gravity of the situation is starkly evident from the calendar year 2023 results–IMBs incurred an average loss of $1,056 per loan, a significant increase from the previous year’s loss of $301 per loan. This marked the largest loss in the 15 years the MBA has tracked production data, underlining the urgent need for a strategic business move.

Even with the evaporation of the refinance market, IMBs can leverage their staff, processes and technology to find new opportunities in the purchase market serving seniors. The Federal Housing Administration (FHA) Home Equity Conversion Mortgage (HECM) for Purchase (H4P) program offers a ray of hope. By strategically leveraging this program, IMBs can broaden their portfolios to include older homeowners seeking to right size, a demographic that is rapidly growing in urban, suburban and rural communities. This strategic move not only has the potential to increase loan volume and revenue streams but also aligns perfectly with IMBs’ commitment to promoting sustainable homeownership. By embracing the H4P program, IMBs can turn market challenges into opportunities, making the dream of a manageable home with little or no debt service a reality for many seniors, thereby making a significant positive impact on their lives.

What is the H4P?

The H4P program, established by the Department of Housing and Urban Development (HUD) in 2009, allows seniors 62 or older to purchase new houses or condos as their primary residence while securing a reverse mortgage. Here is how it works:

• Borrowers contribute approximately 60-65% of the new home’s sales price. Those proceeds typically come from the current home or their savings on hand.
• The lender covers the rest, and seniors keep their name on the title if they continue to live in the home and meet loan terms such as maintaining the property and paying property taxes and insurance.

FHA has also introduced a series of new H4P program provisions that could align the H4P with forward purchase programs, making it more viable for seniors who want to age in place. This presents a golden opportunity for IMBs to venture into a market yet to be fully explored. However, the product remains untapped due to the stigma around reverse mortgages. H4P is not just a last resort financial product for seniors struggling with income shortfalls or increased health expenses. Instead, it is a savvy tool that allows senior homeowners to unlock their home’s equity, resize their homes based on their needs, extend the life of their retirement income and create additional cash flow to maximize their lifestyle preferences.

Why Does the H4P Make Sense Now?

Today’s market challenges impact not only mortgage lenders but also buyers and sellers. Between 2020 and 2021, many seniors took advantage of low-rate mortgages, with rates averaging around 3%. With 30-year fixed mortgage rates hovering around 7%, many retirement-age homeowners are locked in–unable to relocate without taking on higher monthly payments on the new home. For example, a couple with a $500,000 mortgage at 3.5% would have a monthly principal and interest payment of $2,245. If they sell their home for $1,000,000 and put their $500,000 of accumulated equity into a more fitting home for their situation worth $850,000, their new monthly payment on the $350,000 purchase loan would be $2,328–higher than their current payment as they head into retirement on a reduced income.

The H4P program offers a solution by allowing seniors to purchase a home without a required monthly payment. In this case, the borrower would put the $500,000 down on the $850,000 home (59% downpayment) and use an H4P mortgage for the balance. Instead of incurring higher monthly payments on a rightsized home, the borrowers enter retirement with no debt service on their house. This benefit presents an opportunity for IMBs to facilitate more home sales, earn higher margins, and provide loan officers with a new purchase mortgage tool. The H4P program thus offers a mutually advantageous solution for the current market. This emphasis on the financial benefits of the H4P program should motivate and drive IMBs to explore this opportunity further.

Harvard University’s JCHS data highlights a concerning trend in mortgage debt among older Americans: It rose from 24% to 41% between 1989 and 2022. This surge in debt has led to seniors spending over 30% of their income on housing costs, resulting in them becoming “cost-burdened.” Further, Mayer and Moulton’s research reveals that in 2018, over 210,000 purchase mortgage applications from borrowers aged 62 and older were rejected or withdrawn due to high debt/income ratios, accounting for 34% of applications in this group. Introducing a payment-free product could be a game-changer for many lenders, addressing this critical issue.

The Growing Market

The population of older Americans in the United States is on the rise, with those aged 65 and above increasing significantly. The National Association of Realtors recently released a report shedding light on this demographic. The report revealed that people over 65 own 33% of all homes in the United States, accounting for 35% of all buyers. Older Americans are a key segment in the current economic landscape and hold over $12 trillion in home equity. This substantial wealth underscores the importance of lenders offering tailored loan products to meet the diverse financial needs of different generations. With Baby Boomers being the largest group of home sellers, representing 45% of all home sales, the market potential for IMBs is substantial. Understanding and catering to this demographic’s unique needs will be key for industry players looking to capitalize on this growing market segment.

Win-Win Opportunity

The economic landscape is changing, and IMBs must adapt to stay competitive. The H4P program empowers older Americans to find a more suitable home for retirement while boosting their cash flow and extending the life of their retirement nest eggs. IMBs also have a built-in customer base. This product enables lenders to offer prior customers ample equity and locked-in rates the opportunity to right-size without a steep mortgage payment, addressing the typical reluctance of aging adults to re-enter the home-buying process. With the economic landscape in flux and over 12,000 Americans turning 65 daily in 2024, the market for this program is set for significant growth.

HECMs and H4P are not rocket science but require specific training for loan officers and underwriters. Check out these resources from MBA and others:

• Understanding Home Equity Conversion Mortgage (HECM) Loans One-Pager

 • MBA Educational Offering: Adding Reverse Mortgages to Your Business Line: The Value Proposition Series

IMBs are encouraged to educate potential borrowers about this option and work with CPAs and financial service professionals to ensure it fits their client’s lifestyles. By doing so, they can turn today’s challenges into tomorrow’s successes.