reverse mortgage in india

REVERSE MORTGAGE IN INDIA

A

PROJECT REPORT

ON

“Reverse Mortgage In India”

SUBMITTED BY

Mr. Girish Kukreja

MMS (Finance)

\

2008-2010

Vivekanand Education Society’s

Institute of Management Studies & Research, Chembur,

Mumbai

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ACKNOWLEDGEMNT

I deem it to be a privilege to acknowledge and remain indented to the people

who their by reach and varied contribution have helped me in understanding

the concept included in my project.

First and Foremost I would like to thank University of Mumbai, for giving me

an opportunity to do project on “REVERSE MORTGAGE”

It is because of the University, that I has the pleasure of doing an extensive

research project of this sort.

I would like to thank Mr.Viraj, who has helped me in right direction, His

support and guidance has helped me to give my best towards this project

Last but not Least I would like to thank all other persons help and

assistance on each step, has helped me to complete my project.

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DECLARATION

I, Girish Kukreja, a student MMS-II of Vivekanand Education Society’s

Institute of Management Studies & Research, Chembur, Mumbai, hereby

declare that, I have completed a research project on “Reverse Mortgage in

India” during the academic year 2009-10. The information submitted is true

and original to the best of my knowledge.

Mr. Girish.A.KukrejaMr. Girish.A.Kukreja

MMS-II MMS-II

VESIMSR, Chembur,

Mumbai.

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CERTIFICATE

This is to certify that Mr. Girish Kukreja of

Vivekanand Education Society’s Institute of Management

Studies & Research, Mumbai specializing in finance has

completed his summer project on “Reverse Mortgage in India”.

The information submitted is true and original to the best of my

knowledge.

For VESIMSR

Prof. Mrs. Nupur Gupta

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TABLE OF CONTENT

Sr No Particulars Page No

1 Abstract 6

2 Introduction 7

3 Genesis Of Reverse Mortgage 9

4 Reverse Mortgage In India 12

5 Features Of Reverse Mortgage 13

6 Indian Market Potential 21

7 Research Methodology 27

8 Questionnaire 29

9 Analysis Of Data 20

12 Conclusion 31

13 Bibliography 32

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ABSTRACT

Old age comes with its own share of problems. As a person grows older, and his

regular source of income dries up, his dependency on others can increase significantly.

With health care expenses on the rise and little social security, living the golden years

respectfully can be quite a challenge for senior citizens. In such a scenario, a regular

income stream that can help them meet their financial needs and maintain their current

living standards becomes important.

Senior Citizens are an increasing component of the Indian society and dependency

in old age is increasing in the country. While on the one hand, there is significant increase

in longevity and low mortality, on the other hand cost of good health care facilities is rising

and there is little social security. Senior Citizens need a regular cash flow stream for

supplementing pension/other income and addressing their financial needs. Secular increase

in residential house prices has created considerable “home equity” wealth. For most Senior

Citizens, the house is the largest component of their wealth. One typical feature with

most senior citizens is that their residential property accounts for a significant

portion of their total asset pie. And, given its illiquid nature, property fails to aid senior

citizens on the liquidity front. Changing demographics and increased home ownership in

India have stimulated housing finance market to experiment with a new mortgage product.

And this experiment gave birth to another new mortgage loan called “The Reverse

Mortgage”

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INTRODUCTION

(MECHANISM AND EMERGENCE OF REVERSE MORTGAGE IN INDIA)

Here is how it works. Reverse mortgage as its name indicates operates in a manner

opposite to that of the typical mortgage such as a home loan. In a typical mortgage, we

borrow money in lump-sum right at the beginning and then pay it back over a period of

time. In our payback -- the EMI -- a portion goes towards paying the interest and the

remaining goes towards paying back principal.

All along, we pledge the asset -- namely the home we have bought with the loan -- to the

bank. This asset is the security against which the bank is lending to us. In reverse

mortgage, we pledge a property we already own (with no existing loan outstanding against

it). The bank in turn gives us a series of cash-flows for a fixed tenure. These can be

thought of as reverse EMIs.

There are various forms of reverse mortgage available in the developed countries. The

specific format National Housing Board (the facilitator for housing finance in India) is

promoting is one in which the tenure is 15 years and the owner of the house and his/her

spouse continue to live in the house till their death -- which can occur later than the tenure

of the reverse mortgage.

In India, people who have retired from jobs constitute a good portion of the total

population. Generally, retired people have to depend upon their earning family members

for a living. This way, without an adequate source of income for themselves, they may not

be able to live a financially independent life.

In the Union Budget 2007-08, a proposal to introduce 'Reverse Mortgages' was put forth.

To understand the concept of reverse mortgage, first let us understand what a regular

mortgage is. In a regular mortgage, a borrower mortgages his new/existing house with the

lender in return for the loan amount (which in turn he uses to finance the property); the

same is charged at a particular interest rate and runs over a predetermined tenure. The

borrower then has to repay the loan amount in the form of EMIs (equated monthly

installments), which comprise of both principal and interest amounts. The property is

utilized as a security to cover the risk of default on the borrower's part.

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In the reverse mortgage, senior citizens (borrowers), who own a house property, but do not

have regular income, can mortgage the same with the lender (a scheduled bank or a

housing finance company-HFC). In return, the lender makes periodic payment to the

borrowers during their lifetime. Inspite of mortgaging the house property, the borrower can

continue to stay in it during his entire life span and continue to receive regular flows of

income from the lender as well. Also, since the borrower doesn't have to service the loan,

he need not bother about repaying the 'borrowed amount' to the lender.

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GENESIS OF REVERSE MORTGAGE

Base and Emergence of Reverse Mortgage:

It is reported that as early as 400 years ago, European investors purchased homes

from elderly person and allowed them to stay in the same house rent-free for the rest of

their lives. Similar arrangements called “viagre” were available in France. The concept

was, subsequently brought into U.S, where it has developed and evolved the most both in

variety and volumes.

Reverse Mortgage has also been extensively practiced in most countries of the

world such as Canada, Japan, France, U.K, Australia and others. As far as the models of

these countries are concerned

Canada and Japan follow the basic structure of the US model with minor

differences. Japan differs in the type of products available, insurance structure, etc,

whereas Canada differs in percentage of equity accessible and costs involved.

France for that matter has a totally different structure, known as Yiager. (This is a

type of contract relating to purchase and sale of housing property, in which the aged seller

continues to live in the property even after signing the contract and the purchaser continues

to pay fixed amount to the seller until he dies).

Till date, more than 80,000 Reverse Mortgages have been originated in C. S.

Lenders closed a record 13,049 Home Equity Conversion Mortgage (HECM) loans during

the federal fiscal year, ending September 30, 2002, a 63 percent increase over the old mark

of 7,982 set in FY 1999.The year's (FY 2002) volume figure was 68 percent higher than

the 7,781 HECMs closed in FY 2001 i.e. roughly $1 billion in Reverse Mortgage loan

proceeds was advanced between 1989 and 1999. An additional $1 billion was funded

between 1999 and 2002.

Between now and 2015, $23.7 billion will be advanced to seniors, representing

a solid 20 percent growth rate for the industry.

Though the low interest rates and the boom in the real estate market of the 1990s

may be behind this fast growth, observers believe that the RM market is set to take off,

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thanks to the relentless underlying demographics of ageing.

However, the above actual volumes are miniscule compared to the potential U.S

target market size identified in literature.

Year 1981, was a very important year in the life of Reverse Mortgage. Reverse

mortgage took birth in United States of America. Below given are its achievements made:

(in chronology)

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Need for Reverse Mortgage

Change is the only constant. So is the change in the social fabric of our society. With the rise in nuclear family system, especially in larger cities, more and more senior citizens are facing emotional, psychological and financial issues.

Further, with the advancement of technology and developments in the medical field, the average life span of an individual is on the rise. Considering the relatively inadequate social security regime in India, the question that needs to be addressed is how to generate a regular cash flow for senior citizens to supplement their pension/other income and address their financial needs.

Regular cash flow – A support system for old age people…

In this context, reverse mortgage scheme helps senior citizens to address their financial requirements to a great extent. Under the reverse mortgage scheme, senior citizens can unlock the value of their house by mortgaging the same with a financial institution like bank etc, and enjoy regular payments during the contract period. Continue to stay in the same house.

The arrangement will be available to those above a specific age. The aim is to use the property and make it generate a return at the same time.

Another key attraction of this scheme is that senior citizens can continue to stay in their mortgaged house, as per the terms and conditions of the contract.

Other advantages of this scheme are, under the provisions of the Income Tax Act, any transfer of a capital asset in a transaction of reverse mortgage under a scheme made and notified by the centre is not regarded as a transfer , and hence, does not attract capital gains tax.

Moreover , any amount received as a loan either in lump sum or instalments under such a scheme, is also not regarded as income, and hence, not liable to income tax.

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The Indian budget 2007-08 had spelled good news for senior citizens. Not only can they

continue to live in their home but can also earn a regular income from their property now.

The union budget has proposed a REVERSE MORTGAGE scheme for them.

The National Housing Bank (NHB) a subsidiary of the Reserve Bank of India (RBI) and

the apex regulatory authority for the housing finance sector had introduced this unique

offering in due course of time and had refinanced the housing finance companies to offer

this loan product to the elderly.

Senior citizens can now rejoice, since, apart from the increase in the income tax

exemption limit, the budget has also proposed to facilitate reverse mortgage for them. Let’s

take a look at how this move will prove beneficial for the aged.

A reverse mortgage is just the opposite of a regular mortgage. In a regular

mortgage, a borrower mortgages his new/existing house with the lender in return for the

loan amount (which in turn he uses to finance the property); the same is charged at a

particular interest rate and runs over a predetermined tenure. The borrower then has to

repay the loan amount in the form of EMIs (equated monthly installments), which

comprise of both principal and interest amounts. The property is utilized as a security to

cover the risk of default on the borrower's part.

In the reverse mortgage, senior citizens (borrowers), who own a house property, but

do not have regular income, can mortgage the same with the lender (a scheduled bank or a

housing finance company-HFC). In return, the lender makes periodic payment to the

borrowers during their lifetime. In spite of mortgaging the house property, the borrower

can continue to stay in it during his entire life span and continue to receive regular flows of

income from the lender as well. Also, since the borrower doesn't have to service the loan,

he need not bother about repaying the 'borrowed amount' to the lender.

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FEATURES OF REVERSE MORTGAGE

Following are some of the key features of the scheme from the drafted norms:

3.1: REVERSE MORTGAGE LOAN (RML) :

It to be extended by Primary Lending Institutions (PLIs) viz. Scheduled Banks and

Housing Finance Companies (HFCs) registered with NHB. The PLIs reserve their

discretion to offer Reverse Mortgage Loans. Prospective borrowers are advised to consult

PLIs regarding the detailed terms of RML as may be applicable to them.

3.2: ELIGIBLE BORROWERS:

Should be Senior Citizen of India above 60 years of age.

Married couples will be eligible as joint borrowers for financial assistance. In such

a case, the age criteria for the couple would be at the discretion of the PLI, subject

to at least one of them being above 60 years of age. PLIs may put in place suitable

safeguards keeping into view the inherent longevity risk.

Should be the owner of a self- acquired, self occupied residential property (house

or flat) located in India, with clear title indicating the prospective borrower’s

ownership of the property.

The residential property should be free from any encumbrances.

The residual life of the property should be at least 20 years.

The prospective borrowers should use that residential property as permanent

primary residence. Permanent primary residence refers to the self acquired, self

occupied residential property where a person spends majority of his time. Factors

that may be relevant in this regard include the address used for general

correspondence, utility bills, bank statements, tax return, bank accounts and

banking relations etc. For the purpose of determining that the residential property is 13


the permanent primary residence of the borrower, the PLIs may rely on

documentary evidence, other sources supplemented by physical inspections.

3.3: ELIGIBLE BORROWERS:

The amount of loan will depend on market value of residential property, as

assessed by the PLI, age of borrower(s), and prevalent interest rate.

The table given hereunder may serve as an indicative guide for determining loan

eligibility:

Age Loan as proportion of Assessed Value of

Property

60 – 65 50%

66 – 70 60%

71 – 75 65%

Above 75 70%

The above table is indicative and the PLIs will have the discretion to determine the

eligible quantum of loan reckoning the ‘no negative equity guarantee’ being provided by

the PLI. The methodology adopted for determining the quantum of loan including the

detailed tables of calculations, the rate of interest and assumptions (if any), shall be clearly

disclosed to the borrower.

The PLIs will have the discretion to determine the eligible quantum of loan

estimating the ‘no negative equity guarantee’ being provided by the PLI. The

methodology adopted for determining the quantum of loan including the detailed

tables of calculations, he rate of interest and assumptions (if any), shall be clearly

disclosed to the borrower.

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The PLI would ensure that the equity of the borrower in the residential property

(Equity to Value Ratio - EVR) does not at any time during the tenure of the loan

fall below 10%.

The PLIs will need to re-value the property mortgaged to them at intervals that may

be fixed by the PLI depending upon the location of the property, its physical state

etc. Such revaluation may be done at least once every five years; the quantum of

loan may undergo revisions based on such re-valuation of property at the discretion

of the lender. However, the bank/HFC will have the discretion to decide the mode

of payment of loan and to determine the tenure of the loan, depending on factors

like the state and market value of the property and age of the borrower, among

others.

3.4: NATURE OF PAYMENT:

Any or a combination of the following: -

Periodic payments (monthly, quarterly, half-yearly, annual) to be decided

mutually between the PLI and the borrower upfront

Lump-sum payments in one or more branches

Committed Line of Credit, with an availability period agreed upon mutually, to

be drawn down by the borrower

The maximum monthly payments shall be capped at Rs. 50,000/- or such other

amount as may be notified by the Government of India.

The Lump-sum payments may be made conditional and limited to special

requirements such as medical emergency, home improvement, maintenance, up-

gradation, renovation, extension of residential property etc. The PLIs may be

selective in considering lump-sum payments option and may frame their internal

policy guidelines, particularly the eligibility and end-use criteria.

The maximum lump-sum payment shall be restricted to 50% of the total eligible

amount of loan subject to cap of Rs. 15 lakh or such other amount as may be

notified by the Government of India, to be used for medical treatment for self,

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spouse and dependents, if any. The balance loan amount would be eligible for

periodic payments.

It is important that nature of payments be decided in advance as part of the RML

covenants. PLI at their discretion may consider providing for options to the

borrower to change. All conditions stipulated by the PLIs shall be disclosed to the

borrower in advance.

3.5: ELIGIBLE END USE OF FUNDS:

The loan amount can be used for the following purposes:

Up gradation, renovation and extension of residential property.

For uses associated with home improvement, maintenance/insurance of residential

property

Medical, emergency expenditure for maintenance of family

For supplementing pension/other income

Repayment of an existing loan taken for the residential property to be mortgaged

Paying property taxes; and prevailing foreclosure

Meeting any other genuine need

Use of RML for speculative, trading and business purposes shall not be permitted

3.6: PERIOD OF LOAN:

The Maximum loan disbursement tenure should not exceed 15 years.

3.7: INTEREST RATE:

The interest rate to be charged on the RML to be extended to the borrower(s) may

be fixed by PLI in the usual manner based on risk perception, the loan pricing policy etc.

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and specified to the prospective borrowers. Fixed and floating rate of interest may be

offered by the PLIs subject to disclosure of the terms and conditions in a transparent

manner, upfront to the borrower.

3.8: SECURITY:

The RML shall be secured by way of mortgage of residential property, in a suitable

form, in favour of PLI.

Commercial property will not be eligible for RML

3.9: VALUATION OF RESIDENTIAL PROPERTY:

The residential property should comply with the local residential land-use and

building bye laws stipulated by local authorities, with duly approved lay-out and

building plans.

The PLI shall determine the Market Value of the residential property through their

external approved valuer(s). In-house professional valuer(s) may also be used

subject to adequate disclosure of the methodology.

The valuation of the residential property is required to be done at such frequency

and intervals as decided by the PLI, which in any case shall be at least once every

five years. The methodology of the revaluation process and the frequency/schedule

of such revaluations shall be clearly specified to the borrowers upfront.

PLIs are advised not to consider expected future increase in property value in determining the amount of RML. Should the PLIs do so in their best commercial judgement, they may do so under a well defined Policy approved by their Board and based on professional advice regarding property prices

3.10: SETTLEMENT OF LOAN:

The loan shall become due and payable only when the last surviving borrower dies

or would like to sell the home, or permanently moves out of the home for aged care

to an institution or to relatives. Typically, a "permanent move" may generally mean

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that neither the borrower nor any other co-borrower has lived in the house

continuously for one year or do not intend to live continuously. PLIs may obtain

such documentary evidence as may be deemed appropriate for the purpose.

Settlement of loan along with accumulated interest is to be met by the proceeds

received out of Sale of Residential Property.

The borrower(s) or his/her/their estate shall be provided with the first right to settle

the loan along with accumulated interest, without sale of property.

A reasonable amount of time, say up to 2 months may be provided when RML

repayment is generated, for house to be sold.

The balance surplus (if any) remaining after settlement of the loan with accrued

interest shall be passed on to the estate of the borrower.

Any transfer of a capital asset in a transaction of reverse mortgage under a scheme

made and notified by the Central Government shall not be regarded as a transfer

and therefore shall not attract capital gains tax. A borrower, under a reverse

mortgage scheme, will be liable to income tax (in the nature of tax on capital gains)

only at the point of alienation of the mortgaged property by the mortgagee for the

purposes of recovering the loan.

ROLE OF DIFFERENT PLAYERS

REGULATORY AUTHORITY:

It is concerned with the broad monitoring of the working and growth of the

concept in the country.

USA: In USA the regulatory authority is Housing and Urban Development (HUD)

The Department of Housing and Urban Development (HUD) is the Federal

agency responsible for national policy and programs that address America's housing

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needs improve and develop the Nation's communities and enforce fair housing laws.

HUD's business is helping to create a decent home and suitable living environment for

all Americans, and it has given America's cities a strong national voice at the Cabinet

level. HUD's programs include:

Providing mortgage insurance to help individuals and families become

homeowners;

Development, rehabilitation and modernization of the nation's public and Indian

housing stock;

Development of HUD-insured multifamily housing;

Development, improvement and revitalization of America's urban centers and

neighborhoods;

Providing rental subsidies to lower-income families to help them obtain

affordable housing; and,

Enforcement of Federal Fair Housing laws.

INDIA: In INDIA the regulatory authority is National Housing Bank (NHB)

The National Housing Bank (NHB) was established on 9th July 1988 under an

Act of the Parliament viz. the National Housing Bank Act, 1987 to function as a

principal agency to promote Housing Finance Institutions and to provide financial and

other support to such institutions. The Act, inter alia, empowers NHB to:

Issue directions to housing finance institutions to ensure their growth on sound

lines

Make loans and advances and render any other form of financial assistance to

scheduled banks and housing finance institutions or to any authority established

by or under any Central, State or Provincial Act and engaged in slum

improvement and

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Formulate schemes for the purpose of mobilization of resources and extension

of credit for housing

LENDERS:

This would one who accepts the decision of reverse mortgage of the consumer. It

can be a Housing Finance Company (HFC), Bank or any Financial Institution.

BENEFICIARY :

He/she is the person who takes Reverse Mortgage Loan.

TRUSTEE :

He/she is responsible for the custody of the Assets and ensures transparency and

fair play in transaction to the satisfaction of lenders and borrowers.

NOMINEE :

He/she who is the spouse of the borrower and who can continue with the RML after

the dismissal of the borrower

LEGAL HEIRS :

He/she who will have the first right of the house before it is sold by the b

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Indian Market Potential

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.

Complexity, variety and location specific variations in types of home ownership.

a. Benami holdings/ ‘Irrevocable power of attorney’

b. Leasehold/ freehold

c. Land use conversion regulations

d. Floor space regulations

e. Rent/ tenancy controls

f. Disposal of ancestral property

Absence of competitive suppliers for immediate life annuity products. This, in

turn, is a consequence of

a. Lack of data on old age mortality rates

b. 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.21


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 2030. Their share in the total population is projected

to be 8.9 % by 2016 and 13.3% by 2026. 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.

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Instead of huge potential, Reverse Mortgage Acted as a ticker bomb in Initial phase of launch And Hence Almost No one showed interest in it….

Embedded in the structure of a reverse mortgage is a time bomb. The longer the borrower survives the louder the bomb will tick.

If the borrower outlives the tenure of the loan, the bomb could even explode. Though reverse mortgage appears to offer prima-facie a sense of financial independence to the elders, it is likely to carry to create future baggage and crush them down with financial problems, all at an age when they wish to put their feet up and live in peace. Reverse mortgage is the scheme of providing money to a house owner against the security of the house. It is intended for senior citizens, aged 60 or more, with maximum loan tenure of 20 years. The loan need not be repaid until the term is completed.

If the senior citizen dies before the term, the lender would sell the house and recover the loan. The surplus of sale proceeds after extinguishing the loan would be passed onto the heirs. If the senior citizen survives the term, the entire outstanding would be treated as a corpus and interest alone would accumulate until the death of the owner.

The first issue concerns end-use. What happens when the money so borrowed is used up for purposes other than what it was intended? The guidelines do mention end-use as a pre-requisite. But these are prescriptive and it would be left to individual institutions to do due diligence.

The concept of repayment itself is dangerously structured. What happens when mortgagee survives the tenure of the loan? The entire outstanding comprising principal and interest would be treated as corpus and the interest meter starts ticking on the corpus. A loan of Rs 14.4 lakh @45% of the present market price of Rs 32 lakhs, taken when the house owner is 62 becomes Rs 35.8 lakhs at the end of 15 years at 12% rate of interest. If the senior citizen survives till then and continues to stay in this house, he/ she could opt to continue servicing the loan. The interest then for the next five years is as follows:

Snowballing effect of interest in reverse mortgage when borrower survives term.

Thus at 82, the total outstanding would be a staggering Rs 63 lakhs. If the mortgagee survives another five years, this outstanding would become Rs 111 lakh. In terms of

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valuation, property valued at Rs 32 lakhs must after 25 years have a value of at least Rs 111 lakhs otherwise the borrower is in deep trouble.

The interest paid on reverse mortgage is an expense not carrying tax advantage.

It would not be allowed under the head ‘income from house property’ since this is not a loan for construction/purchase of property. At the same time at the time of sale, the interest cannot be added to the cost of acquisition of property for computing capital gains. This poses an interesting question: if on the death of house owners and the property is sold, the proceeds would be utilised to repay the principal and interest.

The amount of capital gains is likely to be very high. What happens if the net proceeds remaining after repaying principal and interest are inadequate to pay capital gains tax?

Finally, there is the finer print that would add on a basket of costs, processing charges, legal opinion, and registration of mortgage, valuation at sanction and after every five years— all of which would act as an invisible sledge hammer.

A Survey on “Success of Reverse Mortgage” showed that less than 500 applicants have used the product in India till March2008 since its inception in 2007.

There seem to be many reasons the model hasn’t taken off in India ranging from an emotional attachment with one’s house to real estate price correction. Many also feel that an absence of clear guidance against legal complications to inadequate marketing, are reasons the product hasn’t been unable to meet the expectations of financial institutions.

Dewan Housing, which is one of the largest housing finance companies, had 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 mortgages in their portfolios.

In fact, several other players in the segment are also facing difficulties in selling reverse mortgage 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.

The tradition of passing down one’s property over generations is an age-old one and is unlikely to change soon. Inheritance of property too is a problem. According to Kamlesh Rao, senior V-P at Kotak Mahindra Bank, the problem lies in the fact that in India the son inherits the property of his father but is reluctant to inherit the loan amount.

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“Such a model may not work in our country due to its very nature. One’s shelter is not meant to be sold,” reiterates Mr Sinha.

RECENT DEVELOPMENTS (Oct’09) — A step forward to encourage Old age people to opt for Reverse Mortgage as a Financial support system

Despite reverse mortgages not taking off it India, banks recently improved the product by allowing homeowners to receive regular monthly payments until death. Prior to the change, there was a 20-year cap on payments from the time of entering into the arrangement with the lender

The National Housing Bank (NHB) worked with Star Union Dai-chi Life Insurance Company (SUD Insurance) to provide the life-long annuity facility.

There were several representations on behalf of senior citizens that the 20-year cap on payment on annuities was unjust since the requirement of money is more when they grow older. The new scheme not only allows for annuity payment till death but also because it is an arrangement with an insurer the monthly payment would be higher than the earlier scheme. Borrowers are able to receive a higher payout because insurers are using mortality charts to determine the payout where as banks previously calculated the payment amount through discounting the property value at a specified rate..

The customer will continue to deal only with the bank with which the deal has been entered with. However, there will be a back-to-back arrangement between the bank and the insurer under which the bank will pay premium to the insurance company.

While the changes make reverse mortgages more attractive, they need to be marketed properly in order to be attractive to the Indian psyche that is generally not amenable to pledging ownership papers to banks.

“The product has not picked up during the past two years because generally Indians want to pass on their properties to their offspring and not give it back to the bank once they are old,” said H Rathnakara Hegde in an Interview, executive director, Oriental Bank of Commerce.

Hegde said there has to be concerted effort to market the product so that senior citizens understand its utility. “Reverse mortgage could have a huge potential in India. However, one needs to explain its benefits to the people,” he said.

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Even after the above development; few banks and insurance companies have started offering the new reverse mortgage product which was recently updated to provide monthly payments for the remainder of the borrowers life.

As of January 2010, over three months since the new product was announced and yet the only companies who have signed up to offer it are the original companies (Central Bank of India and Star Union Dai-chi Life Insurance).

The market is adopting a ‘wait and watch’ approach and would like to see the response to the first such product that has been put on offer. “Our feedback is that not many new players are coming up with the offering. Most banks and insurers are wanting to see how the Central Bank-Star Union product fares in the market,” One of the official at NHB said in an interview.

The official said going forward, more players would like to come up with the product. “The new product is an improvement over the earlier reverse-mortgage scheme through which banks had done a good amount of business” the official added.

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http://reversemortgagedaily.com/2009/12/30/india-gets-first-reverse-mortgage-annuity-product/


RESEARCH METHODOLOGY

Scope of Research

The Study has been confined to the People belonging to the age group of 50-65 (Older people) who are about to reach the age of retirement and residing in India (62+ being the average age of retirement in India) spread throughout the Suburban and Non-Suburban cities. This Research is done through a combined process of Primary data (Survey through Questionnaire) and Secondary data.

Objective

It has been observed that only around 500 people had opted for the Reverse Mortgage in India (March09) since its Inception in March2007.

Hence, The Objective of the study is to determine the issues involved in Present and Past, and Scope in Future for Reverse Mortgage in India.

Type of Research and sampling

The research is Empirical and Exploratory in nature. Since the research is exploratory in nature the appropriate research strategy has been research survey.The respondents interviewed are the People belonging to the age group of 50-65, approaching towards the age of Retirement. The sampling size and the distribution of the respondents are as given below. Stratified random sampling technique was used to sample the population.

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Sex No. of respondents

Male 22

Female 8


The Survey Instrument.

The survey instrument selected is a questionnaire that tests for the factors under study. The questionnaire contains 10 questions & included questions which determine the awareness, perception and acceptability of Reverse Mortgage in India. And finally heading towards the Reasons for its failure(If majority initial responses are in negative tone).The direct question is taken as a base for the research & the other questions are used to relate & justify the response to the direct question.

Hypothesis

Ho (Null Hypothesis):- The reasons for failure of reverse mortgage in India, primarily, are Emotional attachment to their home and Lack of awareness about the product.

H1 (Alternate hypothesis):- The reasons for failure of reverse mortgage in India are not primarily Emotional attachment to their home and Lack of awareness but other factors are responsible for it.

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QUESTIONNARE

Name:-________________

Age:-_____ Sex:-_________

Income Range (optional) :- <200000

200000 - 400000

400000 - 600000

600000 &Above

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1. Have you planned for your retirement? No Yes

2. (If Yes), In which of the following investment options have you parked your money or would prefer to invest?

Pension funds ULIP (with combination of retirement benefits and life insurance) PPF FDs Post office Savings scheme Others (Please Specify)___________________

3. Do you have any idea about Reverse Mortgage as a tool for retirement solution? No Yes

(Examining the awareness about the product)

4. (If yes) From where did you come to know about it? Friends and Relatives Newspaper and magazines Any promotional Calls (from any Institution or agency) Surfing through Internet Any Other kind of Advertisement (Brochure, Hoardings, TV

commercials…etc.)(Checking whether marketing strategies are competent enough to reach consumers across the board)

5. Would you like to go for Reverse Mortgage loan as a retirement benefits tool?

No Yes

6. Do you have any idea about the recent development in the regulations of Reverse Mortgage loans being amended to enjoy the benefits of Annuity payments till death?

No

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Yes(Checking with the Awareness of the recent development of a product)

8. (If No) After being made aware about the above development would you opt for Reverse Mortgage as your retirement solution?

No Yes

9. (If No) Than, what is the primary reason behind it (Please tick one of the following which best suits your reason for refraining from R.M)?

We, as a Joint family, own a single house as joint ownership; so it’s not possible to mortgage our house to any bank to fulfill the retirement needs of 1-2 person(s) in family.

(A typical Problem persisting in Middle-class family)

We cannot Sell/Mortgage the family house (which is our forefather’s gift to us), to any bank because of day-to-day and health expenditure incurred by us.

(Signaling Emotional Attachment of Indian for their homes)

I would not prefer to sell-off the house property as a result of settlement dues of EMIs ; but to pass it on to my children (or other heirs).

I fear about the possible drastic fall in the quantum of EMIs received due to the sudden property corrections and rise in the interest rates in economy.

Any other Reason (Please Specify)……..

10. What changes, if included in a way Reverse Mortgage scheme is provided in India, would change your mind set towards it and hence inducing you to opt for it??

Any Amendment will not change my decision towards it, because I cannot sell/mortgage the family home to any institution on any condition.

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I may think about it if I am provided the scheme with some Government-backed much nominal and subsidized Interest rates.

I may think about it, if there is some mechanism between insurance company and Bank (Providing R.M loan) where in Insurance company will settle your dues of EMIs Partially (with some fixed proportion) after your death, hence providing some relief regarding the value of Home equity and your lose of house from their hands.

ANALYSIS OF DATA

AWARENESS AND NEED FOR FINANCIAL PLANNING:-

((In consideration of this parameter the following question was asked

Have you planned for your retirement? ))

The response was as follows…

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The Above Response shows that a good majority (80%)of People are aware about and feel the importance of Retirement planning in their lives.

But there is a scope for Improvement; Still 20% of the people do not plan for their retirement. Further, It was noticed that the whole lot of people Under the bracket of that 20% were the same who had mention their income as “Above Rs.4lakhs”

Inference: - It exhibits that People with a decent Income level are not much serious about need for Retirement planning in their life.

ANALYSIS OF INVESTMENT OPTIONS PREFERRED FOR RETIREMENT PLANNING…

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It has been observed that Safety is the top most priority while selecting any Investment avenue for Retirement… And hence Pension funds and Post office savings schemes dominate the above list of investment options.

Inference :- This Parameter (Safety) too act as an hindrance in a way of success of Reverse Mortgage in India, the primary reason being the Direct Relation between the amount received as EMIs and Real Estate Prices Fluctuations.

To make it more clear, the chart showing the relationship among Amount of EMIs, Real Estate Prices and Home Equity is pasted below…

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MARKETING….A BIG CONCERN

Lack of Marketing of a Product is clearly proved from the chart below….

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People who were aware about Reverse Mortgage Loans were asked about the source from which they got to know about the product. And the answers showed that major chunk of the people come to know about it Either by their Friends and Relatives Or Surfing through Internet.

This signifies that there is a big gap of marketing efforts made any financial institution to create awareness among the Prospective Customers. But it is seen from the following data that this is like a Cyclical Problem--- People are not willing to ACCEPT the product since its inception 3years back and Therefore, Bankers are not making any efforts to reach it to consumers… However it may be viewed other way round (Exactly inverse) Bankers are not Pulling their socks tight to make this product a success.. and hence Almost No one Knows about it..

REASONS OF PEOPLE IN INDIA REFRAINING FROM THE PRODUCT AND EVEN NOT ACCEPTING IT…

Below is the responses from the people with respect to Question, Why they are not willing to accept the concept of R.M

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We, as a Joint family, own a single house as joint ownership; so it’s not possible to mortgage our house to any bank to fulfill the retirement needs of 1-2 person(s) in family.(A typical Problem persisting in Middle-class family)

20%

We cannot Sell/Mortgage the family house (which is our forefather’s gift to us), to any bank because of day-to-day and health expenditure incurred by us.

(Signaling Emotional Attachment of Indian for their homes)

30%

I would not prefer to sell-off the house property as a result of settlement dues of EMIs ; but to pass it on to my children (or other heirs).(A mix of Emotional and Traditional Issues)

50%

I fear about the possible drastic fall in the quantum of EMIs received due to the sudden property corrections and rise in the interest rates in economy.(A concern of Safety)

0%

From the above Responses for this question, People’s perception gave a signal that they are not much concerned about the safety in specific consideration with Property Prices (Reason Presumed Before); But the primary reason been noticeable is that there are two possible and very strong issues behind the scene; i.e.;

1. People in India (covered under survey) find it difficult to accept the idea of Selling/Mortgaging the family house (which is considered to be forefather’s gift to them), to any bank because of day-to-day and health expenditure incurred.

2. One would not prefer to sell-off the house property as a result of settlement dues of EMIs ; but to pass it on (transfer) to their children (or other heirs).

As a result; With more than Six months having elapsed since the scheme was amended in October 2009 (In which Bank and Insurance Co. would tie-up and provide a Annuity Payments to customers), banks and insurance companies have stayed away from the product with only one tie-up between a bank and an insurance company — Central Bank of India and Star Union Dai-chi Life Insurance.

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FINDINGS AND SOME SUGGESTIONS (with respect to last question)

The Last question in Interview addresses the chance Success for Reverse Mortgage in India (where the traditional and emotional issues are the primary reasons for its failure), Which answers the following Question..

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Would People accept the Concept of mortgaging their house acting as a retirement solution???

The responses were as follows----

Any Amendment will not change my decision towards it, because I cannot sell/mortgage the family home to any institution on any condition. 65%

I may think about it, if there is some mechanism between insurance company and Bank (Providing R.M loan) where in Insurance company will settle your dues of EMIs Partially (with some fixed proportion) after your death, hence providing some relief regarding the value of Home equity and your lose of house from their hands.

35%

As per the model adopted in U.S, If in case the amount of the EMIs (As a whole) exceeds the Value of the home equity, the Insurance company concerned (which gets premium through the life of Rev. mort. Loan) rescues the Bank and provides for the further regular EMIs going forward and hence acting as a support system to old age people.

We, in India too need such Innovative Mechanism with tie-up between Bank and Insurance companies, where in Customer, opting for reverse mortgage loan, would receive EMIs through out the life and pays a certain amount of sizeable premium to Insurance Co. at the same time.

If and when the Customer dies before the maturity of R.M Loans, Insurance Company concerned would pays-off the payments due to the customer to some extent (with some fixed proportion pre-agreed) and hence providing some relief to their children.

CONCLUSION

Today’s trend is towards nuclear families, the retired community/members have to depend upon themselves and their savings to fend themselves. At times parents spend major proportion of their savings on the upbringing and education of their children, leaving the old dependent upon their children. There are enough sad stories which need no repetition.

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A house is still seen as one of the most secure investment made. Reverse mortgage can show the elderly a way to live the remaining part of their life with dignity.

Instead of all above factors; Reverse Mortgage has not been a Success Story in India primarily because of Lack of Awareness, Emotional attachment to their home and Traditional trend of transferring of house to their Children.

In short, The psyche of Indians does not make them comfortable with the idea of selling their home and in India the son inherits the property of his father but is reluctant to inherit the loan amount.

Hence, India needs a great amount of innovation in Product which could be only possible with the combined efforts of Banks and Insurance companies. As India being a country heading towards modernization it may be a success story in long run. It was witnessed that in mid-90’s that even the Credit card story got a big hit and was proved to be a big failure in India as Indians were not feeling comfortable with world of paper money. But, today it has become the way of life in financial markets, especially in Metros.

Following steps may be taken to make the facility of reverse mortgage workable:

1. Interest paid on reverse mortgage should be explicitly allowed under ‘income from house property’ to give tax advantage to the borrower.

2. Insurance of credit default such as in the US should be made mandatory. A small part of the loan amount may be parked in unit linked insurance schemes so that the premia paid will keep appreciating and at the same time in the eventuality of death, the sum assured will likely make good any deficit.

3. Instead of merely capping loan amount as a percentage of value, total outstanding including interest should be capped if the borrowers survive the term of loan. The borrower must undertake to pay the difference from his other sources.

4. A pool account may be operated by NHB or any agency promoted for this purpose which will meet short recoveries either due to outstanding overtaking the value of property or, due to value of property falling. Counselling to be mandatory could be free as in the US and should be done by advisors carrying NHB certificates.

5. We, in India need much Innovative Mechanism with tie-up between Bank and Insurance companies where in Customer, opting for reverse mortgage loan,

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would receive EMIs through out the life and pays a certain amount of sizeable premium to Insurance Co. at the same time.

BIBLIOGRAPHY

Articles:

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Reverse Mortgage Pamphlet and FAQ booklet: NHB Mumbai

Reverse Mortgage in India: Your property pays you a regular income: Rupee Times

Reverse Mortgage – a financial lifeline for senior citizens: India Inc. 3rd June, 2007

Web Sites:

www.reversemortgagedaily.com

www.RaagVamdatt.com: - http://www.raagvamdatt.com/Article161.html

www.nhb.org.in: - Reverse Mortgage Operations Guidelines

www.reversemortgage.org

www.aarp.org

www.hud.gov

www.reverse.org

Search Engines:

www.google.co.in

www.wikipedia.com

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http://www.reverse.org/

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