Buyers Respond to HECM for Purchase
by Nathan Jameson
John and Mary Smith were the first to use Traditions of America’s HomePlus program — a reverse mortgage purchase program from MetLife — to buy their new home. They had accepted an offer for their existing home that would help them move to their new one in Traditions of America at Hanover in their home town of Bethlehem, Pa.
 The entrance to Traditions of America at Hanover, in Hanover, Pa., twice voted Best Community in the Lehigh Valley |
Their new home was nearly complete when I received word that the Smiths had decided to cancel their purchase, walking away from nearly $30,000 of deposit money.
Their change of heart stemmed from John's overwhelming concern for Mary. He did not want her to be saddled with an expensive monthly mortgage payment if something happened to him. This concern led him to decide it was better to forego his deposit rather than leave Mary with a burdensome mortgage payment in his absence.
I picked up the phone and dialed Mr. Smith’s number. “Hello, Mr. Smith. Did you know you could purchase your new home with a reverse mortgage and as little as 35% down, and never make a monthly mortgage payment?"
With that call, Mr. Smith became the first of many Traditions of America home buyers who have enjoyed the benefits of purchasing their new home with a Home Equity Conversion Mortgage from MetLife — HECM for Purchase (pronounced “heck’m”), or “H4P” for short.
H4P is a tool that belongs in every active adult home builder’s belt. It helped turn Mr. Smith from a cancelation to a resident. Employed properly, it is a solution for the many 62+ buyers who uncertain how to “make the numbers work.” It is also a retirement planning tool to enhance buyers' investment diversification to combat fluctuations in asset prices including equities, fixed income and their home.
All Reverse Mortgages are Not the Same
Similar to traditional reverse mortgages, H4P is a mortgage loan that leverages the equity in an owner’s home. But in this case, qualified buyers use H4P to purchase a new home — and here’s the key — the loan is on the new home. At settlement, the purchaser provides a down payment that typically ranges from 30% to 50% of the home’s value, and the H4P loan provides the balance to the builder. [see example]
 The energy-efficient Betsy Ross model in Traditions of America in Hanover |
Each month, the interest that would have been paid in a conventional loan is instead added to the existing loan balance.
Your buyer enjoys owning a new home without the burdens of a monthly mortgage payment; the loan is completely non-recourse; and thanks to the government-backed insurance included in each H4P loan, the buyers can never owe more than the home is worth at the time it is sold.
Before builders begin using and promoting this compelling tool, there are a few things to consider, and maybe a challenge or two to overcome.
First, many lenders and brokers offer reverse mortgages. Align yourself with one whose mission and goals are consistent with your brand and vision for your customers. The complexities of this program and the much maligned term “reverse mortgage” must be handled deftly by your financing partner. If they handle the program education process poorly, it may scare away customers who might otherwise have purchased.
Second, consider the type of ownership in your communities. As with conventional mortgages, U.S. Housing and Urban Development (HUD) and the Government-Sponsored Enterprises (Fannie Mae and Freddie Mac) have lower hurdles for non-condominium communities. If your company's community is a condominium, you will need to have it approved by HUD and the Federal Housing Administration (FHA) before purchasers will be able to use H4P to buy one of your homes.
Finally, HUD and FHA currently require a home to have a new certificate of occupancy (C.O.) permit before the purchaser can apply for the loan. Depending upon the speed with which the financing partner can underwrite the application and fund the loan, this could mean a settlement three to six weeks after the C.O. is in hand.
Even with these considerations, H4P holds great promise for active adult builders looking for new and creative ways to move prospective purchasers to the buyer side of the fence. [See FAQs]
Our Experience
At Traditions of America, our soft launch of HECM for Purchase in April 2011, yielded immediate results. At year end, we attributed more than 10% of our new sales between May 1 and Dec. 31 to this program.
Properly marketed and with effectively trained sales staff, we believe the program will account for 15% to 20% of sales in 2012. Getting there requires sales staff to engage customers in discussion about the cost and benefit tradeoffs in each type of financing, and to address their concerns about H4P head-on.
HECM for Purchase is not a panacea. Many prospects will resist the idea of deferred interest, or feel compelled to leave a debt-free home for their children. Still, many active adults did not plan for their increased life expectancies and its impact on financial planning, and surveys results reflect a baby boom generation much more comfortable with debt than the preceding generation. These changing dynamics guarantee that H4P will become a financing tool that increasing numbers of active adults will elect.
H4P is a promising new tool for builders who serve active adult buyers. And while skepticism — and some cynicism — still surrounds the reverse mortgage industry, word is reaching today’s mature home buyers that HECM for Purchase may be the best choice to purchase a new home and enjoy retirement without financial worries. Active adult builders looking to overcome objections and create urgency should put adding H4P at the top of their New Year’s resolutions.
*Names have been changed to protect privacy.
Nathan W. Jameson is director of operations for Traditions of America, the largest developer and builder of active adult communities in Pennsylvania. His experience in the 50+ industry includes land acquisition, development approvals, sales and marketing, and general community operations. Jameson previously served as the chief investment officer for Traditions Capital, an investor and partner in active adult housing nationwide with a concentration on the eastern seaboard.
Jameson has an MBA in finance and management from Lehigh University, has been twice named to 50+ Builder Magazine’s list of the Top 50 Executives in 50+ Housing, and is an active participant in the NAHB 50+ Housing Council.
