Given housing inventory shortages that have created fierce competition for homes, new-construction purchase lending has been hot almost everywhere except the reverse mortgage market.
While more than half of recent traditional home loans tracked by the Mortgage Bankers Association are purchase originations, less than 10% of the Home Equity Conversion Mortgages processed by ReverseVision's origination system get used by borrowers to buy a house.
But now that the Federal Housing Administration and a bank that specializes in new-home and construction financing have come up with ways to address a timing concern that has held back the use of HECMs to purchase new construction, things could change.
The HECM for Purchase, which allows seniors to take out a reverse mortgage on the property they are buying to pay for it, hasn't been as widely used as it could be in the new construction market because the loans require a certificate of occupancy or equivalent. The requirement made it difficult for the borrower to get the funds in time to pay for the new home and the complication is off-putting to real estate agents.
"Most Realtors really didn't use the HECM for Purchase because of the confusion as to whether it's going to close on time," said Rick Davis, a senior vice president at Fidelity Bank in West Des Moines, Iowa.
But an FHA bulletin last fall gave lenders who typically wouldn't even start applications until they had the certificate of occupancy a little more leeway. The clarification suggests borrowers can start the application before the certificate of occupancy is issued, before or after counseling. However, the loan can still not be submitted to the FHA for endorsement until the certificate of occupancy or equivalent is available.
"Prior to the change, builders would need to carry the interest on a newly constructed home for an extra 30 days or more for buyers using a HECM for Purchase loan," said Joe DeMarkey, strategic business development leader at Reverse Mortgage Funding. So builders were reluctant to promote HECM for Purchase as a financing option. But they may be more likely to do so now.
Loan officers adjusting to the change were at first skeptical that underwriters would allow loans to close without the occupancy certification, so long as they could submit the certificate before endorsement; but they were willing to test the waters.
In the event there is still time to be bridged in between the need to pay for a home and occupancy, there is another option. Fidelity Bank recently introduced a home equity line of credit that helps bridge gaps that exist in new-construction purchases.
"I think lenders will increase their business with all this," said Dan Hultquist, a director at ReverseVision. "Borrowers can move in the moment the house is complete."
Boosting the use of reverse mortgages to buy new homes could be significant to the broader mortgage market because seniors' tendency to age in place has contributed to home inventory shortages.
The extent to which reverse mortgages can be used for new-home purchases will depend not only on whether lenders can find a way to bridge the gap between the purchase of the home and the start of the application process.
Recent mortgage insurance changes, a new seller contribution rule, and adjustment to the amount of equity borrowers can withdraw collectively mean that borrowers may get a break on some costs but won't have as much purchase power.
The shift to a flat 2% upfront MI charge could be helpful because previously upfront MI increased with the amount of equity withdrawal, and borrowers who withdrew the maximum amount — as most consumers who use a HECM to purchase a home do — paid the highest possible charge of 2.5%.
When it comes to the mortgage insurance changes, "the HECM for Purchase is the big winner," said Cecilia Delgado, director of the reverse mortgage division at Fidelity Bank.
However, the FHA also just adjusted the principal limit factors for HECMs, which reduces how much equity a borrower can withdraw from their home and constrains their ability to finance a purchase.
So the jury is still out on how the recent regulatory changes will collectively affect the HECM for Purchase program.
"The buyer still has to come up with a significant amount of cash because the HECM will only provide roughly half the cost of a new home," said Peter Bell, president of the National Reverse Mortgage Lenders Association.
However, the technical correction "should make the program more user friendly for homebuilders and homebuyers," Bell said.
And it could help improve the financial condition of the HECM program. "New construction probably would provide better collateral compared to homes lived in for 40 years," he noted.
Brian Collins contributed to this report.