OPPORTUNITIES IN INDIA REVERSE MORTGAGE SOCIAL AWARENESS PROGRAMME IIFT DELHI

Transcription

1 REVERSE MORTGAGE OPPORTUNITIES IN INDIA SOCIAL AWARENESS PROGRAMME IIFT DELHI MENTOR: Anupama Datta Deputy Director (Policy Research and Development) Helpage India SUBMITTED BY : Sathiyanarayanan M (44) Varun Bajla (56) Yukti Bhanuka (114) IIFT Delhi MBA (IB)

2 Acknowledgements The NGO awareness project marks the end of an exciting and enlightening phase of our life. A lot of time and effort has gone into this project and a number of people have contributed in some way or the other. We would like to particularly thank Madam Anupama Datta for her constant guidance and support throughout this endeavor. She has always been there right from the start and has been instrumental in giving us sense of direction throughout this study We extend our heartfelt gratitude to the management of IIFT and Helpage India for the immense support throughout the project. 2

3 Table of Contents Reverse Mortgage Industry in India...5 Introduction...5 Reverse Mortgage...5 Types of Reverse Mortgage Products...6 Pricing of Reverse Mortgage Products...6 Significance of Reverse Mortgage System in India...6 Risk inherent in the Reverse Mortgage Product...7 Risk Mitigation...8 Why is it Not Clicking in India?...9 Brief about Home Reversion Schemes in the UK...10 Cash Reversions:...10 Income Reversions:...10 Stepped Reversions:...10 Brief about Home Reversion Schemes in Australia...11 Sale and lease model...11 Sale and mortgage model...11 RELEVANCE TO INDIA MARKET...12 SWOT Analysis...13 Strengths...13 Weaknesses...13 Opportunities...14 Threats...14 Market Potential in India...14 India-specific Characteristics of Relevance to RM...15 Old Age Population

4 Current Sources of Income...17 Market Potential...18 Reverse Mortgage Scores...18 Potential segments for Reverse Mortgages...19 Constraints for marketability of Reverse Mortgages...21 Regulatory Mechanism in India...21 Conclusions & Suggestions...22 References...24 Website...24 Texts

5 Reverse Mortgage Industry in India Introduction With the growth of the ageing population, old age security has become one of the prime concerns for the Indian government. The PFRDA Bill and other such measures provide a solid ground for this assumption. Even the establishment of IIMPS for micro pensions for the people of the unorganized sector is in the same direction. All these measures are good for people who are into their working life and thus can save for their retirement now. But one of the segments which have been left is the one who are in their retirement phase and who may not have enough cash to sustain their life. Pension by Central and State Governments are not enough to sustain them. These people may not have enough income or saving in cash but may have assets which may not be providing income. To overcome this problem, The National Housing Bank, apex body on housing finance in India, came out with its guidelines on reverse mortgage in early Some of the public sector banks and one private housing finance company have already come up with their products and the market in India started growing. Reverse Mortgage A reverse mortgage (or lifetime mortgage) is a loan available to senior citizens. Reverse mortgage, as its name suggests, is exactly opposite of a typical mortgage, such as a home loan. A reverse mortgage is a loan available to seniors and is used to release the home equity in the property as one lump sum or multiple payments. The homeowner's obligation to repay the loan is deferred until the owner dies, the home is sold, or the owner leaves (e.g., into aged care) The analysis of definition provides some basic features of reverse mortgage products. These are The loan is available only to senior citizens owning a home The loan can be in the form of Lump-sum or multiple payments like annuity etc Homeowner does not have obligation to repay the loan till the house is his prime residence The payback is done once the owner dies or leaves the house. This is done though selling the house and recovering the loan through its proceeds. Thus a home owner going for reverse mortgage may take his payment in the following form. A lump sum at the beginning (can be used for home improvement health expenses etc) Monthly payments till a fixed term Monthly payments as a life-long annuity 5

6 Establishing a credit-line with or without accrual of interest on credit balance A combination of the above Some lenders have come out with plans different from the above to suit the requirements of the borrowers. Types of Reverse Mortgage Products Home Reversion / Sale and Lease Back- The homeowner sells the house but keeps the right to live in the house till the time it is his prime residence. The amount could be used for home improvement, any other health need etc. Interest-only Mortgage- The borrower takes lump sum and pays only interest during his lifetime. The principal is recovered through the sale of the home Mortgage Annuity/ Home Income- The loan is used to purchase an annuity for the homeowner. The advantage is that even if the homeowner moves out of the home, the annuity will continue till his death Shared Appreciation Mortgage- This provides loans at a below market interest rate.. In return, the lender gets a pre-agreed share in any appreciation in the property value over the accumulated value of the loan. Pricing of Reverse Mortgage Products The various considerations which needs to be taken while pricing a product of this nature are Age of the borrower-if it is a joint borrowing then the age of the younger borrower is considered. Value of the property- Then value of the property plays a major role in determining the price for an RM product Expected Interest Rate- As the product resembles the normal annuity product in some sense, the current and expected interest also plays a major role in pricing the product Significance of Reverse Mortgage System in India The society in India has under-gone huge changes in last 4-5 decades. Nuclear family has replaced the joint family system. The system of family supporting the older people has gone. As mentioned earlier the public pension system has not been able to provide an alternate support to old people. This condition leaves the older people in jeopardy. They face following issues Outliving their retirement income Depending on their children to help pay expenses 6

7 Getting sick and having no way to pay the expenses Not being able to guarantee an income for their spouse after they are gone Being able to live as long as they like in their own home Looking at the current situation, the needs for a product which can help these people to solve some of these problems is always a welcome step. Reverse mortgage or equity release products tries to answer all these problems. Every Indian, irrespective of its income level tries to build a home for himself during his working life. Reverse mortgage will give him/her an opportunity to generate income from that very home. As the ownership remains with the borrower, he can transfer the home to his successors also if the later agrees to pay the loan amount. Such a product relieves the pressure on government also to provide old age security and thus government also needs to support such initiative. Risk inherent in the Reverse Mortgage Product Any financial product involves some risk and reverse mortgage is no exception. The lender faces many type of risk for this product. Some of these risks are Longevity Risk- The lender has to provide the payment upfront either lump sum or installments as the case may be but gets his money back only when the borrowers dies or move into another residence. As we are aware that the life expectancy of people is increasing, the risk of late recovery of loans is a big risk for the lenders. The risk is aggravated by the fact that with the payments from reverse mortgage, the lifestyle of the borrower gets better which may become one of the contributors in the improvement of longevity. The longevity risk is higher for reverse mortgage where the payment is continued till the death of the borrower since not only the recovery gets delayed but also the lender has to make payments for a longer time, Interest Rate Risk- The payments to the borrower in case of a reverse mortgage is fixed, either for a term or lifetime but the cash flows for the lender may not be fixed and are dependant on the interest rate market. Thus the lender runs the risk that the interest rates in the market may move in the opposite direction of that the lender anticipated. Market Risk (Property Value Risk)- The lender in a reverse mortgage can claim back his loan only from the property on which the loan has been granted. He does not have recourse to any other asset of the borrower. If the sales proceeds of the home are not sufficient, the lender cannot clam the balance from the heirs of the borrower. This gives rise to the risk of adverse 7

8 movement in property market which affects the profitability of the product. Though this risk can be diversified with increasing the geographical reach of the operations of the lender but the risk still remains Early Redemption Risk- Some of the reverse mortgages loans may give the borrower an option of repay the loan at any point of time. This leads to another risk for the lender of early redemption as the borrower will pay back the loan when it is most beneficial to him which in most cases does not coincide with the interests of the lender. In case the lender has securitized the loan, which in most of the cases it is, the risk becomes higher as the lender cannot closer its position in this case. Condemnation/ Sovereign takeover of the property by a government agency. The asset available to the lender is the house and if there are changes like takeover of property by the government for development purposes etc, the lender is the looser But as spillover/multiplier effect of releasing the equity value of houses is very large as total household stock in a country ranges between 100% and 150% of GDP, it is good if home equity conversion products become a success in India as it can provide a strong dynamism to the economy by unlocking the illiquid wealth represented in India s stock of owned houses. Therefore, this market should be looked at favorably both by the regulators and market participants. Risk Mitigation Risk mitigation is the key for the success of any financial product including reverse mortgage. Some of the risk mitigation techniques which the providers can apply to reduce the risk on their books Proper eligibility criterions- The first mitigation of risk can be done at the time of providing loans. This can be done through proper verification of the title of the property, age of the borrower; his/her credit analysis etc. This reduces the risk of default by the borrower Variable interest rates loan as compared to fixed interest rate loan- To avoid interest rate risk, the lender can go for variable interest rates based on some market benchmark like MIBOR. This will also reduce the risk of Pre-payment as the borrower will not have interest arbitrage on prepayment of the loan Proper analysis of mortality trends- As the product has significant longevity risk, the lender can do a detailed mortality trend analysis on a macro level and also in the market where it is operating. Geographical diversification- the lender can look at spreading the business across the country by promoting the product in secondary and tertiary cities also so that the law of large numbers may work properly and if the provider has a bad experience in one market, it can be compensated with good experience in other cities 8

9 Develop the product for lower age groups- The lender can develop home equity conversion mortgages for all households and not just for elderly. This will significantly reduce loan to value ratio and that will take care of many of the risks inherent in the product. In the Repayment schedule, some default conditions or changes that affect the security of the loan for the lender that can make reverse mortgages payable should also be added, like: Declaration of bankruptcy; Donation or abandonment of the house; Condemnation/ Sovereign Takeover of the property by a government agency Why is it Not Clicking in India? Till now, less than 500 applicants have availed this loan in India since its inception in 2007, a senior bank official, who did not wish to be identified, said. The reasons for the model not taking off in India are manifold. From an emotional attachment with one s house to real estate price correction; from an absence of clear guidance against legal complications to inadequate marketing, the plan has been unable to meet the expectations of financial institutions. Reverse mortgage is a plan through which senior citizens can avail loans from either banks or other financial institutions by mortgaging one s home. If a senior owns a house and has a mortgage on the house, he might get a reverse mortgage to pay off the existing loan and then have some money left over to take care of his expenses for the rest of his life. The homeowner could get that as a lump sum or a line of credit, and wouldn t have to pay it back until he moved or died and the house was sold. The banks can sell off the property to realize the loan amount. However, there is a provision that the legal heirs can acquire the property back by paying off the loan to the bank. Dewan Housing, which is one of the largest housing finance companies, has been able to sell only 4-5 reverse mortgage loans during the last two years. Two large financial institutions, HDFC, which incidentally is one of the largest home loan lenders in the country, and Kotak Mahindra do not have reverse mortgage in their portfolios. In fact, several other players in the segment are also facing difficulties in selling reverse mortgage 9

10 products. Says Sujan Sinha, senior V-P and head of retail liabilities, Axis Bank, The product has not done well. In India, you can count the number of cases of reverse mortgage on your finger tips. There are some very basic reasons that have worked against this product which has taken off rather well in international markets. The psyche of Indians does not make them comfortable with the idea of selling their home. This could be perhaps because better awareness had not been created about the product. Secondly, the Indian banking industry caps the available loan amount at Rs 50 lakh (Rs 5 million), instead of providing for an equitable percentage of the property's value, and limits the loan period to a tenure of 15 years. The product is still evolving and may take on new dimensions depending on how the banks wish to present its consumer appeal. Brief about Home Reversion Schemes in the UK The following are the types of Home Reversion Plans sold in UK Cash Reversions: In the market at present most reversions are sold as cash products, i.e. the customer gets the value of the reversion paid over as a single cash sum at the outset of the scheme. Most lenders offer cash reversions with the optional purchase of an annuity if required Income Reversions: At present income reversions are not common as it is generally assumed that an annuity could be bought with the proceeds of a cash reversion. For the client an income reversion provides a guaranteed level of income for life and for the reversion company there will be an improvement in the funding and cash flow position. Stepped Reversions: With a stepped reversion the customer can take their benefits from the scheme either as a lump sum or as a series of payments and the amount that is repaid is expressed as a proportion of the property sale proceeds. The proportion starts as the proportion of the initial advance to the initial property value and steps up'' by a fixed percentage each year, adjusted for further payments as they are made. This product overcomes the main criticism of reversions, that the schemes are very expensive on early death. 10

11 Brief about Home Reversion Schemes in Australia In Australia, two types of House Reversion Schemes are available: Sale and lease model In the sale and lease model, the title to the property actually passes to the provider at the time the parties enter into the contract and the property is leased back to the consumer for the remainder of his or her life at a nominal rent. The provider pays the purchase price to the consumer in the form of a lump sum payment, in monthly payments over a period of between five and 30 years, or through a combination of the two. It is possible for the consumer to protect their interest in the property by lodging a caveat. The provider assumes responsibility for rates, maintenance and other outgoings upon title passing to it. The provider may then on-sell the property to investors who acquire the title subject to the lease to the consumer, which is acknowledged by deed. The investor then assumes responsibility for payments to the consumer as well as for paying rates and other outgoings, and maintaining the property. Sale and mortgage model The sale and mortgage product is structured by two documents, a sale of land contract and a mortgage. Under the contract of sale the consumer sells a percentage of the property to the provider. The provider pays the consumer an agreed amount on the date the contract is signed. The title to the property remains in the consumer s name. To protect the provider s interest in the property, the consumer is required to give the provider a mortgage over the property, the terms of which prohibit the consumer from dealing with the property without the provider s consent. The contract may oblige the consumer to: 11

12 pay all outgoings keep the property insured maintain the property in a reasonable state of repair, and Obtain the purchaser s consent before selling, leasing or renovating the property. The sale and mortgage product that is currently available in Australia is solely distributed by employees of the one provider with whom the house reversion company has an agreement. RELEVANCE TO INDIA MARKET Social Security Scenario The share of the old persons (age 60 and above) to the total population in India is expected to rise from 6.9 in 2001 to 12.4% in The growth of this segment of population is causing tremendous pressure on the economic system. Government of India has already recognized the urgency and initiated measures which can address income and security needs of the old age persons. Pension reforms, amendments to housing policies, National Old Age Pension scheme and Maintenance & Welfare of Senior citizens Bill, 2007 are some steps in this direction. But, Government initiatives are sometimes constrained by disparities in income and social characteristics of the population and the result, no one size fits all. Social responsibility has demanded on the public sector and private sector enterprises to launch financial products which can complement the welfare schemes of the government, so that the Indian Diasporas have a well orchestrated social security system. Thus, Pension, Housing Finance and Reverse Mortgage products from financial institutions have a major role in meeting the growth objectives of the business community and the welfare objectives of the Government. Public participation in these 12

13 initiatives will not only cause improvement in the standard of life but has a large positive impact on the national economy. SWOT Analysis Strengths The senior citizens are entitled to regular cash flows at their choice - monthly, quarterly, half yearly & annually. No income criteria No loan servicing or repayment required during the lifetime of borrower & spouse. If the borrower dies during the period, the spouse will continue to get the loan amount for 15 years. No tax on the regular cash flows. The borrower & their spouse can continue to stay in the house till both die. Heirs of the borrower will be entitled to get the surplus of sale value of the property. Borrower/heir can get mortgage released by paying loan with interest without having to sell property at any time. Prepayment of loan is allowed. NHB to guarantee obligation of banks/housing finance companies to pay the committed loan amount as regular sums over a period of time. Reassessment of property value will be done periodically or at least once every 5 years. Borrower can cancel the mortgage within three days of approval/disbursement, subject to return of loan amount. Weaknesses This loan product has a maximum tenure of only 15 years. Basis of property valuation is not clear. Requirement of clear title to property in the name of the borrower. Three days period to cancel loan is too less. 13

14 Various fees to be added to borrowers liability, which can be quite substantial. Opportunities Partial substitute for a social security scheme for senior citizens. Longevity increasing with nuclear families. Most Indians have strong preference for own home. Therefore many eligible citizens may opt for the scheme. Quantum of loan can increase favorably for borrower on revaluation of property. Threats Property valuations are ambiguous. There is a non-recourse guarantee. Rate of interest is at the discretion of lender. Any increase in the rate, if floating, will increase the burden of the borrower. Lender has discretion to raise loan amount on revaluation. However, if it does not do so, borrower doesn't get loan according to proper value of property. Lender has right to foreclose loan by forcing sale of property if borrower doesn't pay for insurance, property taxes or maintain & repair house. Can lead to further harassment. The norms need to be fine-tuned & made watertight so that these borrowers are not harassed or short-changed in their old age. Market Potential in India Age Group/Sex-wise Population in India (2001 Census) Age- Total Rural Urban group Person Male Female Person Male Female Person Male Female 14

15 India-specific Characteristics of Relevance to RM There are no universal old age social security related benefits. Only about 10% of the active working population are covered by formal schemes. This would substantially enlarge the potential target market for RM: house-rich, cash-poor. A much lower proportion of urban households, and by implication, less scope for RM. A much larger proportion of elders co-living with their family members of subsequent generations and hence less scope for RM A possibly stronger bequeath motive, reducing the scope for RM. A possibly higher real rate of appreciation of real estate and housing prices, making RM more attractive to the lender. Widespread under valuation of real estate properties to accommodate transactions involving unaccounted money and evasion of taxes on property and real estate transactions Complexity, variety and location specific variations in types of home ownership: Benami holdings/ Irrevocable power of attorney Leasehold/ freehold Land use conversion regulations Floor space regulations Rent/ tenancy controls Disposal of ancestral property 15

16 Absence of competitive suppliers for immediate life annuity products. This, in turn, is a consequence of Lack of data on old age mortality rates Lack of long-term treasury securities for managing interest rate risks of annuity providers The fledgling nature of the secondary markets for mortgage and securitization of mortgage loans India specific legal and taxation issues License/ Permission required under insurance/ banking regulation for offering RM Income tax treatment for RM lender and borrower Capital gains on property Reporting and provisioning by the lender as per banking/ insurance regulation Seniority of RM claims vis-à-vis other secured lenders Status of RM loan in case of insolvency Old Age Population Though the Indian population is still comparatively young, India is also ageing. Some demographic projections for India indicate that The number of elderly (>60 yrs) will increase to 113 million by 2016, 179 million by 2026, and 218 million by Their share in the total population is projected to be 8.9 % by 2016 and 13.3% by The dependency ratio is projected to rise from 15% as of now to about 40% in the next four decades The percentage of >60 in the population of Tamil Nadu and Kerala will reach about 15% by 2020 itself! Life expectancy at age 60, which is around 17 yrs now, will increase to around 20 by 2020 State-wise Percentage Share in Total Population of Persons Age 60+ by Sex and Residence in India (2001) Total Rural Urban States/UTs Persons Males Female Persons Males Females Persons Males Female Kerala

17 West Bengal Tamilnadu Pondicherry Manipur* Tripura Punjab Lakshadweep Goa Orissa Current Sources of Income A National Sample Survey of the senior citizen reported that about 5% of them lived alone, another 10% lived with their spouses only and another 5% lived with relatives/ non-relatives, other than their own children. The remaining (80%) lived with their children (Rajgopalan, 2006). In other words, coresidence with children and other relatives is predominant. As of 1994, the estimated percentage among the elderly, dependent on various sources of income is given in Table below. The data shows that they were dependent primarily on their own work and transfers including from their children. Source Men Women All elderly Pensions/Rent 9-10% 5% 7-8% Work 65% 15% 40% Transfers 30% 72% 40% 17

18 The above factors project that Reverse Mortgage is made for India. It is a bankable scheme that takes away the sting from the existing defined-contribution pension plans. RML takes care of two simultaneous risks associated with these plans for the savers, first is insufficient returns earned and the second is unpredictable longevity of beneficiaries. Market Potential Considering the above facts in mind, if we assume that about 20% of the eligible elderly population will take the advantage of RML, the total number of loans would be of the order of 18 Million in 2010, 28 Million by 2016 and 44 Million by If the average eligible amount of one loan is taken to a conservative sum equal to Rupees 1 Million per borrower, the total RML market size will become in the range of Rupees 20 to 25 Trillion (About half a Trillion in US Dollar terms). This is a huge market and cannot be ignored in terms of opportunity by the lenders and also social security measure by the borrowers and the Government of India. Reverse Mortgage Scores Rank States/UTs The Reverse mortgage Score 1 Andhra Pradesh Gujarat Delhi Punjab Karnataka Assam Orissa Kerala Bihar Uttar Pradesh

19 11 Maharashtra West Bengal Tamil Nadu Madhya Pradesh Tripura Jammu & Kashmir Potential segments for Reverse Mortgages Middle Class segment: An average middle class person would have utilized all his savings to purchase house so that later in his life he can fall back upon the property for his sustenance. Providing a start-up in living or financing education or performing marriage of the dependents is still the responsibility of some elderly population. Health care priority segment: Old age persons may need to incur high costs for health maintenance. Current income levels may not be sufficient to take lump sum costs. Besides, these people have low credit worthiness. Health insurance is not wide spread and even where the health insurance schemes exist; getting cashless service is a difficulty. The only way out in this case is to have a credit line available at the shortest call. Small Business segment: There is a remote possibility of non-salaried segments of population to have personal pension schemes. These people who may be owners of small businesses may not have any source of regular income after they retire from active business or after handing over business to their heirs. People who can afford comfort spending: A study conducted by Technical Committee on Population, Planning Commission shows that 52% of the elderly people in urban areas are living alone. A large segment of this population will be on the look out for a relaxed life style. They may also be having none to bequeath their property, so they may intend to spend the equity in their house to meet the expenses in increased standard of living. 19

20 Parents of Non-Resident Indians (NRIs): This is a growing segment of old age parents living alone in India, while their children make a living abroad. Children would have no intention of coming back to India. In this case, utilizing house equity to enhance their living comfort is better than handing over property issues to the children. Also, increasing satellite families, migration of children to urban and industrial areas leaving aged parents at villages are few more reasons of aged parents living alone. Low Current Incomes Relative to Desired Standard of Living: Amongst such households, we are looking for those whose current levels of income are insufficient to afford their desired standard of living. The salary replacement rates suggested in the literature, for maintaining the same standard of living after retirement as before, is around 60%. This implies a pre-retirement take home salary or income (after-tax) of around Rs a month. A potential RM borrower would be one who had such a pre-retirement income but no substantial pension benefits. Therefore, he would have been employed in the private sector or self-employed. Long Tenure at Current Home: RM is attractive to a borrower especially when he values continued stay in his current residence and plans to do so for a long term into the future. This is likely when he has already stayed in his current home for a relatively longer period- say a minimum of 10 years. Additional indicators for such a desire could be a person currently resident in one s home town/ state. Lack of Other Supports: If such an individual is living alone, as in the case of a widower or widow, RM can make a substantial contribution to his/ her standard of living. Alternatively, the next generation may be living far away, either in India or abroad. Independence and Quality of Life: A potential RM borrower must be an elderly person who values his financial independence. He must be interested in maintaining his desired quality of life rather than curtailing consumption for lack of current cash income. This implies he must be mentally prepared to consider borrowing in old age, let alone through innovative financial products like RM. This implies certain minimum education and exposure to financial savings/ assets/ markets. 20

21 Constraints for marketability of Reverse Mortgages Indian Old parents do not want to shift from their house for reasons of proximity to family and friends, emotional attachments to their Houses. The hope to offset need for a regular stream of income by demanding maintenance from heirs. Heirs are promised rights over the property in return. Loan repayment in Term Reverse Mortgages could run into rough weather due to variations in the paying capacity of the heirs. Conflicting interests of the heirs might cause legal hurdles for lender to getting the loan paid off. It will be a tall order for the lenders to provide all the guarantees to make Reverse Mortgages attractive. For instance, inconsistency and lack of information in asset appreciation rates and over long periods in India may hamper Crossover risk assessment. Variations in standard of living between urban and rural India population and its impact on longevity, debt repayment commitment, satisfying legal requirements in mortgage contracts etc makes it difficult for those designing Reverse Mortgage products to strike a balance between business and welfare objectives. Moral hazards in valuation of the property, will lead to erroneous lending. This may either cause losses or create unfair competition among the lenders. Regulatory Mechanism in India The housing finance regulator, National Housing Bank (NHB), empowered with the responsibility of regulating the Reverse Mortgage Loan (RML), announced the draft guidelines. After receiving public comments and incorporating the same, came up with final Reverse Mortgage Loan (RML): Operational Guidelines at the end of May 2007 and subsequently revised and notified in May The salient features of these guidelines are split into various sections (NHB, 2008) as detailed below. Reverse Mortgage Loans (RMLs): Primary Lending Institutions (PLIs) viz. Scheduled Banks and Housing Finance Companies registered with NHB have been allowed to extend it. Eligible Borrowers: The borrower should be more than 60 years and the spouse should not be less than 55 years of age. The minimum residual life of the property should be 20 years Determination of Eligible Amount of Loan: Depends on the value of the property, age of the borrower and the prevalent interest rate. The PLI should ensure that the Equity to Value Ratio (EVR) should never be less than 10%. 21

22 Nature of Payment: Monthly, Quarterly, Half Yearly, Yearly or Revolving Credit. However a cap of Rs 50000/ on monthly and Rs / or 50% of the eligible amount have been introduced. Eligible End use of Funds: Allowed for the purposes beneficial to the senior citizens and prohibited for activities like speculation. Period of Loan: Maximum 20 years (Revised from 15 years earlier). Interest Rate: The interest rate to be charged on the RML to be extended to the borrower(s) may be fixed by PLI. Fixed and floating rate of interest may be offered. Security: The RML shall be secured by way of mortgage of only residential (not commercial) property in favour of PLI. Valuation of Residential Property: Periodic, compulsory in every 5 years. Taxation: All payments to the borrower from the PLI are income tax exempt as the same are considered as capital payments rather than income. Provision for Right to Rescission: 3 working days time is given for this Loan Disbursement by Lender to Borrower: PLI is expected to pay directly to the borrowers except in certain special situations Title Closing: The PLIs will provide a fair and complete package of reverse mortgage loan material and specimen documents, covering the benefits and obligations of the product. Settlement of Loan: All the conditions under which the loan is due are listed. Prepayment of Loan by Borrower(s): The borrower(s) will have option to prepay the loan at any time during the loan tenor. There will not be any prepayment levy/penalty/charge for such prepayments. Loan Covenants, Indemnity/Insurance, Foreclosure: Option for PLI to Adjust Payments Title Indemnity /Insurance: PLI will have the obligation of ensuring clarity on title of the residential property Foreclosure: Several events are listed on the occurrence of which the loan would be liable for foreclosure. PLI s Option to Adjust Payments Counseling and Information to Borrowers Conclusions & Suggestions Split term Reverse Mortgages may be preferred to Term Reverse Mortgages by most people. Split Reverse Mortgages are safe to borrower because there is no need for mandatory repayment at the end of the term. However, they can be risky to the lender - especially in the context of absence of suitable property appreciation rates. On the other hand, Term Reverse Mortgages are safe from lender's perspective because crossover risk is minimized - only the interest rate and property appreciation rate are the risk factors but for a borrower it may not offer complete protection if he survives beyond the term. Government may initiate an insurance scheme to share the burden of Crossover Risk of lenders to encourage these products. 22

23 Working with Life Insurers, Life Insurance protection to the extent of minimum of house value and the outstanding loan balance on the lives of borrowers can be provided. In the event of death of the borrowers, realization of proceeds can be hassle free for the lenders as wells as to the heirs of the borrowers. Actuarial world can examine applicability of risk management options available to India. It needs to be explored if mortality securitization is feasible if different places in the country are categorized according to their geographic / demographic characteristics. Senior citizens may prefer to live in rural India if only they have all amenities. A government arm on the lines of Housing Development Authority can build projects in rural India, provide amenities and sell those houses to the NRIs who can gift the property to the parents. Parents can avail Reverse Mortgage loans for making a living and increasing their comforts. Economic activity in rural India will also increase as more and more projects come up. Professional bodies may initiate an exercise to collect information like mobility rates. Further, inadequacy of property appreciation data may force the lenders to have static assumptions while designing the products. Hence a regular study can be commissioned by National Housing Bank (NHB) to study the property appreciation rates in different geographies which can be used to price the products accurately Banks and Insurance companies can form joint venture and market Reverse Mortgage products on the lines of Bancassurance. The relationship can be leveraged to combine the skills in financing and risk management and to keep the costs at a lower level. The benefits can be passed on to the borrower. A study needs to be conducted among the senior citizens in different classes of cities to understand the income needs, their views on utilizing the house equity when they are alive for luxury needs. The study could throw light on the type of Reverse Mortgage most suited for that category of city. Probably availability of different variants of Reverse Mortgage products in the market, well marketed, would create a win-win situation to the borrower and the lender. 23

24 References Website Texts Chidambaram, P, 2007, Union Budget, , Para 89, Available on ttp://indiabudget.nic.in/ub /bs/speecha.htm, Accessed multiple times, latest on 7th January, 2009 Chidambaram, P, 2008, Union Budget, , Para 166, Available on Accessed multiple times, latest on 7th January, 2009 Dey, A, 2008, RBI to Issue Norms for Reverse Mortgage Business Standard, April 22, Mumbai DHFL, 2007, Saksham - Reverse Mortgage Loan, Available on Dewan Housing Finance Ltd website Accessed on 7th January