reverse mortgage in india

REVERSE MORTGAGEHave the Cake and Eat it too

PROF CHOWDARI PRASAD

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• 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 ?

• 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 ?• 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 ?• 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


HOUSING FINANCE MARKET

Households, Corporations, Trusts, Provident Funds

Governmentof India

Reserve Bankof India

ExternalSources

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/GIC

StateGovernments

Housing & Urban Devpt. Corporation

State Apex CHFS

Primary CHFSPublic, Pvt. Agencies/

SHGs/MFIs


What formalities ?• Application ?• Enclosures :-

– 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?• Type of Loan ?

• Eligibility ? Margin ?

• Rate of Interest ? Fixed or Floating ?

• Security ?– 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


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…


Table 1.2 -Retail Portfolio of Banks(Amt in Rs Crs) – T&P OF BKG IN INDIA 2005

S No

Item March 2004

March 2005

%Vari-

ation

01 Housing Loans 89,449 1,34,653 50.5

02 Consumer Loans 6,256 3,810 -39.1

03 Credit Card Dues 6,167 8,405 36.3

04 Other Per. Loans 87,170 1,20,120 37.8

05 Total Retail Lns 1,89,041 2,66,988 41.2

06 Total Loans 8,64,271 11,05,725 27.9

07 % of (5) out of (6) 21.9 24.1


Table 1.3 - Personal Loans (ET dt August 17, 2007) Rs Crs

Particulars Oct 2006 Dec 2006 May 2007

Retail Loans

3,98,055 4,27,909 4,55,439

Housing 2,09,468 2,17,829 2,30,751

Agst FDs 33,744 35,764 39,092

Cr Cards 11,870 11,913 14,221

Education 12,692 13,399 15,438

Con Dur’ble 9,291 8,558 8,831

Others 1,20,990 1,40,446 1,47,106


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?• 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)


Population (In Millions) % of Population Over 65 Pop’n over 65 (No’s in Mn)

YEAR 2000 2030 2000 2030 2000 2030

China 1262 1483 7.0 16.0 88 237

India 1014 1437 4.6 9.0 47 129

USA 276 351 12.6 20.0 35 70

Indonesia 225 313 4.5 10.9 10 34

Brazil 173 203 5.3 13.2 9 27

Russia 146 133 12.6 20.5 18 27

Japan 127 117 17.0 28.3 22 33

Thailand 61 71 6.4 16.4 4 12

France 59 62 16.0 24.0 9 15

UK 60 61 15.7 23.5 9 14

S.Korea 47 54 7.0 19.5 3 11

Malaysia 22 35 4.1 9.4 1 3

Australia 19 23 12.4 21.1 2 5

S’pore 4 9 6.8 14.8 0 1

Table 1.4 : Population Ageing in Selected Countries


Proportion of Elderly in Population

28.325.8

24

23.521.1

20.520

19.516.4

1614.8

13.210.9

9.49

7.7

0 5 10 15 20 25 30

JapanGermany

FranceUK

AustraliaRussia

USAS.Korea

ThailandChina

SingaporeBrazil

IndonesiaMalaysia

IndiaPhilippine

2000 2030

Source: An Ageing World, 2001, US Census Bureau


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))

21

19

18

16

17

16

16

16

25

22

21

19

19

18

17

17

0 5 10 15 20 25 30

Japan

Singapore

Thailand

China

Malaysia

Philippines

India

Indonesia

Male Female


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 • 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

• 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• 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

• 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• 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

• Depends on Market Value of Residential Property and prevailing rate of interest

Age Loan as proportion of Assessed Value of Property

60 – 65 40 %

66 – 70 50 %

71 – 75 60 %

Above 75 70 %


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• 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

• 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

• 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

• 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• 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• 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• 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

• 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

• 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

• 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• 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

• 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

• 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• 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

• 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• 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• 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


References• www.nhb.org.in; www.domain-b.com;

• www.google.com; www.rediff.com

• www.reverse.org; www.investorwords.com

• www.reversemortgage.org

• www.apnaloan.com for FAQs

• www.iloveindia.com/real-estate/reverse-mortgage.html; www.financialexpress.com

• www.tapmi.org/paper1/rr.rtf

• www.thehindubusinessline.com;

reverse mortgage in india

Education

normal mortgage

house flat

insurance

senior citizens

residential

rm loan

reverse mortgage

house property