REVERSE MORTGAGEHave the Cake and Eat it too : REVERSE MORTGAGEHave the Cake and Eat it too PROF CHOWDARI PRASAD Housing in India : REVERSE MORTGAGE FDP BU BLR 2 Housing in India A basic human necessity supporting economic activities
Second largest employment generator, next to agriculture.
Has forward and backward linkages with over 250 ancillary industries.
Every Rupee spent on construction, an estimated 75-80 paise is added to GDP.
GOI created enabling Fiscal, Monetary and Legal Environment
Housing Industry Growth in last 5 years –
Physical Terms 3.0 % p.a.
Financial Terms 30% p.a.
Contribution of Housing in GDP is about 6%
Percentage of Mortgage Debt to GDP is 8.50% (E) in 2005-06, still way below China’s (12%), Malaysia (22%), Hong-Kong (40%) and US (65%). Introduction : REVERSE MORTGAGE FDP BU BLR 3 Introduction What is Housing Finance ?
Construction of a House / Flat
Purchase of land/ ready house / flat
Extension of existing house / flat
Regn/ Repairs, renovation of a house / flat
Furnishing /Insurance / Home Equity/ Rentals
Shopping Complex, Schools, Hospitals
Co-operative Housing Society,
Construction of Workers / Employees Qrtrs
And now… REVERSE MORTGAGE LOANS! Why take a Housing Loan ? : REVERSE MORTGAGE FDP BU BLR 4 Why take a Housing Loan ? Roti, Kapda aur Makaan ! Build a shelter !!
A real saving for any class individual
An asset always likely to appreciate
Compare with several other savings
Easy to acquire, repay and transfer
A good tax savings facility
A decent line of business in modern days
And now RML…. To maintain decent living Who can be Applicant ? : REVERSE MORTGAGE FDP BU BLR 5 Who can be Applicant ? Any Individual ?
Salaried/ Self-employed / Businessman / Professional / Agriculturist / Artist / etc ..?
Non Resident Indian ??
Jointly with Spouse / Father / Son or others ???
A Firm / Company /Trust / Hospital etc ?
A Co-operative Society?
Industrial Estate / Builder-Contractor ?
And now………. SENIOR CITIZENS Why H F by Banks in India ? : REVERSE MORTGAGE FDP BU BLR 6 Why H F by Banks in India ? To conform to National Infrastructure Policy
Also to Housing and Habitat Policy of GOI
Permitted line of developmental activity
A modern day retail banking instrument
Backed by secure / tangible asset
Sentimental loans; Assured repayments
Easy to recover dues thro’ legal methods
Refinance from NHB and RBI / NABARD
Part of Priority Sector Lending (40%)
Rural : Rs 5 lacs and Urban : Rs. 10 lacs Slide 7: REVERSE MORTGAGE FDP BU BLR 7 HOUSING FINANCE MARKET : REVERSE MORTGAGE FDP BU BLR 8 HOUSING FINANCE MARKET Households, Corporations, Trusts, Provident Funds Government
of India Reserve Bank
of India External
Sources N H B Scheduled
Banks LIC : Life Insurance Corporation of India GIC : General Insurance Corporation of India CHFS : Co-operative Housing Finance Societies Households & Corporations Housing Finance Companies LIC/
Governments Housing &
Corporation State Apex CHFS Primary CHFS Public, Pvt. Agencies/
SHGs/MFIs What formalities ? : REVERSE MORTGAGE FDP BU BLR 9 What formalities ? Application ?
Estimate / Land papers / Plans / Designs – approved by Municipal or Town Planning Dept
Salary Certificate / IT-ST-Wealth Tax Assessment
Partition / Gift / Sale Deed ?
Duplicate papers ? In Vernacular Language ?
Agricultural / Urban Land ?
Proof of residence ? Guarantors ?
Builders’ Credentials ? How much? : REVERSE MORTGAGE FDP BU BLR 10 How much? Type of Loan ?
Eligibility ? Margin ?
Rate of Interest ? Fixed or Floating ?
Equitable / Registered (Simple) Mortgage ?
Third Party Guarantee ?
NOC / No Dues / Letter of Undertaking ? MORTGAGE – Transfer of Interest in an immovable asset viz., land, building, etc : REVERSE MORTGAGE FDP BU BLR 11 MORTGAGE – Transfer of Interest in an immovable asset viz., land, building, etc Transfer of Property Act, 1882 : REVERSE MORTGAGE FDP BU BLR 12 Transfer of Property Act, 1882 Sections 58 a, b and c…..
A mortgage is the transfer of an interest in specific immovable property for the purpose of securing the payment of money advanced or to be advanced by way of loan, an existing or future debt, or the performance of an engagement which may give rise to a pecuniary liability.
Mortgagor, mortgagee, m-money, m-deed… Slide 13: REVERSE MORTGAGE FDP BU BLR 13 Slide 14: REVERSE MORTGAGE FDP BU BLR 14 Table 1.2 -Retail Portfolio of Banks(Amt in Rs Crs) – T&P OF BKG IN INDIA 2005 : REVERSE MORTGAGE FDP BU BLR 15 Table 1.2 -Retail Portfolio of Banks(Amt in Rs Crs) – T&P OF BKG IN INDIA 2005 Table 1.3 - Personal Loans (ET dt August 17, 2007) Rs Crs : REVERSE MORTGAGE FDP BU BLR 16 Table 1.3 - Personal Loans (ET dt August 17, 2007) Rs Crs EGAGTROM ESREVER? : REVERSE MORTGAGE FDP BU BLR 17 EGAGTROM ESREVER? What is Reverse Mortgage?
Who is the Mortgagor?
Who is the Mortgagee?
What is being Mortgaged?
What is Reverse Mortgage Loan Scheme?
Who formulated the Scheme? When? Why?
How is it implemented?
Who repays the RML? When? How?
Which Banks / Others launched it in India?
What are the issues? Legal, Taxation, Insurance, Risks..? What is Reverse Mortgage? : REVERSE MORTGAGE FDP BU BLR 18 What is Reverse Mortgage? Definition : www.investorwords.com
An arrangement in which a homeowner borrows against the equity in his/her home and receives regular monthly tax-free payments from the lender.
Also called Reverse-Annuity Mortgage or Home Equity Conversion Mortgage (HECM) Slide 19: REVERSE MORTGAGE FDP BU BLR 19 Table 1.4 : Population Ageing in Selected Countries Proportion of Elderly in Population : REVERSE MORTGAGE FDP BU BLR 20 Proportion of Elderly in Population Source: An Ageing World, 2001, US Census Bureau Demographic Trends : REVERSE MORTGAGE FDP BU BLR 21 Demographic Trends In 2030, 9% of India’s population, or nearly 130 million people, will be over 65 years of age. The population over 60 years of age will approach 200 million in that period
By 2030, 237 million people, or 16% of China’s population will be over 65 years of age
The vast numbers of elderly adds a human dimension and imposes a significant responsibility on the part of those who are involved in managing retirement funds and systems
How Asia addresses the challenge will largely determine how the world will cope with ageing Implications for India Life Expectancy at age 60: Selected Asian Countries (Source: Adopted from Chakraborty (2004)) : REVERSE MORTGAGE FDP BU BLR 22 Life Expectancy at age 60: Selected Asian Countries (Source: Adopted from Chakraborty (2004)) RML is ................. : REVERSE MORTGAGE FDP BU BLR 23 RML is ................. A reverse mortgage is the exact opposite of a normal mortgage transaction (hence the name reverse mortgage) but restricted to a housing property
A normal mortgage transaction involves the home being mortgaged by the borrower to the lender as a security for the loan. In a normal mortgage transaction, banks and home finance companies have to consider the borrower's income and repayment capacity to determine the loan amount, duration and the monthly repayment.
However, in a reverse mortgage (popular in USA, UK and Canada) the lender instead of paying upfront, pays the borrower a sum every month RML – History : REVERSE MORTGAGE FDP BU BLR 24 RML – History Started in 1980s in USA as “reverse mortgage” known as Home Equity Conversion Mortgage;
Providers were Banks and specialist reverse mortgage finance companies;
In UK, it is known as “Equity Release or Home Income Plans” mainly provided by Insurance Companies;
In Canada, both banks and insurance companies are involved. Origin of RML Scheme : REVERSE MORTGAGE FDP BU BLR 25 Origin of RML Scheme Senior Citizens – Old Age Dependency
Increase in Longevity and Low Mortality
Rising Cost of Good Health Care
No proper Social Security Systems
Regular Income flow + Pensions (?)
Biggest Savings / Asset / Wealth
Increase in residential house prices What is RML?/1 : REVERSE MORTGAGE FDP BU BLR 26 What is RML?/1 RML seeks to monetize the house as an asset and specifically the owner’s equity in the house
Senior Citizen borrowers (SCB) mortgage the house property to a Public Lending Institution (PLI), who then makes periodic payments to borrowers during the latter’s lifetime
SCB not required to service the loan and hence no EMIs – Principal or Interest! What is RML?/2 : REVERSE MORTGAGE FDP BU BLR 27 What is RML?/2 On borrower’s death or leaving the house property permanently, loan is repaid along with accumulated interest, through sale of the house property
SCB/Heirs can prepay the loan with intt.
Mortgage on property can be released
FM announced in 2007-08 Union Budget
NHB issued Guidelines on May 31, 2007 Eligibility of Borrowers : REVERSE MORTGAGE FDP BU BLR 28 Eligibility of Borrowers Senior Citizen of India – above 60 years age
Married Couples as joint borrowers
Should be owner of a self-acquired, self occupied residential property (house or flat) located in India, with clear title of ownership
Property should be free from encumbrances
Residual life of property be at least 20 years
Borrowers should use the property as permanent primary residence Eligible Amount of RM Loan/1 : REVERSE MORTGAGE FDP BU BLR 29 Eligible Amount of RM Loan/1 Depends on Market Value of Residential Property and prevailing rate of interest Eligible Amount of RM Loan/2 : REVERSE MORTGAGE FDP BU BLR 30 Eligible Amount of RM Loan/2 The above table is indicative
Banks / PLIs have the discretion
Methodology adopted to be disclosed
PLI to ensure that Equity of the borrower in the residential property (Equity to Value Ratio – EVR) does not fall below 10%
PLI to re-value the mortgage-property at intervals – at least once in every five years Nature of Payment : REVERSE MORTGAGE FDP BU BLR 31 Nature of Payment Any or Combination of the following:-
Monthly, Quarterly, Half-Yearly or Annually
To be decided with prior / mutual consent
Lump-sum payments in one or more tranches
Committed Line of Credit, with an availability period agreed upon mutually (Borrower and PLI), to be drawn down by SCB
Lump-sum may be conditional and limited to – for medical exigencies, home improvement, maintenance, up-gradation, renovation, extension of residential property – Option given to SCB Eligible End Use of Funds : REVERSE MORTGAGE FDP BU BLR 32 Eligible End Use of Funds Upgradation, Renovation and Extension
Home improvement, maintenance / insurance of residential property
Medical, Emergency expenditure for family
For supplementing pension / other income
Repayment of an existing loan taken ...
Meeting any other genuine need
NOT FOR ANY SPECULATIVE PURPOSES OTHER TERMS : REVERSE MORTGAGE FDP BU BLR 33 OTHER TERMS Period of Loan: Maximum of 15 years
Interest Rate: To be fixed by PLI as usual
Security: Mortgage of Residential Property
COMML. PROPERTY IS NOT ELIGIBLE
Valuation: Local Laws to be complied with
Assessed by external Approved Valuers
Revaluation to be carried out every 5 years
Best commercial judgement; no future values Right to Rescission : REVERSE MORTGAGE FDP BU BLR 34 Right to Rescission PLIs to maintain Customer friendly gesture
To follow international best practices
SCBs to be given three days time after finalisation of RML to cancel transaction
Even amount is disbursed, may be repaid
Interest for the period may be waived RM Loan Disbursement : REVERSE MORTGAGE FDP BU BLR 35 RM Loan Disbursement Direct to the borrower, except in case of adjustment for existing debts, payments to contractors, of taxes or insurance premium
Settlement of dues to other PLIs...
Periodicity: Mly, Qly, HYly, Annually - Cash
PLI to decide mode of payment, loan tenor, etc depending upon market value, age of borrower and other factors
All facts to be disclosed to the borrowers Closing : REVERSE MORTGAGE FDP BU BLR 36 Closing PLIs to provide in writing, a fair and complete package of RML and specimen documents covering all aspects
A tool kit with illustrations be prepared
Closing charges to be borne by SCBs
These are – Appraisal fees, Inspection fees, Verification charges by External firms, Title Examination fees, Legal charges, Stamp Duty and Registration Charges, Property Survey and Valuation Charges, etc... Settlement of RM Loan : REVERSE MORTGAGE FDP BU BLR 37 Settlement of RM Loan Loan becomes due and payable only when the last surviving borrower dies... Or would like to sell the home, etc...
Amounts to include accumulated interest
SCBs may settle dues without sale of asset
Reasonable amount of time, say up to 2 months be provided to settle RML dues
Balance / surplus, if any, after settlement of loan be passed on to the estate of borrower Pre-payment of RM Loan : REVERSE MORTGAGE FDP BU BLR 38 Pre-payment of RM Loan Borrower will have option to pre-pay the RML at any time during the loan tenor
There will not be any prepayment levy / penalty / charge for such payments RM Loan Covenants/1 : REVERSE MORTGAGE FDP BU BLR 39 RM Loan Covenants/1 SCB will continue to use the property
Non-Recourse Guarantee = No negative equity – SCB will never owe more than net realizable value of the property…
Loan Agreement – to be entered into
SCB shall not make any testamentary (will) disposition of the property during loan is due
Even if done, it is subject to the mortgage… RM Loan Covenants/2 : REVERSE MORTGAGE FDP BU BLR 40 RM Loan Covenants/2 PLI may obtain a Registered Will
Such Will, is the last “WILL” for availing RML and that no other Will be made again
SCB to insure property against fire, earthquake and other calamities
To pay all taxes, electricity charges, water charges and other statutory payments
To maintain the property in good condition
PLI reserves the right to inspect property… Foreclosure : REVERSE MORTGAGE FDP BU BLR 41 Foreclosure PLI may foreclose the RML for defaults
If SCB has not stayed for one year period
If SCB fails to pay taxes or maintain or insure the property…
If SCB declares himself bankrupt
If property is donated or abandoned
If ownership changes, rented out, etc…
In case of fraud or misrepresentation..
Any statutory action by Govt for taking over the property for public use or for condemning asset Option to adjust Payments : REVERSE MORTGAGE FDP BU BLR 42 Option to adjust Payments PLI has option to revise periodic or lump-sum payments or frequency or intervals on account of revaluation at every 5 years;
Borrower is given option to accept above..
If not acceptable, further payments will be stopped by PLI. Amount outstanding will attract interest at agreed rates; Counseling and Information to Borrowers : REVERSE MORTGAGE FDP BU BLR 43 Counseling and Information to Borrowers PLI to observe / maintain high standards
To disclose all terms without ambiguity
To clearly explain all terms / conditions
To suggest to SCBs to nominate relatives
To counsel possible impacts/ intt. Changes
To counsel about possible price changes
To specify all the costs associated with RML
Take all possible steps to treat SCBs fairly Illustration/1 : REVERSE MORTGAGE FDP BU BLR 44 Illustration/1 Age of an Senior Citizen Borrower : 65 years
Value of House Property Assessed: Rs 40 Lacs
Period for which eligible: 15 Years (180 months)
Eligible Amount of Loan: 40% of Market Value
Reverse Mortgage Loan: Rs. 16 Lacs
Mode of payment : Rs. 8,000 every month
Rate of Interest : x% pa (Fixed or Floating?)
Total Principal amount received: Rs. 14.40 Lacs
Assumption: No effect of changes in value of property during pendency of the loan (15 years) Illustration/2 : REVERSE MORTGAGE FDP BU BLR 45 Illustration/2 Gross Interest on Rs. 14.40 Lacs – compounded annually : Rs. 21.38 Lacs
Total amount due to Bank: Rs. 35.78 Lacs
If SCB dies at the end of 15 years, bank sells house property, realises the dues and releases the balance, if any, to legal heirs
If Legal Heirs want to retain the property, entire dues of Rs. 35.78 Lacs may be paid to the bank and complete legal formalities. RML in India/1 : REVERSE MORTGAGE FDP BU BLR 46 RML in India/1 Oct 18, 2004 : Why we need Reverse Mortgage? Article in www.domain-b.com by V Jagannathan
August 31, 2006 : Dewan Housing Finance Ltd introduces RML Scheme by name “Saksham”
Feb 08, 2007 : XL Dynamics-India Reversesoft
Feb 28, 2007 : FM’s 2007-08 Budget Speech
Feb 2007 : National Housing Bank prepares Draft Guidelines of Reverse Mortgage Scheme
April 14, 2007 : PNB, 1st Public Sector Bank to announce Reverse Mortgage Loans (Baghban)
May 2007: NHB Guidelines revised..... RML in India/2 : REVERSE MORTGAGE FDP BU BLR 47 RML in India/2 June 5, 2007 : ICICI, BOB and OBC offer RMLs
Also to start : Allahabad, Indian & Corp Bank
June 15, 2007 : LIC Housing Finance Ltd.
June 19, 2007 : Nucleus Software announces new software
July 30, 2007 : Union Bank of India to launch
July 31, 2007 : Operational Guidelines from NHB to PLIs
Oct 12, 2007 : State Bank of India announces
Nov 01, 2007 : Central Bank of India launches