Title Road for reverse mortgage programme in Hong Kong : a study of consumer's perception Author(s) Lui, Sai-yan; 雷 世 昕 Citation Issued Date 2014 URL http://hdl.handle.net/10722/207665 Rights The author retains all proprietary rights, (such as patent rights) and the right to use in future works.
Road for Reverse Mortgage Programme in Hong Kong A Study of Consumer s Perception by LUI SAI YAN DISSERTATION Submitted in partial fulfilment of the requirements for the degree of Master of Housing Management, The University of Hong Kong July 2014
DECLARATION I declare that this dissertation, entitled Road for Reverse Mortgage Programme in Hong Kong A Study of Consumer s Perception, represents my own work, except where due acknowledgement is made, and that it has not been previously included in a thesis, dissertation or report submitted to this University or other institutions for a degree, diploma or other qualification. Lui Sai Yan 1
Table of Content Chapter Content Page Acknowledgement 4 Abstract 5 Chapter 1 Introduction 1.1 Introduction 7 1.2 Aim of the Study 9 1.3 Objectives of the Study 10 1.4 Significance of the Study 10 1.5 Scope of the Study 12 1.6 Organization of the Study 12 Chapter 2 Literature Review 2.1 Definition of Reverse Mortgage 15 2.2 Reverse Mortgage in U.S. 17 2.3 Evaluation of Reverse Mortgage in U.S. 21 2.4 Chinese Studies on Reverse Mortgage 25 2.5 Reverse Mortgage Programme in Hong Kong 27 2.6 Three Enhancements of Reverse Mortgage 30 Programme in Hong Kong 2.7 Mechanism of Reverse Mortgage Programme in Hong Kong 31 Chapter 3 Methodology 3.1 Introduction 38 3.2 Conceptual Framework 39 3.3 Survey Design 41 3.3.1 Data Collection 42 3.3.2 Questionnaire Design 43 Chapter 4 Data Analysis 4.1 Introduction 47 4.2 Consumer s Awareness 48 4.2.1 Awareness 49 2
4.2.2 Understanding 52 4.3 Consumer Motivation 55 4.4 Factors Affecting the Consumer s Motivation 58 4.4.1 Programme Content 58 4.4.2 Legacy Concern 64 4.4.3 Psychological Factors 71 4.5 Relationship between Consumer s Perception and 75 Demographic Information 4.5.1 Gender 75 4.5.2 Age 77 4.5.3 Education Level 80 4.5.4. Value of Self-Occupied Property Owned 82 4.5.5 Value of Assets Owned (Excluding Value 85 of Self-Occupied Property Owned) 4.5.6 Household Member 88 4.6 Summary 92 4.6.1 High Awareness but Low Understanding 92 4.6.2 Low Consumer s Motivation 93 4.6.3 Programme Content and Legacy Concern 93 as Major Factors Influencing Consumer s Motivation 4.6.4 Consumer s Motivation by Age, Value of Assets Owned and Household Member 94 Chapter 5 Recommendation and Limitation 5.1 Introduction 96 5.2 Recommendation 97 5.2.1 Promote RMP by Different Means of 97 Media 5.2.2 Focus on Elderly without Children 99 5.3 Limitation 101 Chapter 6 Conclusion 102 Chapter 7 References 105 Chapter 8 Appendix 110 3
Acknowledgement I shall take this opportunity to express my gratitude and respect to Dr. Zhang Feng, my dissertation supervisor for his kind guidance and continuous support. Without his precious advice and professional supervision, the dissertation could not be completed smoothly. Also, it is important to say thank you to my family, friends, colleagues, and especially to Ms. Esther Chan, my beloved fiancee for their support and patience given to me. Their encouragement did contribute a lot to my work. Last but not least, the primary data collected from the respondents is absolutely the key of the study. Thank you so much for their valuable time spent for completing the questionnaire. 4
Abstract Reverse Mortgage Programme ( RMP ) was launched in Hong Kong on 11 th July 2011. It aims to help the elderly to improve the living standard. Since the aging population is getting serious and the lack of comprehensive retirement protection scheme in Hong Kong, a big potential market for reverse mortgage is given which is anticipated that the eligible elderly should eagerly participate to the programme. However, the statistic from the Hong Kong Mortgage Corporation ( HKMC ) showing that the participation rate of RMP is surprisingly low. Up to 31 st May 2014, only 624 numbers of applications were recorded. In order to boost the participation rate, this dissertation has conducted a study to identify the reason(s) of low participation rate and explore the possible way(s) to enhance the RMP. In order to achieve the aim of the study, a questionnaire survey was conducted to investigate the consumer s perception to RMP. It divided consumer s perception into consumer s awareness and consumer s motivation. High awareness but low understanding to RMP was found according to the results of survey. Meanwhile, low consumer s motivation to RMP was found and the complicated programme 5
content and legacy concern are the major factors influencing the consumer s motivation. Nevertheless, there still a long way to go for the RMP in Hong Kong. To enhance the performance of RMP, it is recommended to promote it by different means of media and focus it to the elderly without children. Further studies would be needed to assess the effectiveness of the approaches in the recommendation. 6
Chapter 1 Introduction 1.1 Introduction Aging population has long been the major problem in Hong Kong. Generally speaking, the problem is mainly due to the low fertility rate and long life expectancy. According to the data from Census and Statistics Department (2012), the total fertility rate decreased from 1281 live births per 1000 women in 1991 to 1204 in 2011, which may be caused by marriage postponement and increased prevalence of spinsterhood etc. Besides, as more and more people in Hong Kong emphasize healthy life, the life expectancy is increasing in recent years. In 2011, the expectation of life at birth was 80.5 for males and 86.7 for females. And under estimation, the life expectancy was expected to increase by 3.9 years for males and 4.1 years for females in 2041. Combining the above-mentioned situation, the proportion of the population aged 65 and over is projected to rise tremendously from 13% in 2011 to 30% in 2041, which is equal to around 2.5 million of people. Also, the median age would rise from 41.7 in 2011 to 49.9 in 2041. 7
Hence, the retirement life of the elderly is the top agenda of the HKSAR government. Although 27% of older persons had self-occupied properties as refer to the data from Census and Statistics Department (2009), many of them are regarded as house-rich-cash-poor, as the data also revealed that over 50% of the older persons had assets less than $50,000 excluding the value of owner-occupied properties. Probably the burden of repayment of property mortgage loan leads to the low saving. To cope with, however, the lack of comprehensive retirement protection scheme in Hong Kong being the major challenge for the politicians. The Mandatory Provident Fund ( MPF ), being the main pension scheme, is always criticized by the public for low contribution rate. Given these conditions, it is believed that there should be a relatively big potential market for reverse mortgage in Hong Kong. The HKSAR government aware the situation and, after the pass of a motion in the Legislative Council on Policy on elderly housing, the Reverse Mortgage Programme ( RMP ) launched on 11 th July 2011 which is regulated by The Hong Kong Mortgage Corporation ( HKMC ). Given the expected big potential market, the participation rate of the RMP is disappointing low. According to the statistic from HKMC (2013), the total number of applications is 624 as at 31 st May 2014, 8
which is less than 20 applications per month after calculation. To address the problem of low participation rate of RMP, this dissertation would conduct a research to study the consumer s perception towards RMP. The findings would be analyzed and some recommendations based on the findings would be made. 1.2 Aim of the Study The aim of the study is as follow: (a) To explore the possible way(s) to enhance the Reverse Mortgage Programme in Hong Kong by identifying the reason(s) of low participation rate. 9
1.3 Objectives of the Study The objectives of the study are as follow: (a) To conduct literature review on the definition and mechanism of Reverse Mortgage. (b) To conduct literature review on the development of Reverse Mortgage in Hong Kong and U.S. (c) To find out the reason(s) of low participation rate of RMP in Hong Kong by understanding the consumer s perception. (d) To make a recommendation to enhance RMP in Hong Kong. 1.4 Significance of the Study Reverse mortgage has been discussed vigorously in Hong Kong before the implementation. Many research studies were conducted to investigate the 10
feasibility of the application of the idea. Today the RMP was launched for over 3 years. Nevertheless, very few studies were conducted to review the performance of RMP. Hence, it is significant to have a study to review the performance of RMP and, through a research of consumer s perception, find out the major factor(s) influencing the performance of RMP. Second, as only a few studies reviewing the performance of RMP, it is not difficult to know that even fewer studies have been conducted to propose the possible enhancement method(s) for RMP. Thus, this study is also very significant to, by understanding the major factor(s) influencing the performance of RMP, make an enhancement proposal to boost the participation rate of RMP. Last but not least, the findings of the survey shall provide some insights for the HKMC and other related planners. Therefore the study could facilitate the future development of the RMP. 11
1.5 Scope of the Study The study would focus on the consumer s perception towards Reverse Mortgage Programme ( RMP ) in Hong Kong launched on 11 th July 2011. Understanding that the Global and Hong Kong s financial condition would affect the participation rate of RMP as well, nevertheless, this aspect would not be covered in the study. To achieve the aim and objectives of the study, a research would be conducted by interviewing the targeted consumers. They are the eligible applicants who did not apply RMP yet. Hence, the research would focus on interviewing homeowner in Hong Kong who are aged 55 or above. 1.6 Organization of the Study The flow of the study would as following. Chapter 1 is the foundation of the study. Background information of the RMP is provided together with the aim, objectives, significance and scope of the study. It draws a clear picture for the study so that everyone knows what the study is dealing with. 12
Chapter 2 is literature review containing the empirical background of the RMP in Hong Kong and the Chinese studies on reverse mortgage. Also, being one of the biggest markets, the reserve mortgage in U.S. and the relevant studies on reverse mortgage in U.S. would be covered. Moreover, the literature review on the definition of reverse mortgage and the mechanism of RMP in Hong Kong would be provided. Methodology is discussed in the Chapter 3 of the study. After a brief introduction of the study, the conceptual framework of the study would be illustrated. Afterwards, the methods of data collection and the questionnaire design would be elaborated. Being the Chapter 4 of the dissertation, data analysis would be the core part of the study. The results of each part of the questionnaire including consumer s awareness, consumer s motivation, factors influencing the consumer s motivation and the demographic information of the respondents would be shown and discussed. A comprehensive summary of the findings would be given in the last part of this chapter. 13
According to the findings in the data analysis, recommendation and limitation of the study would be discussed in Chapter 5. By generalizing the key points of the study, a conclusion would be made in Chapter 6. And finally the references and appendix would be shown in Chapter 7 and Chapter 8 respectively. 14
Chapter 2 Literature Review 2.1 Definition of Reverse Mortgage According to Michelangeli (2008), reverse mortgage is a type of home equity loan allows homeowners to convert some of the equity in their home to cash. The elderly homeowners could remain in their homes while using the equity in their homes as a form of income (Foote, 2010). Feng (2010) indicated that reverse mortgages allows those who are house rich, cash poor to consume their housing asset without moving out. Actually those seniors who are 60 or above could consider the product. Seniors borrow against their housing assets and receive one lump sum or multiple payments. The loan does not have to be repaid as long as the borrower lives in the house (Michelangeli, 2008). Generally, reverse mortgage are typically repaid with the proceeds from the sale of the property securing the loan or the repayment made by family members (Bhuyan, 2011). 15
In Hong Kong, the Hong Kong Mortgage Corporation Limited ( HKMC ) also provided similar definition for reverse mortgage: Reverse mortgage is a loan arrangement. It enables borrowers to use their self-occupied residential properties in Hong Kong as security to borrow from a participating bank. The borrowers remain as the owners of the properties and can continue to stay at the properties for the rest of their life. Borrowers will receive monthly payouts over a payment term of either a fixed period of 10, 15 or 20 years or their entire life, and they may also borrow lump-sum loan(s) for specific purposes when needed. In general, borrowers do not need to repay their reverse mortgage loan during their lifetime, unless they move out from their property permanently or the reverse mortgage loan is terminated due to other reasons. When borrowers reverse mortgage terminates (or borrowers pass away), they (or their inheritors) have the preferential right to redeem their property by repaying to the bank in full the outstanding loan amount owed by them 16
under the reverse mortgage. If borrowers (or their inheritors) choose not to exercise such a right, the bank will sell their property to recover the outstanding loan amount they owe. If the sale proceeds from the property exceed the outstanding loan amount owed by borrowers, the bank will return the surplus to them (or their inheritors) after paying off such outstanding loan amount in full. However, if there is any shortfall, borrowers (or their inheritors) need not worry as the shortfall will be borne by the HKMC under an insurance arrangement between the bank and the HKMC. 2.2 Reverse Mortgage in U.S. The United States is a key market model to study in the reverse mortgage field. It involves parties from all walks, and offers a variety of product options targeting seniors of all levels (Feng, 2009). As such, it is absolutely beneficial to review the previous studies conducted on reverse mortgage in U.S. Chan (2002) completed a comprehensive study regarding The HECM Programme, The HomeKeeper Programme and Private Sector Products of reverse mortgage in U.S. 17
The HECM Programme The federally insured reverse mortgages under the HECM programme are available throughout the United States to homeowners aged 62 or over, regardless of income. The HECM insurance programme is backed by the Federal Housing Administration (FHA) of the U.S. Department of Housing and Urban Development (HUD). HUD is responsible for the design and modification of the insurance programme whereas FHA is responsible for the lenders approval, collects mortgage insurance premiums and manages the insurance fund. As of today, The HECM programme generates the largest number of reverse mortgage loans in the U.S. market. The programme started in 1990, which U.S. Congress authorized the HECM trial programme to insure up to 2,500 reverse mortgages. In 1991, Congress extended the trial programme till 1995 and expanded the limit to insure up to 25,000 reverse mortgage loans. Later in October 1998, Congress made the programme permanent and increased the number of allowable outstanding loans to 150,000. Actually in October 1999, more than 38,000 elderly homeowners have chosen HECM loans to help them with their financial needs. It was recorded that around 9,000 out of 38,000 loans have matured, 28,500 loans are still in force and only 400 loans ended in claims on the 18
insurance fund. The programme is developing gradually and steadily. Indeed, the reverse mortgage loans are not come from HUD or FHA directly. Instead, HECM loans are issued by banks, mortgage companies or other private lenders. However, these companies sell virtually all HECM loans to Fannie Mae subsequently, which is a government-sponsored entity that operates under the general oversight of the federal government. The HomeKeeper Programme Fannie Mae introduced its own reverse mortgage product, the HomeKeeper starting from 1995. The loan options available under the HomeKeeper programme are similar to those of the HECMs with fewer payment options. Borrowers can only choose monthly cash advances, or a line of credit or a combination of both, however, could not choose lump sums or term payments. Similar to most HECM reverse mortgages, HomeKeepers are monthly floating interest rate loans. Due to the unrestricted limits of the size of loans, the major advantage of Fannie Mae s programme is that owners with high-value homes may be able to borrow more than from the HECM programme, which the limit is restricted by FHA. 19
Fannie Mae also has a shared appreciation option that borrowers are allowed to gradually increase the loan amount along with their appreciating home values. In comparison, HECM loans often provide more funds for qualified borrowers as they use more favourable assumption for borrowers and so are preferred by owners who are eligible for both programmes. Indeed, only borrowers with high-value properties would prefer to choose the HomeKeeper programme. As such, the number of HomeKeeper loans originated has been much smaller than the number of HECMs. To compare, there were less than 1,000 HomeKeeper loans issued whereas around 8,000 newly originated loans under the HECM programme in 1999. Private Sector Products In the early 1990, there have totally three private sector reverse mortgage products available from TransAmerica HomeFirst, Financial Freedom Senior Funding Corporation, and Household Senior Services. However, Household Senior Services discontinued its programme in 1997. Unfortunately, TransAmerica also discontinued its programme and sold its entire loan portfolio to Financial Freedomin 1999. Hence, Financial Freedom is the only private firm offering a 20
reverse mortgage product other than the HECM and HomeKeeper programmes today. 2.3 Evaluation of Reverse Mortgage in U.S. While the population of older homeowners eligible for reverse mortgages is poised to grow significantly in the coming years, the number of eligible homeowners that will actually choose to take out a reverse mortgage is much more uncertain. Older homeowners today are largely uninterested in reverse mortgages, and market penetration is very low. Only about 2 to 3 percent of eligible homeowners today have a reverse mortgage (Galloway & Kantor, 2013). Several surveys were conducted in U.S. to assess the perception of consumers towards reverse mortgage. AARP survey in 2007 In December 2006, AARP began to conduct the first national survey of reverse mortgages borrowers and homeowners who had considered these loans but decided against them. The study found that the consumer impressions of and attitudes toward reverse mortgages are still in the formative stages. AARP s 21
research indicates that awareness of the existence if reverse mortgages is increasing, though interest in taking out a loan in the future has decreased. Most consumers admit that they do not know much about these loans. And misunderstandings about reverse mortgages are still common. Data from research indicate that many consumers are still wary about of such loans. Harris Interactive survey in 2007 The survey aimed to assess the consumer s awareness and favorability of different mortgage products of a Harris Poll of 2,383 U.S. adults conducted online between May 8 and 14, 2007 by Harris Interactive. Consumer s awareness of reverse mortgage is relatively low among the mortgage products. The 64% awareness of reverse mortgage ranked sixth out of ten mortgage products. For the favorability, reverse mortgages also recorded a disappointing result among other mortgage products. The category of net total favorable is 25%, which is lower than the net total unfavorable at 36%. 22
Survey conducted by Leviton in 2001 This study explored response of homeowners who had received reverse mortgage counseling through open-ended interviews. Decision-making was influenced by attachment to home, family input, and financial attitudes, including desire to leave a legacy. In general, homeowners took reverse mortgages only as a last resort that enabled them to maintain their independence. The financial legacy was a strongly-held value. Many elderly homeowners regard this as a responsibility, even for people without children who wanted to leave something for nieces and nephews. They wanted to hold on to them even though they did not expect heirs to live there, which reverse mortgages inevitably conflict with the desire to leave a legacy. In this study, the author also quoted some other authors, who have suggested that leaving a legacy may satisfy a very basic need for a sense of immortality, a feeling that somehow we will live on in the memories of people we care for (Dobrof&Moody, 1996). In short, the legacy motive will continue to dampen demand for reverse mortgages. 23
Survey conducted by Stephanie and George in 2009 They surveyed 324 homeowners over the age of 62 living in 30 states to obtain information about their attitudes toward and awareness of HUD's HECM program. The majority of the respondents are either unaware of the program, uninterested in the program, or both. Most of the respondents expressed having limited knowledge of the program and no knowledge of the program at all. Only a few respondents were either well informed due to the involvement of family and friends, and, the remaining was misinformed about the program's attributes. For the attitudes aspect, many respondents expressed little personal interest but believe it was an attractive program for those who needed it. In addition, the respondents expressed that the term payments would be more attractive than tenure payments. It could be deduced that the respondents may be confused or skeptical about the program features that were unique or unusual. That may relate to the seniors fear of being victimized by complex financial transaction (Peterson, 2002). 24
2.4 Chinese Studies on Reverse Mortgage As mentioned before, only few studies on reverse mortgage were found in Hong Kong and even China since reverse mortgage is not popular in Chinese society. Nonetheless, these studies could undoubtedly give us some insights especially for the influence of legacy concern to reverse mortgage in Chinese society. Study by Sau Po Centre on Ageing in 2010 Just before the implementation of RMP in Hong Kong, the Sau Po Centre on Ageing of The University on Hong Kong conducted a study regarding the reverse mortgage in 2010. The study aims to assess the receptivity amongst older persons (aged 60 or above) towards the reverse mortgage and examine the factors affecting the older person s consideration of taking up the reverse mortgage. The study found that around 20% of the respondents showed interest in reverse mortgage but over 50% of respondents did not show any interest in reverse mortgage. The study discovered that leaving the property to their families was the major reason for those who were not interested in reverse mortgage. 25
Study by Jun Feng in 2010 In the same year, Jun Feng from The University of New South Wales conducted a study to investigate the Chinese reverse mortgage market. Feng discovered that the major obstacle for introducing reverse mortgage in China is the Chinese culture. The close family ties lead to a strong bequest motives to the elderly in China. However, he believed that the culture is changing gradually which may lead to a increasing demand on reverse mortgage in China. Study by Wai-Sum Chan in 2002 Almost 10 years before the implementation of the RMP in Hong Kong, Chan conducted a study on the development of reverse mortgage of several overseas countries and recommended strategies to overcome the possible obstacles for introducing reverse mortgage in Hong Kong. Chan stated that most Chinese old people wish to leave their houses to their children being one of the major obstacles of introducing reverse mortgage in Hong Kong. To cope with, the government may cooperate with the potential lenders for implementing some campaigns shaping the elderly s perception on reverse mortgage. 26
2.5 Reverse Mortgage Programme in Hong Kong In July 2011, the HKSAR Government introduced Reverse Mortgage Programme ( RMP ), which is regulated by The Hong Kong Mortgage Corporation Limited ( HKMC ) established in March 1997, is wholly owned by the Hong Kong Special Administrative Region (HKSAR) Government through the Exchange Fund. Background According to the meeting notes of Legislative Council (2011), the idea of launching a "reverse mortgage" scheme in Hong Kong was raised by Members of Legislative Council ( Members ) since early 2000s. It was discussed in connection with issues relating to the care for the elderly without actively pursued by the Administration before 2010. On one hand, the Administration indicated that Hong Kong shall have a demand for reverse mortgage due to the aging population. On the other hand, the Administration believed it should be hard to supply a reverse mortgage product which would be welcomed by the elderly. As combining the expected low property value of the old buildings owned by the elderly and the long average life expectancy of the elderly homeowner, the average monthly 27
payment for the elderly homeowner should not be high and attractive enough. Studies in 2000s According to the report of HKMC (2010), several studies regarding reverse mortgage were conducted in 2000s. Chou and his colleagues (Chou, Chow, & Chi, 2006) conducted secondary data analysis on data provided by the Census and Statistics Department that was based on a representative random sample of middle aged adults (aged between 45 and 59) in 2001 in Hong Kong. The findings showed that about 11% of the respondents definitely or probably would consider applying for the reverse mortgage once it is available in Hong Kong. It was also found that childlessness and possession of stocks, bonds or funds were positively related to the willingness to consider applying for the plan while the amount of financial asset (excluding their self occupied properties) was negatively associated with that willingness. In 2005, the first ever empirically based study was conducted by Chui and his colleagues. The research surveyed 1,001 respondents from two age groups: elderly people (aged 60+) and the soon to be old (aged 45 59) homeowners of private residential housing. A potential market of reverse mortgage was found amongst 28
the homeowners who would like to remain in their original residence; who are not in immediate need of a large lump sum of cash and who have middle to upper ranks of property (i.e. those above HK$3 million). According to the study, around 10% of respondents revealed interest to reverse mortgage given the circumstance that the payment is calculated based on 30% of property value. Discussions in 2010 and 2011 At the meeting of the Panel on Financial Affairs on 1 March 2010 (Legislative Council, 2010), HKMC was asked whether they would consider providing reverse mortgage services and details of the relevant work plan. The Hong Kong Monetary Authority replied that HKMC was considering conducting a feasibility study of a reverse mortgage product and the demand in Hong Kong. HKMC would draw on international experience as well as the local conditions to examine whether Hong Kong should and could introduce reverse mortgage. At the Council meeting on 30 June 2010, the Council passed a motion on "Policy on elderly housing", urging the Government to formulate a targeted, comprehensive and long-term planning policy on elderly housing to meet the challenges arising from an ageing population. Regarding this, the Members 29
believed that the HKSAR Government should encourage the banking and insurance sectors to work on more financial products such as reverse mortgage in order to help the elderly to improve the living standard. On 16 December 2010, HKMC announced that its Board had approved the corporation to launch a pilot scheme on reverse mortgage in 2011. The pilot scheme would enable the elderly homeowners to receive annuity payment by mortgage their self-occupied and non-mortgaged residential properties to the bank while they can still staying at the said properties. Finally on 11 th July 2011, HKMC announced that the RMP was launched. 2.6 Three Enhancements of Reverse Mortgage Programme in Hong Kong The HKMC announced in November 2012 that three enhancements to the RMP will come into effect on 16 November 2012, bringing greater flexibility and benefits to both existing and prospective reverse mortgage borrowers. These enhancements include: 30
(1) increasing the maximum specified property value for payout calculation from HK$8 million to HK$15 million. (2) lowering the minimum age of borrowers from 60 to 55. (3) increasing the maximum lump-sum payout amount from 50% of the actuarial value of the reverse mortgage to 90%. However, the number of application did not record a tremendous increase after the implementation of the 3 enhancements. Up to 31 st May 2014, the total number of application is just 624. The effectiveness of the three enhancements is very low. 2.7 Mechanism of Reverse Mortgage Programme in Hong Kong Anyone who would like to apply the RMP in Hong Kong should observe the terms and requirements as formulated by the HKMC: 31
Eligibility For those who are interested in applying RMP, he/she must hold a valid Hong Kong Identity Card and aged 55 or above; and must not be an undischarged bankrupt or otherwise subject to bankruptcy petition or individual voluntary arrangement. Their properties must be held in the borrowers own name. If it is jointly held with another person as joint tenant, the joint tenant must become a co-borrower under the same reverse mortgage and is able to satisfy the relevant eligibility criteria as well. Also, the property must not exceed 50 years of age and must not be subject to any resale restriction. For the property exceeding 50 years of age, it will be considered only on a case-by-case basis. Last but not least, the property must not be rented out, which must be occupied by the borrower as his/her principal residence in Hong Kong. Loan Cost Interest expense Reverse mortgage is a loan arrangement in which interest would be charged by the borrower's bank on the outstanding loan amount (including interest) on a 32
compound basis. Interest will be debited to the outstanding loan amount and the interest rate would be Hong Kong Prime Rate minus 2.5%. Mortgage insurance premium There are totally 2 mortgage insurance premiums required and the amount payable by the borrower will be debited to the outstanding loan amount. The first one is Upfront Mortgage Insurance Premium. It is payable in 7 annual installments starting from the 4 th anniversary. Each annual installment is calculated at 0.28% of the property value. The second is Monthly Mortgage Insurance Premium. It is payable on a monthly basis at the annual rate of 1.25% of the outstanding loan amount. Counselling fee The borrower needs to pay a counselling fee to his/her Reverse Mortgage Counsellor (counsellor) for counselling service before applying the RMP. The counselling fee varies among different counsellor. 33
Handling fee A handling fee of HK$1,000 will be charged for each change of payment term or request for a lump-sum loan. Other fees and expenses The borrower will be responsible for the legal fee for execution of the mortgage documents. For those property exceeding 50 years of age, a building inspection report is required and the service charge shall be borne by the borrower. Terms of Loan Flexible payment term There have different options for borrower to receive monthly payouts for either a fixed period of 10, 15 or 20 years or the entire life according to his/her own consideration. The borrower could apply to switch to another payment term during the existing payment term. Lump-sum loan Apart from the monthly payouts, the borrower may apply to borrow lump-sum loan(s) at the time of initial loan application and/or at any time during the payment 34
term for 1) full repayment of an existing mortgage on the property which is applicable only at the time of initial loan application; 2) payment for major repair and maintenance of the property; 3) payment for medical expenses even though the treatment is received outside Hong Kong and 4) payment for the fees payable to the relevant solicitors and medical practitioners in connection with the enduring power of attorney or the fees in connection with the application for a Court Order under Part II of Mental Health Ordinance. Other purposes not listed above may be considered on a case-by-case basis. Loan Amount & Disbursement Methods The monthly payout amount of RMP is determined by the calculation as refer to the table below, which will be unchanged throughout the payment term and will not be affected by the cost involved, movement in property price and interest rate, inflation/deflation or other economic factors. However, if the borrower takes out a lump-sum loan, the amount of his/her subsequent monthly payout will be reduced accordingly. 35
Table 1: Scale of monthly payout amount (per HK$1 million of property value) Entry age 55 years old 60 years old 70 years old Payment term One borrower Two borrowers One borrower Two borrowers One borrower Two borrowers 10-year $3,200 $2,800 $3,700 $3,300 $5,100 $4,600 15-year $2,400 $2,150 $2,800 $2,500 $3,800 $3,500 20-year $2,050 $1,800 $2,400 $2,100 $3,300 $3,000 Life $1,650 $1,450 $2,000 $1,800 $3,100 $2,800 Table 2: Maximum specified property value for payout calculation Appraised property Maximum specified property value for payout calculation value HK$8 million or 100% of appraised property value less Over HK$8 million higher of 80% of appraised property value and HK$8 million to HK$12 million Over HK$12 higher of 70% of appraised property value and HK$9.6 million to HK$16 million million Over HK$16 higher of 60% of appraised property value and HK$11.2 million million (capped at HK$15 million*) General Application Flow The general application flow of RMP involves 4 steps. The first one is pre-application. Interested elderly homeowner could approach the participating bank for more details and conduct a preliminary eligibility assessment for them. Second is counselling. The potential borrower must meet an eligible consellor before making a formal application for a reverse mortgage loan. The counsellor will explain the general features of a reverse mortgage, the major legal rights and 36
obligations as well as the legal consequence of taking out a reverse mortgage loan to the potential borrower. Upon the completion of the counselling, the counselor will issue a counselling certificate to the potential borrow. And then is the formal application. After obtaining the counselling certificate, the potential borrower may approach any participating bank to make a formal application. Finally is the execution of legal documents. Once the formal application is approved by the bank, the borrower could receive the reverse mortgage loan after the execution of the mortgage document. Participating Banks Up to now, there are totally 7 banks participating the RMP. Interested elderly homeowners could obtain more details of RMP and proceed formal application procedures with the banks including 1) Bank of China (Hong Kong) Limited; 2) Bank of Communications Co., Ltd.; 3) Fubon Bank (Hong Kong) Limited; 4) Nanyang Commercial Bank, Limited; 5) Shanghai Commercial Bank Limited; 6) The Bank of East Asia, Limited; and 7) Wing Lung Bank Limited. 37
Chapter 3 Methodology 3.1 Introduction As mentioned in Chapter 1, this study aims to explore the possible ways to enhance the RMP in Hong Kong by identifying the reason(s) of low participation rate. Follow this logic, this study should first find out the reason(s) of low participation rate of RMP in Hong Kong. The finding(s) would be analyzed and recommendation in respect of the results could be made. Hence, reference would be made to the previous studies on reverse mortgage and a tailor-made study in respect of the aim of this dissertation would be constructed. Refer to the topic Evaluation of Reverse Mortgage of U.S. in Chapter 2, several surveys have been conducted in U.S. to assess the perception of consumers towards reverse mortgage, including the AARP survey in 2007 ; Harris Interactive survey in 2007 ; Survey conducted by Leviton in 2001 ; and Survey conducted by Stephanie and George in 2009. 38
Generalizing the ideas of the above surveys which assessing the perception of consumers towards reverse mortgage in U.S., the term perception could be divided into 2 major aspects: I) Consumer s Awareness and II) Consumer s Motivation, which consumer s motivation may be affected by 3 main factors. Therefore, this study would focus on these indicators and the following conceptual framework would illustrate the logic of the study. 3.2 Conceptual Framework The conceptual framework of the study is shown as below to illustrate the outline and the flow of the study. By following the steps of the framework, the aim of the study could be achieved. 39
Low Participation Rate of Reverse Mortgage Programme in Hong Kong Consumer's Perception Consumer's Awareness - Awareness - Understanding Consumer's Motivation - Interest on Future Application Factors Affecting the Consumer's Motivation - Programme Content - Legacy Concern - Psychological Factors Reason(s) of Not Applying RMP Recommendation The conceptual framework is built on the previous studies on reverse mortgage in U.S. in Chapter 2. It starts with the fact that the participation rate of RMP in Hong Kong is low. In order to find out the reason(s) behind, the consumer s perception would be studied and 2 main aspects would be investigated including I) Consumer s Awareness and II) Consumer s Motivation. The consumer s awareness could be assessed by finding out the consumer s awareness and understanding on RMP. For consumer s motivation, it could be assessed by finding out the consumer s interest on future application to RMP. In 40
the meantime, it is necessary to address the factor(s) affecting the level of consumer s motivation. According to the previous studies on reverse mortgage in U.S. in Chapter 2, 3 main factors could be generalized including i) Programme Content; ii) Legacy Concern; and iii) Psychological Factors. The findings on consumer s awareness and consumer s motivation would be analyzed and that would be the reason(s) that consumers consider not to apply RMP. And finally a recommendation in enhancing the performance of RMP could be made in connection with the said reason(s). 3.3 Survey Design A quantitative research was conducted in the study to collect primary data. Questionnaire surveys were conducted by interviewing 100 homeowners aged 55 or above (i.e. those are eligible to apply RMP) who did not apply RMP. The design of the questionnaire would be elaborated in the following part. Since some of the questionnaires have not been returned successfully, finally 95 numbers of questionnaires were collected. 41
3.3.1 Data Collection For the recruitment of interviewees, convenience sampling and snowball sampling were used. For convenience sampling, face to face interviews were conducted near MTR stations and totally 60 numbers of questionnaires surveys were completed. To enhance the representativeness to the population, 20 numbers of questionnaires were conducted near the MTR stations in Hong Kong Island; other 20 numbers of questionnaires were conducted near the MTR stations in Kowloon and the remaining 20 numbers of questionnaires were conducted near the MTR stations in New Territories. For snowball sampling, 40 numbers of questionnaires were passed to my elderly family members. Each of them received 10 numbers of questionnaires and invited interviewees through social networking. However, 5 numbers of questionnaires could not be returned on time. In order to avoid any delay to the completion of this study, only 35 numbers of questionnaires were collected finally. Together with the 60 numbers of questionnaires conducted by face to face interviews, totally 95 numbers of questionnaires were collected for analysis. 42
3.3.2 Questionnaire Design The questionnaire is divided into 4 parts and a sample questionnaire is attached in Chapter 8 Appendix. Before going to Part 1, a brief introduction to the questionnaire interview is provided to familiar the respondents with the interview topic and the aim of the interview. Also, the respondents would be understood that the information obtained would be confidential and used for research purpose only. Part I Screening Questions The purpose of the screening questions is to ensure the respondents are eligible to apply RMP but did not apply before. Hence, the first question asked if the respondents are aged 55 or above; the second question asked if the respondents own a self-occupied property and the third question asked if the respondents applied RMP. Should the respondents reply No for the first and second questions and Yes for the third question, the interview would be ended immediately and would not be used for data analysis. 43
Part II Consumer s Awareness to RMP The questions asked in this part aim to collect data to assess the consumer s awareness to RMP, and for the further discussion whether it would be the reason of low participation rate of RMP. Thus, the first question asked if the respondents know RMP has been launched in Hong Kong. Should the respondents reply No in this question, he/she does not need to answer the remaining questions in Part II and Part III since those would not be applicable. The second question asked the respondents to rate their level of understating about RMP and the third question asked the respondents from which medium they heard about RMP. The questions aim to assess the respondent s awareness and understanding to RMP. Part III Consumer s Motivation to RMP The questions asked in this part aim to collect data to assess the consumer s motivation to RMP, and for the further discussion whether it would be the reason of low participation rate of RMP. Therefor the respondents were asked to rate the level of intention of applying RMP and that RMP is favorable to them. To further 44
investigate the factors affecting the consumer s motivation, several questions were asked in respect of Programme Content, Legacy Concern and Psychological Factor. For programme content, 3 questions were asked to rate the favorability in respect of 3 aspects of RMP including Eligibility, Loan Cost and Loan Amount. The high/low favorability in respect of these 3 aspects would probably affect the consumer s motivation to RMP. For legacy content, it is understood from the survey conducted by Leviton in 2001 that elderly homeowners may wish to leave their house to their children. This thought would affect their willingness to apply RMP. Hence, 2 questions were asked to find out whether the respondents would leave their self-occupied property to their children and whether they would worry the future housing needs of their children if they joined RMP. 45
For psychological factor, it is understood from the survey conducted by Stephanie and George in 2009 that elderly may be skeptical about the financial transactions that were unique or unusual. This thought may also affect their willingness to apply RMP. In this connection, 2 questions were asked whether the respondents will consider not to join RMP and no similar programme launched in Hong Kong before and that RMP is not popular in Hong Kong. Part IV Demographic Information Finally some demographic information was collected in this part of the interview. The gender, age, education level, value of self-occupied property owned, value of asset owned (excluding value of self-occupied property owned) and household member of the respondents were asked. The relationship between these six aspects and the awareness and motivation to RMP of the respondents would be investigated as well. 46
Chapter 4 Data Analysis 4.1 Introduction In this chapter, the data collected from the 95 numbers of questionnaires would be analyzed. First of all, the data of the questionnaires would be divided into different parts in accordance with the conceptual framework. And then the data would be summarized and illustrated in Pie Chart respectively for easy perusal. Afterwards, analysis would be made in accordance with the concerned data. Reference would be made to the previous studies on reverse mortgage in U.S. in order to support the findings drawn in the study. The data analysis would be divided into 6 topics. This topic Introduction would be the beginning of the whole chapter for briefly describing the flow of the chapter. Following the introduction is Consumer s Awareness. It would be divided into 2 sub-topics Awareness and Understanding, each sub-topic would be analyzed respectively. The third topic is Consumer s Motivation. The data of the respondents interest on applying RMP would be shown. After reviewing the findings on consumer s motivation, it is important to know the 47
findings on Factors Affecting the Consumer s Motivation, which would be elaborated in the fourth part. Programme Content, Legacy Concern and Psychological Factors would be discussed in this topic respectively. In the fifth topic, analysis would be made regarding the Relationship between Consumer s Perception and Demographic Information. Finally a Summary of the findings from topic 2 to topic 5 would be conducted as the sixth topic. 4.2 Consumer s Awareness Consumer s awareness would undoubtedly affect the participation rate of RMP in Hong Kong. It is easy to understand that the fewer the people aware of the RMP launched, the fewer the people would apply RMP. Yet, awareness does not focus only on whether the people have heard of something, but also the understanding on something. Hence, the previous studies on reverse mortgage in U.S. also investigating the consumer s understanding on reverse mortgage. In this study, Part II of the questionnaire survey was conducted to assess the awareness and understanding of the respondents on RMP. The results and analysis of the data collected are shown in the following respectively. 48
4.2.1 Awareness Question 2.1 Do you know the RMP launched in Hong Kong? and question 2.3 From which medium you heard about RMP? investigating the respondents awareness to RMP. According to Figure 1 as shown below, 57.9% of respondents replied Yes in question 2.1 whereas 42.1% of respondents replied No. It shows that around 60% of respondents knew that RMP was launched in Hong Kong. Figure 1: Do you know the RMP launched in Hong Kong? No 42.1% Yes 57.9% The result of question 2.1 is somewhat beyond expectation. According to the studies of AARP survey in 2007, 70% of respondents in U.S. stated that they have heard of reverse mortgages. And according to the studies of Harris Interactive survey in 2007, 49
64% of respondents revealed that they aware of the reverse mortgage as one of the mortgage products. Combining the findings of these two surveys, it shows that the awareness of reverse mortgage in U.S. was around 60% to 70% even the programme started over 10 years. It is surprised that the awareness of reverse mortgage in Hong Kong is similar to that in U.S. although the programme was launched only around 3 years. The high level of awareness in Hong Kong may due to effective promotion. As the size of Hong Kong is much smaller than U.S., promotion of reverse mortgage is much easier in Hong Kong than in U.S. However, the high awareness did not contribute to the participation rate of RMP. In other words, there should have some other factor(s) hindering the participation rate of RMP in Hong Kong. In short, the level of awareness may not be the crucial reason influencing the participation rate of RMP in Hong Kong. Besides, according to Figure 2 as shown below, 85.5% of respondents replied Media in question 2.3; 1.8% of respondents replied Bank ; 12.7% of respondents replied Relatives or Friend and 0% of respondents replied Others. It indicates that most of the respondents 50
heard about RMP from media. Only few of them heard about RMP from other sources, which is not significant in comparison. Figure 2: From which medium you heard about RMP? Bank 1.8% Relatives or Friend 12.7% Others 0.0% Media 85.5% The result of question 2.3 is remarkable. Although it is believed that media would dominate the information provided regarding RMP, over 80% of respondents revealed that they heard about RMP from media is still surprisingly high. The finding concurs with the idea from Piotrow et al. (1990) that mass media can be a powerful too not only for creating awareness about new technology but also for stimulating people s desire for more information and facilitating their efforts to apply the information to their own behavior. According to the finding, the HKMC and the related planners should further make use of the media to promote RMP. A well-designed media campaign can be 51
effective in creating a positive social environment for a behavior by bringing about shift in popular opinion (Parlato, 1990). In addition, since only one (1.8%) respondent replied that he/she had heard about RMP through bank, the result is totally disappointed and the participated banks are recommended to spend more effort on the promotion of RMP. The details would be discussed in Chapter 5 Recommendation subsequently. 4.2.2 Understanding Question 2.2 Please rate your level of understanding about RMP investigating the respondents understanding to RMP. According to Figure 3 as shown below, 23.6% of respondents replied Very Low in question 2.2; 52.8% of respondents replied Low ; 23.6% of respondents replied High and 0% of respondents replied Very High. It shows that over 75% of respondents do not have sufficient understanding to RMP (i.e. including the categories of Very Low and Low ). 52