REVERSE MORTGAGE

• What Does Reverse Mortgage Mean?

A type of mortgage in which a homeowner can borrow money against the value of his or
her home. No repayment of the mortgage (principal or interest) is required until the
borrower dies or the home is sold. After accounting for the initial mortgage amount, the
rate at which interest accrues, the length of the loan and rate of home price
appreciation, the transaction is structured so that the loan amount will not exceed the
value of the home over the life of the loan.
Often, the lender will require that there can be no other liens against the home. Any
existing liens must be paid off with the proceeds of the reverse mortgage. Investopedia
explains Reverse Mortgage as, a reverse mortgage provides income that people can tap
into for their retirement. The advantage of a reverse mortgage is that the borrower's credit
is not relevant, and is often unchecked, because the borrower does not need to make any
payments. Because the home serves as collateral, it must be sold in order to repay the
mortgage when the borrower dies (in some cases, the heirs have the option of repaying
the mortgage without selling the home). These types of mortgages have large origination
costs relative to other types of mortgages. These costs become part of the initial loan
balance and accrue interest. Senior citizen borrowers with good credit should carefully
analyze the options of a more traditional mortgage, such as a home equity loan, against a
reverse mortgage.

Getting into old age without proper financial support can be a very bad experience. The
rising cost of living, healthcare, other amenities compound the problem significantly. No
regular incomes, a dwindling capacity to work and earn livelihood at this stage can make
life miserable. A constant flow of income, without any work would be an ideal solution,
which can put an end to all such sufferings. In other words, 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.

1
 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.

In the Union Budget 2007-08, a proposal to introduce ‘Reverse Mortgages’ was put forth.
Understanding Reverse Mortgage requires the knowledge of meaning of 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.

The concept of Reverse Mortgage is very simple as shown below, where any senior citizen
who owns a house can go to a bank. The person can avail the reverse mortgage loan from
the bank by mortgaging the house to the bank. This loan ensures that the senior citizens can
get a decent monthly income(based on the valuation of the house) till the senior citizen is
alive and can stay in the house as well. It helps the “house-rich-but-cash-poor” people.

(Source: www.Google.com)

2
 The whole idea is to ensure a financial monthly cash flow to allow senior citizens to live
freely and independently. Upon the death of the person, the bank may return the house to
legal heirs if the loan is paid back or else the house is sold and loan recovered, with the
remaining amount paid back to legal heirs.

The concept is simple and on the paper it sounds to be a super-hit with the ever increasing
population above 65 years in India, especially with the family support system breaking very
fast. In my apartment complex itself, I have seen hundreds of old age people, who are
staying alone with their kids settled out of country. But to the surprise of financial
institutions, the scheme has seen a very damp response in India.

Reverse Mortgage is a Home Loan product designed for the senior citizens by
converting their fixed assets- their home or in banking terms, their equity in any house
property into an income channel without having to liquidify your equity in case of any
requirement. In other words, in the Reverse Mortgage, senior citizens (borrowers) who own
a house property, but do not have a 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 receive regular flows of income from the lender as
well. Also, since the borrower doesn’t have to service the loan, he need not bothered about
repaying the ‘borrowed amount’ to the lender.

• Reverse Mortgage in India

Reverse Mortgage in India is still at an infancy stage. The Reverse Mortgage came into
existence in the UK during the crash of 1929. Having evolved genetically from the
developed countries and mainly USA, Reverse Mortgage is a scheme formulated to
benefit the senior citizens the most. Recently, National Housing Bank (NHB), a
subsidiary of the Reserve Bank of India (RBI), released draft norms of reverse mortgage
(the final guidelines are awaited). Following are some of the key features of the scheme
from the draft norms:

(1) Reverse Mortgage loans (RMLs) are to be extended by Primary Lending Institutions
(PLIs) viz. Scheduled Bank and Housing Finance Companies (HFCs) registered with NHB.

3
 The PLIs reserve their discretion to offer Reverse Mortgage Loans. Prospective borrowers
are advised to consult PLIs regarding the detailed terms of RML as applicable to them.

(2) Eligible Borrowers:

i. Should be Senior Citizen of India above 60 years of age.
ii. 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.
iii. 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.
iv. The residential property should be free from any encumbrances.
v. The residual life of the property should be at least 20 years.
vi. The prospective borrowers should use that residential property as permanent
primary residence. For the purpose of determining that the residential property
is the permanent residence of the borrower, the PLIs may rely on documentary
evidence, other sources supplemented by physical inspections.
(3) Determination of Eligible Amount of Loan:
i. 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.
ii. The table given hereunder may serve as an indicative guide for determining
loan eligibility :
Age (Yrs) Loan as proportion of Assessed Value of
Property (%)
60-65 40
66-70 50
71-75 55
Above 75 60

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:-

4
 o The PLI may consider ensuring that the equity of the borrower in the residential
property (Equity to Value Ratio-EVR) does not at any time during the tenor of
the loan fall below 10%.
o The PLIs will need to revalue 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.

(4) Nature of Payment:

Any or a combination of the following:
o Periodic Payments (monthly, quarterly, half-yearly, annual) to be decided
mutually between the PLI and the borrower upfront.
o Lump-sum payments in one or more trenches.
o Committed Line of Credit, with an availability period agreed upon mutually, to
be drawn down by the borrower.

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

requirements such as medical exigencies, home improvement, maintenance, up-
gradation, renovation, extension of residential property etc. The PLIs may be
selective in considering lump-sum payment option and may frame their internal
policy guidelines, particularly the eligibility and end-use criteria. However, these
conditions shall be fully disclosed to potential borrowers upfront.
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.

(5) Eligible End use of funds:

The loan amount can be used for the following purposes:
Up-gradation, renovation and extension of residential property.
o For uses associated with home improvement, maintenance/insurance of
residential property.

5
 o Medical, emergency expenditure for maintenance of family.
o For supplementing pension/other income.
o Repayment of an existing loan taken for the residential property to be
mortgaged.
o Meeting any other genuine need.
Use of RML for speculative, trading and business purposes shall not be
permitted.

(6) Period of Loan: Maximum 15 years.

(7) Interest Rate: The interest rate (including the periodic rest) to be charged on
the RML to be extended to the borrower may be fixed by PLI in the usual
manner on risk perception, the loan pricing policy etc. and specified to the
prospective borrower. 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.

(8) Security:
o The RML shall be secured by way of mortgage of residential property, in a
suitable form, in favour of PLI.
o Commercial property will not be eligible for RML.

(9) Valuation of Residential Property:

o 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.
o The PLI shall determine the Market Value of residential property through their
external approved valuer(s). In-house professional valuers may also be used
subject to adequate disclosure of the methodology.
o 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

6
 the frequency/schedule of such revaluations shall be clearly specified to the
borrowers upfront.
o PLIs are advised not to reckon 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.

(10) Provision for Right to Rescission:

As a customer-friendly gesture and in keeping with international best practices,
after the documents have been executed and loan transaction finalized, Senior
Citizen borrowers may be given up to three business days to cancel the
transaction, the “Right of Rescission”. If the loan amount has been disbursed, the
entire loan amount will need to be repaid by the Senior Citizen borrower within
this three day period. However, interest for the period may be waived at the
discretion of the PLI.

(11) Loan Disbursement by Lender to borrower:

o The PLI will pay all loan proceeds directly to the borrower, except in cases
pertaining to retirement of existing debt, payments to contractor(s) for the repairs
of borrower’s property, or payment of property taxes or hazard insurance
premiums from the borrower’s account set aside for the purpose.
o In case the residential property is already mortgaged to any other institution, the
PLI may, at its discretion, consider permitting use of part proceeds of RML
prepay/repay the existing housing loan. The loan amount will be paid directly to
that institution to the extent of the loan outstanding with that institution with a
view to release the mortgage.
o Periodicity: The loan will be extended as regular monthly, quarterly, half-yearly
or annual periodic cash advances or as a line of credit to be drawn down in time
of need or in lump-sum.
o The PLI will have the discretion to decide the mode of payment of the loan
including fixation of loan tenor, depending on the state and market value of the
property, age of the borrower and other factors. The rationale behind the
decision of mode of payment and fixation of the loan tenor shall be clearly
disclosed to the borrowers.

7
(12) Closing:
The PLIs will provide in writing, a fair and complete package of reverse
mortgage loan material and specimen documents, covering inter-alia, the
benefits and obligations of the product. They may also consider making
available a tool kit to illustrate the potential effect of future house values, interest
rates and the capitalization of interest of the loan.

The closing costs may include the customary and reasonable fees and charges that
may be collected by the PLIs from the borrower. The cost for any item charged to
the borrower shall not normally exceed the cost paid by the lender or charged to
the lender by the provider of such services(s). Such items may include:

o Origination, Appraisal, and Inspection Fees. The borrower may be

charged pro-rata origination, appraisal and inspection fees by the
PLI/appraiser.
o Verification Charges of external firms
o Title Examination Fees
o Legal Charges/Fees
o Stamp Duty and Registration Charges
o Property Survey and Valuation Charges
A detailed schedule of all such costs will clearly be specified and provided to the
prospective borrowers upfront by the PLIs.

(13) Settlement of Loan:

o 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 relatives. Typically, a “permanent move” may generally mean
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.
o Settlement of Loan along with accumulated interest is to be met by the proceeds
received out of sale of Residential Property.

8
o 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.
o A reasonable amount of time, say up to 2 months may be provided when RML
repayment is triggered, for house to be sold.
o The balance surplus (if any) remaining after settlement of the loan with accrued
interest, shall be passed on to the estate of the borrower.

(14) Prepayment of Loan by the Borrower(s):

o The borrower(s) will have option to prepay the loan at any time during the loan
tenure.
o There will not be any prepayment levy/penalty/charge for such prepayments.

(15) Loan Covenants:

o The borrower(s) will continue to use the residential property as his/her/their
primary residence till he/she/they is/are alive, or permanent primary residence.
o Non-Recourse Guarantee: The PLIs shall ensure that all reverse mortgage loan
products carry a clear and transparent ‘no ngative equity’ or ‘non-recourse’
guarantee. That is, the borrower(will) never owe more than the net realizable
value of their property, provided the terms and conditions of the loan have been
met.
o Loan Agreement: The PLIs shall enter into a detailed loan agreement setting out
therein the salient features of the loan mortgage security terms and other terms
and conditions, including disbursement or repayment of loan, in addition to the
usual provisions, which are ordinarily incorporated in a mortgage loan
document.
o In addition, the PLI may also consider obtaining a Registered Bill from the
borrower stating, inter-alia, that he/she has availed of RML from the PLI on
security by way of mortgage of the residential property in favour of the PLI,
meaning thereby that in the event of death of the borrower (co-borrower, if any),
the mortgage is entitled to enforce the mortgage and recover the loan from the

9
 sale proceeds on enforcement of security of the mortgage. The surplus, if any,
has to be returned to the heirs of the deceased borrower(s).
o The PLIs may consider taking an undertaking from the prospective borrower that
the “Registered Will” given to the PLI is the last “Will”, prepared by him/her at
the time of availment of RML facility as per the property will vest in his/her
demise. The borrower will also undertake not to make any other “Will” during
the currency of the loan which shall have any adverse impact on the rights
created by the borrower in the PLI’s favour by way of creation of mortgage on
the immovaeble property mentioned under the loan documentation for covering
loan to be allowed to his/her spouse and interest thereon, even after the
borrower’s death.
o The PLI will ensure that the borrower(s) has insured the property against fire,
earthquake, and other calamities.
o The PLI will ensure that borrower(s) pay all taxes, electricity charges, water
charges and statutory payments.
o The PLI may reserve the option to pay for insurance premium, taxes or repairs
by reducing the homeowner loan advances and using the difference to meet the
obligations/expenditures.

(16) Title Indemnity/Insurance:

o The PLI shall obtain legal opinion for ensuring clarity on the title of the
residential property.
o The PLI shall also endeavor to obtain indemnity on title related risks, as and
when such indemnity products are available in India.

(17) Foreclosure:
o The loan shall be liable for disclosure due to occurrence of the following events
of default:
 If the borrower has not stayed in the property for a continuous period of one year.
 If the borrower(s) fail(s) to pay property taxes or maintain and repair the
residential property or fail(s) to keep the home insured, the PLI reserves the right
to insist on repayment of loan by bringing the residential property to sale and

10
 utilizing the sale proceeds to meet the outstanding balance of principal and
interest.
 If the borrower(s) declare himself/herself/themselves bankrupt.
 If the residential property so mortgaged to the PLI is donated or abandoned by
the borrower(s).
 If the borrower(s) effect changes in the residential property that effect the
security of the loan for the lender. For example: renting out part or all of the
house; adding a new owner to the house’s title; changing the house’s zoning
classification; or creating further encumbrance on the property either by way of
taking out new debt against the residential property or alienating the interest by
way of a gift or will.
 Due to perpetration of fraud or misrepresentation by the borrower(s).
 If the Government under statutory provisions seeks to acquiring the residential
property for public use.
 If the Government condemns the residential property (for example, for health or
safety reasons).

(18) Option for PLI to Adjust Payments:

o The PLI shall have the option to revise the periodic/lump-sum amount at such
frequency or intervals based on revaluation property, which in any case shall be
at least once every five years.
o Borrower shall be provided with an option to accept such revised terms and
conditions for furtherance of the loan.
o If the borrower does not accept the revised terms, no further payments will will
be effected by the Lender. Interest at the rate agreed before the review will
continue to accrue on the outstanding amount of the loan. The accumulated
principal and interest shall become due and payable as mentioned in clauses (13)
& (17).

(19) Counseling and Information to Borrowers:

o The PLI will observe and maintain high standards of conduct in dealing with the
Senior Citizens and their families and treat them with special care.

11
 o The PLI shall clearly and accurately disclose the terms of the RML without any
ambiguity.
o The PLI should clearly explain to the prospective borrowers the terms and
conditions of RML, the methodology followed for revaluation of the residential
property, the method of determination of eligible quantum of loan, the frequency
of re-valuation and review of terms and all related aspects of the RML.
o The PLI may suggest to the Senior Citizens to nominate their “personal
representatives” usually a close relative who the PLI can contact in the event of
any potentialities.
o The PLIs may counsel the prospective borrowers about the possible impacts to
the borrowers due to adverse movements in interest rates and property price
fluctuations.
o The PLI shall clearly specify all the costs to the Borrower(s) that are associated
with the transaction.
o The PLI shall in no way assert or imply to the borrower(s) or that the
borrower(s) is/are obligated to purchase any other product or service offered by
the PLI or any other associated institution in order to obtain a reverse mortgage
loan.
o Take reasonable steps to check out the background and procedures of third
parties before accepting referrals of business from them, and refuse to accept
referrals from those that are found unacceptable. Members shall disclose to
clients any third party with a financial interest in the reverse mortgage
transaction.
o Overall, the PLI shall treat the Senior Citizen Borrower fairly.

 As the old saying goes, “there are no free lunches in life”. In case of
reverse mortgage, there exists a few guideline, which may not ‘appeal’ to
the house property owner i.e. the borrower:
(1) As per the guidelines, the maximum loan tenure can be 15 years. So, if the
borrower outlives the loan tenure, he can continue to stay in the house. However,
he will no longer be eligible for any payments from the bank/HFC.

(2) The Bank/HFC shall have the option to revise the periodic/lump-sum amount at
such frequency or intervals based on revaluation of property, or at least once

12
 every five years. The borrower will be provided the option to accept the revised
terms and conditions to continue the loan. However, if he refuses to accept the
revised terms and conditions, no further payments shall be made by the bank/
HFC. Interest at the rate agreed before the review will continue to accrue on the
outstanding loan amount.

(3) Since the reverse mortgage can be either at floating or fixed rate, it will be prone
to the interest rate movements. Hence, in the scenario when interest rates are
moving northwards, a floating rate reverse mortgage would add to the borrower’s
liability.

(4) Under the reverse mortgage, the legal heirs of the owner are not entitled to take
control over the mortgaged property up to the extent of the outstanding loan.
They are required to first repay the outstanding loan amount along with the
interest to stake a claim on the property.

(5) The banks/HFC at their discretion may levy penalty or other charges on the
prepayment of loan. So, if the borrower or his heirs wish to prepay the loan
amount, they may have to bear an additional cost.
The most important advantage offered by the reverse mortgage scheme is that
despite mortgaging the house, the house owner retains its ownership, is entitled
to live in the same throughout his lifetime and also has access to a regular
income stream, which can help meet his day-to-day needs. From the Banks/
HFC’s perspective, the mortgage on the property in its favour ensures that there
is no scope for default.

Having said that, individuals who wish to opt for the reverse mortgage scheme
would do well to acquaint themselves with the nitty-gritty’s of the guidelines.
Also, the final guidelines will aid in providing more clarity to individuals who
wish to participate in the reverse mortgage scheme.

• Guidelines for Property Acquisition by Non-Resident Indian (NRI)

Guidelines for property acquisition by an NRI are laid down by FEMA

13
 Regulations, notified vide RBI Notification No. FEMA 21/2000-RB. NRIs and
PIOs can acquire immovable property in India in the following ways:

1. By way of Purchase: An NRI/PIO can acquire a residential or commercial property by

purchasing it under the general permission granted by the RBI. Payment for purchasing
the property should be made only out of funds remitted to India through normal banking
channels or funds held in NRE/ FCNR/NRO accounts maintained in India. No payment
can be made outside India.

A declaration is required to be submitted to Reserve Bank of India (Central Office) about

the real estate acquisition of property by an NRI in form IPI 7 within a period of 90 days
from the acquisition/final payment of purchase consideration, along with a certified copy
of the document as evidence of the transaction and Bank certificate stating the amount
paid.
2. By way of Gift: An NRI/PIO can acquire immovable property (only residential/commercial
property) by way of gift from a resident of India, an NRI or a PIO. Agricultural land/
plantation property/farm house in India cannot be acquired by way of gift.
A foreign national of non-Indian origin resident outside India cannot acquire any immovable
property in India by way of gift.
3. By way of Inheritance:

NRIs/PIOs/ foreign nationals of non-Indian origin are eligible to hold immovable property
acquired by way of inheritance from a resident Indian / NRI or PIO. However, they would
need specific approval from the RBI to hold any immovable property in India if acquired
from a person resident outside India.

It is mandatory that the person from whom the property is inherited should have acquired
the same in accordance with the foreign exchange regulations applicable at the time of
acquisition.

Citizens of Pakistan, Bangladesh, Sri Lanka, Afghanistan, China, Iran, Nepal and Bhutan
are required to seek specific approval of the Reserve Bank of India before being able to
inherit any immovable property in India.

 Documents Required for Acquisition of Property

14
  Title Deed
 Tax Receipt

 Bills

 Encumbrance Certificate

 Document showing measurement of Land

 Registration Papers

 Key facts on acquisition of property by NRI by Purchase/Gift/Inheritance

 There is no lock-in period now for any acquisition of immovable property.
 All the sale proceeds of residential/commercial property received by way of gift by
NRI should be credited to NRO accounts only.
 Sale proceeds of property inherited from a resident Indian not exceeding USD 1
million can be remitted abroad in one calendar year.
 Sale proceeds of property inherited from an NRI cannot be repatriated.
 Sale proceeds of residential/commercial property received by way of gift by
NRI/PIO can only be credited to NRO account.
 NRIs can seek an agreement with their relatives in the form of Power of Attorney in
their resident country. This way, in their absence their relatives can represent them
during the proceedings.

• Reverse Mortgage Pros and Cons

The Reverse Mortgage pros and cons should be measured carefully before subscribing to
it. Since, the bulk of the savings for the average Indian should be locked away in a
house or other property at the time of retirement, and in case of requirement, it cannot be
encashed except by selling the loan or moving out.

Taking the usual mortgage loans in lieu of your homes as a security will not be feasible in
the age above 50 as the repayment of the loan is not feasible. The Banks and Financial
Institutions also won’t be of any help in case of no income source. This is where the
house property proves as an asset and brings in reverse mortgage that allows you to be

15
 the home owner as long as you live. Home ownership is an area most Indians are
sensitive about and reverse mortgage entitles you your house throughout your remaining
life.

According to demographic projections, reverse mortgage loan products could be a hit

among the metros and also in areas like Kerala, Tamil Nadu, Goa, and Chandigarh in
India. With hardly any old age social security schemes and financial helplines, reverse
mortgages have a potential market. Loans are available in the form of reverse mortgage
without any income criteria at an age where normal loans are not available. Reverse
Mortgage for senior citizens is a social-assurance post-retirement.

 How Reverse Mortgage Works

Mr Patil has retired after what can be called a very fulfilling career with a leading
engineering company. His only daughter is married and well settled in Bangalore. He
owns a large house in Thane -- worth about Rs 80 lakh (Rs 8 million), but he has limited
savings (including PPF and EPF) of Rs 10 lakh (Rs 1 million) to generate any major
income.

He is not expecting any pension either. His worry now is to pay for his modest monthly
expenses of Rs 20,000. His financial assets can at best generate Rs 10,000 per month for
him and the income thus generated will not keep pace with inflation -- meaning that after
five years, when he will require Rs 30,000 per month, while his financial assets will still
generate only Rs 10,000 per month.
The only option he had earlier was to rent his house and move to a smaller house himself
or to sell his house altogether and invest the proceeds to earn a higher monthly income.
Either way, in his old age, he will be forced to look around for accommodation and keep
on worrying about the rising rents -- not a very happy prospect.This is where reverse
mortgage can be of great value.

Budget 2007 amongst other things has given a green signal to the launch of Reverse
Mortgage -- a widely used instrument in the developed world by the elderly to derive
cash flows from their owned house.
The popularity of the instrument lies in that it converts an illiquid asset -- the house -- into
liquid cash flows for the owner, typically a senior citizen. A more attractive feature is that

16
senior citizens can continue to live in that house even after drawing cash-flows from it.
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, you
borrow money in lump-sum right at the beginning and then pay it back over a period of
time. In your payback -- the EMI -- a portion goes towards paying the interest and the
remaining goes towards paying back principal.

All along, you pledge the asset -- namely the home you have bought with the loan -- to
the bank. This asset is the security against which the bank is lending to you. In reverse
mortgage, you pledge a property you already own (with no existing loan outstanding
against it). The bank in turn gives you 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.

Simply put, in case of Mr and Mrs Patil, if they were to opt for reverse mortgage for
tenure of 15 years, they will get annuity (the reverse EMI) from bank for 15 years. After
that, the annuity payments stop.

However, they continue to live in the house. Assume that Mr Patil dies after 17 years.
Mrs Patil can still live in the house till she is alive. After her death, the bank will give
their heirs two options -- settle the overall outstanding loan and retain the house or the
bank will sell the house, use the proceeds to settle the outstanding loan and give the rest
to the heirs.

The bank bears the risk that the outstanding will exceed the market value of property then
and will not ask for the difference from the heirs.

The key question is -- how much of an annuity income can my house generate using
reverse mortgage? The banks have so far not indicated which interest rates they will use
to determine the EMI -- however, we can safely assume that it will not exceed the interest
rates used for loan against property -- which is currently in the region of 12-14%.

Second important variable is the loan to value ratio. Most loans against property work at
60% loan to value ratio -- i.e. by pledging a Rs 1 crore (Rs 10 million) property, you can

17
 get a Rs 60 lakh (Rs 6 million) loan. Some banks are however designing reverse
mortgage products with a higher loan to value ratio -- as much as 90% in some cases.

The specific annuity paid out also depends on the age of the home owner. Higher the age,
higher the annuity everything else being constant. For simplicity consider a 60-year-old
home owner taking reverse mortgage with loan to value ratio of 80% and an interest rate
of 12%.

The annuity from reverse mortgage works out to be roughly ~Rs 160 per lakh of property
value. Hence for Mr Patil, with a property valued at Rs 80 lakh, the annuity he can expect
will be in the range of Rs 12,800 per month.

Coupled with his income from financial assets, he can continue to live comfortably with
no cutback on lifestyle.

• Different Reverse Mortgage Offerings in India

• Offerings by State Bank of India (SBI):

The State Bank of India (SBI) started offering reverse mortgage products for senior
citizens on October 12, 2007. Joint loans are given if the spouse is alive and is over 58
years of age.
The loan is offered by all branches of SBI from October 12, 2007. The loan is offered at
an interest rate of 10.75% p.a. and is subject to change at the end of every five years
along with revaluation of security. Every five years, bank may even re-adjust the loan
instalments, if it is needed, depending on market conditions and loan status.
The Chief General Manager for Personal Banking (SBI), Mr. Sangeet Shukla told that
there is no upper limit of amount of loan. Also, the maximum period for availing this
benefit is 15 years.
Under this loan, borrowers can avail payments against the security of their houses on
monthly or quarterly installments or either he/she can go for as a lump-sum payment at
the beginning.

During their lifetime, the borrower does not have to pay the loan and will continue to stay
in their house. Thereafter, either the legal heirs can repay the loan and redeem the
property but if this option is not exercised, bank will sell the property and liquidate the
loan. Surplus, if any, will be passed on to the legal heirs.

18
 For a loan of one lakh, the monthly payment to the borrower on a 10 year loan is Rs 468
and on a 15 year loan it would be Rs 225. Similarly, for a loan of one lakh, the quarterly
payment to the borrower on a 10 year loan is Rs 1,423 and on a 15 year loan it would be
Rs 687.

• Reverse Mortgage Loan- “PNB BAGHBAN” for Senior Citizen

PNB is the first Public Sector Bank to come out with a Reverse Mortgage concept based
product for senior citizen titled “PNB BAGHBAN”. The product addresses one of the
very important requirements of the society in the first changing culture of Indian Society.
The salient features of the product are given hereunder:
o Objective: To address the financial needs of senior citizens owning self-occupied
property (house), for leading a decent life.

o Eligibility: The residential house/flat owner, who is resident of India, of the age of
60 years &above, is eligible to raise the loan under this scheme.

o Qualifying/Maximum Amount of Loan/Margin: The qualifying amount of loan

will depend on the realizable value of the residential property, after maintaining
margin of 20%. The maximum qualifying amount of loan, along with interest, shall
be restricted to Rs.100.

o Rate of Interest: 10% p.a. (fixed) subject to re-set clause of five years (as applicable
for Housing Loan Borrowers).

o Disbursement/Tenure of Loan: The loan shall be extended as regular fixed

monthly payments during the loan period, i.e. 10-20 years or till the death of the last
surviving spouse, whichever is earlier. Depending on the age of the beneficiary, a
chart containing the amount of monthly installments (calculated on “Reverse
Annuity Mortgage” basis) to be paid to the senior citizen borrower for different
tenures of loan per lakh of rupees is as under:

19
 Qualifying Loan Amount (Rs. 1.00 Lakh)

Tenure (Yrs.) 10 11 12 13 14 15 16 17 18 19 20
Monthly 49 42 36 31 27 24 21 19 17 15 135
Installment (Rs.) 0 0 0 5 5 0 5 0 0 0

o Security: The loan shall be secured by way of Equitable Mortgage of Self-Acquired/

Self-Occupied Residential Property in favour of the Bank. The property to be
revalued every 5 years and monthly loan installment to be re-fixed keeping in view
applicable ROI and valuation of property.

o Repayment of Loan: Settlement of loan, along with accumulated interest, to be met

by the proceeds received out of sale residential property and any surplus to be paid to
heirs. The loan will, as such, become due for recovery and payable six months after
the death of the last surviving spouse. However the legal heirs/legatee of the
deceased borrowers will be given first option to settle the loan, along with the
accumulated interest, without sale of the property.

o Upfront fee/Documentation Charges: Upfront Fee –Amount equivalent to half

month’s loan installment subject to Maximum of Rs. 15,000 and Documentation
Charges/Inspection Charges-Nil.

o Right of Recession: After the loan is sanctioned, the senior citizen borrower(s) shall
be given upto 10 days time to re look into his requirements and if he so wishes to
cancel the transaction for any reason whatsoever.

• Reverse Mortgage Loan by DHFL:

India’s Second Largest Private Housing Finance Company, Dewan Housing

Finance Corporation Limited (DHFL). is the first off the block in India with a
reverse mortgage scheme.

The Scheme called “Saksham” is targeted at retired senior citizens above 60

years of age. The scheme is similar to a housing loan except that in a home loan,

20
 the borrower pays a fixed EMI to the lending institution, while in a reverse
mortgage, the lender pays the borrower a fixed sum of money on a
monthly/quarterly basis, the total payment being equal to the value of the
property and the interest on the loaned amount.

After the death of the borrower and the borrower’s spouse, the housing company
sells the property to recover the amount paid out along with interest at a rate
similar to interest on housing loans.

The Scheme is designed to supplement the monthly income of senior citizens.

This scheme is offered to retired people above the age of 60 years who own
property and have been living in it for at least one year.

The loan amount is sanctioned based on the:

 Age of the borrower

 Average value of the property

 Rate of Interest on the loan

 The payment method chosen by the borrower

The eligibility for a reverse mortgage loan is simple. The borrower should be 60
years of age, living in self-owned property, which is free of any encumbrances,
and is an approved construction. The amount loaned would depend on the
estimated value of the property (minus the interest cost) its condition and life.
The loan does not apply to ancestral property. Saksham allows customers and
their spouses to live in the property as long as they are alive, without the fear of
eviction even after the tenure expires. The surplus amount is then paid to the
legal heirs of the borrower. The legal heirs also have the option to repossess the
property after the demise of both customers and their spouses.
According to Shivkumar Mani, head, marketing, DHFL, “As per the guidelines laid
down by NHB, DHFL is the first company to launch this scheme in India. This
unique scheme is designed to help senior citizens to sustain their lifestyle and also
help them maintain their monthly expenditure without being dependent on anyone.
It is a social security scheme designed to benefit the senior citizens post
retirement.”
DHFL will first launch Saksham in Mumbai and its adjoining areas before making

21
 it available nationally.

• Reverse Mortgage Loan by Bank of Baroda:

o Purpose: For supplementing the cash flow stream of senior citizens in order to
address their financial needs.

o Eligibility:

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

 Married couples will be eligible as joint borrowers provided one of them is

above 60 years of age and age of spouse is not below 55 years at the time of
application.

 Should be the owner of a residential property (house or flat) located in India

in his/her own name.

Residential property should be used as permanent primary residence (fully self

occupied property).

o Maximum Amount: The maximum loan amount inclusive of interest for entire
tenure of the loan shall be restricted to Rs. 1 crore subject to value of the property.
o Option to adjust payments: The Bank shall have the option to revise periodic
annuity amount, if lump-sum payment is taken or at the interval of every 5 years
based on valuation of the property.
o Repayment of Loan:

 The loan shall become due and payable when the last surviving borrower
dies or would like to sell the home / permanently moves out of the home
for aged care to an institution or relatives. The loan will, as such, become
due for recovery and payable.

 Settlement of loan, along with accumulated interest, 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 period of 2 months may be provided when
repayment is triggered, for house to be sold.

o Rate of interest: Available at Fixed Rate Option (Subject to re-set clause after
every 5 years) or at Floating Rate Option.
o Security: Simple / Equitable mortgage of the Residential property.
o Tenure: 15 years. The tenure may further be extended till survival of the
borrower/s subject to advance value of the property.
o Insurance: Insurance of the residential property mortgaged to the bank shall be
regularly taken. The premium charges are to be borne by borrower.

22
• Risks to Reverse Mortgage Lenders:

Szymanoski is a good starting point to appreciate the risks faced by an RM lender.

These risks are at the heart of the reluctance of lenders to get into RM lending, in
the absence of public policy support. The principal and unique problem facing the
lender is that of predicting accumulated future loan balances under an RM, at the
time of origination. The uniqueness is because RM is a “rising debt” instrument.
Since RM is a non-recourse loan, the lender has no access to other properties, if
any, of the borrower. Even if the collateral property appreciates in value, it might
still be lower than the loan balance at the time of disposal of the property. There are
three basic sources of this risk:

o Mortality Risks

This is the risk that an RM borrower lives longer than anticipated. The lender might
get hit both ways: he has to make annuity payments for a longer period; and the
eventual value realized might decline. However, this risk is usually ‘diversifiable’, if
the RM lender has the large pool of such borrowers. Possibility of adverse selection
(of predominance of relatively healthier borrowers) is counterbalanced by the
possibility that even borrowers with poor health may be attracted by RM’s credit line
or lump sum options.

However, there is no literature on one possible source of systematic risk. Since RM

is projected to substantially improve the monthly income and/or liquid funds of the
RM borrowers, would not result itself in a systematically higher life expectancy
amongst them than otherwise. Perhaps this lacuna is due to the relatively short
experience with RM so far.

o Interest Rate Risks

Given that the typical RM borrower is elderly and is looking for predictable sources
of income/liquidity, RM loans promise a fixed monthly payment/lump-sum/credit
line entitlement. However, for the lender, this is a long-term commitment with
significant interest rate risks.

23
 While fixing the above, the lender has to account for a risk premium and thus can
offer only a conservative deal to the borrower. This interest rate risk is not fully
diversifiable within the RM portfolio.

Most of the RM loans accumulate interest on a floating rate basis to minimize

interest rate risks to the lender. However, since there are no actual periodic interest
payments from the borrower, these can be realized only at the time of disposal of the
house, if at all.

o Property Market Risk

This risk may be partly diversifiable by geographical diversification of RM loans.

However, property values may be a non-stationary time series. Others have
pointed out additional aspects of these risks:

 RM can be considered as a package loan with a ‘crossover’ put option to the

borrower to sell his house at the accumulated value of the RM loan at the
(uncertain) time of repayment. If this option can be valued, it can be suitably
priced and sold in the market. However, unlike in the case of forward mortgages,
markets for resale, securitization and derivatives based on RMs are non-existent
or non-competitive. Small market size and predominance of government backed
RM insurance may dissuade potential entrants. The impedes the flow of funds to
finance RM loans.

 For the lender, both the interest and any shared appreciation component added to
the loan balance are taxable as current income even though there is no cash
inflow.

RM loans found takers amongst lenders only after the availability of default
insurance under the HECM programme. Even then, in most of the RM loans,
interest accumulates at a floating rate linked to one-year treasury rates.

o Liquidity Risks:

In RM loans where the borrower draws down on his loan through a credit line,
there is a risk of sudden withdrawals.

• Tax Treatment of Reverse Mortgage Loan:

24
 The Direct Taxes Codes Bill, 2009 is silent on the tax treatment of Reverse
Mortgage. The author opines that having regard to the nature of transactions, the
position which prevails under the Income Tax Act, 1961 will continue under the
Code also. However, it is desirable that express provisions be incorporated.

 Under Section 47(xvi) of the Income Tax Act, 1961 , any transfer of a capital asset in
a transaction of reverse mortgage under a scheme made and notified by the Central
Government is not regarded as a ‘transfer’. Consequently, the amount received by an
individual as a loan, either in lump-sum or in installment, in a transaction of reverse
mortgage as above is exempt from tax under Section 10(43) of the Act.

 The Direct Taxes Code Bill, 2009 is silent on the tax treatment of reverse mortgages.
As the Code is silent on the reverse mortgage, the question arises what will be its tax
implications under the Code?

 There is no definition of ‘reverse mortgage’ either under the Act or under the Code.
The Reverse Mortgage is so-called because the payment stream is reversed. Instead
of the borrower making monthly payments to the lender, as with a regular mortgage,
a lender makes payment to the borrower. While a reverse mortgage loan is
outstanding, the borrower owns the home and holds title to it, without having to make
any monthly mortgage payments.

There is no transfer of title in property by the borrower to the lender when he

mortgages property to the lender. The borrower remains the owner with right to
redeem the property by repayment of dues. He has a right to continue living in the
house till death. Non-repayment of amounts received with interest will not invite
action from lender. The Explanatory Memorandum to the Finance Bill, 2008 notes
that “in the context of a reverse mortgage, the intention is to secure a stream of cash
flow against the mortgage of a residential house and not to alienate the property”. To
the same effect paragraph 15.3 of CBDT’s Circular No.1/2009 dated March 27, 2009.
Therefore, amount received on reverse mortgage will not attract capital gains tax in
the financial year in which the amount is received. The transfer/alienation of property
occurs “at the point of alienation of the mortgaged property by the mortgagee for the
purpose of recovering the loan.” Therefore, taxable capital gains will arise in the year
in which the mortgaged property is alienated by the mortgagee for recovering the
loan.

25
  Having regard to the nature of the transaction, it appears that the above position
which prevails under the Act will continue under the Code also. However, it is
desirable that express provisions be incorporated.

 Though the receipts of the Reverse Mortgage Loan in various countries are tax free, the
treatment of the same in India is still under consideration along with the concept itself.
Although a handful of Financial Institutions have initiated the facility of Reverse
Mortgage in India, the National Housing Bank is endeavoring towards crystallizing its
concept and scheme. Reverse Mortgage was introduced for the first time by the Hon’ble
Finance Minister while presenting Budget for 2007-08. The modalities in relation to
taxability of the payments to be received under the Reverse Mortgage are yet to be
considered and have to be worked upon. However, the thrust of the considerations and
deliberations shall focus on imposing no burden of tax on the borrower(s) as the nature of
Reverse Mortgage Loan is on the lines of a welfare loan for the senior citizens.

A Reverse Mortgage is an excellent financial planning tool for older homeowners to

supplement their retirement income, pay for healthcare costs, make home improvements,
buy a second home, and/or establish an emergency fund, while staying in their home. The
Reverse Mortgage Loan may be used anyway the borrower(s) wishes as it is his money
and his house. So modern wisdom rightfully says, one can have the cake and eat it too.

• Reverse Mortgage: A failure in India

Reverse Mortgage is not a very oft heard and used term in India, despite the fact that
there are millions of old age people in the country. Just taking a peek at the Age
Transition graph for India, it is clear that the population of old age group folks are going
to increase many-fold from this year onwards. It is obvious that the entire old population is
not going to be financially stable with the rising inflation & increasing health care costs
and they would not have much means to
earning in old age since the working age
population will be growing as well.

26
 Let us ponder over why this superb scheme doesn’t seem to attract enough
investors.

• The scheme targets the senior citizens, but who are currently the senior citizens?
The folks who are above 60-65 years. These are the people who were born when
India attained independence. These are the people who saw liberalization, when
they were already past their youth. These are the people who had very less
opportunities for earning money and with too many social taboos and rituals.
These people never knew consumerism and did not know how to spend the
money. They just know how to save money and make assets and that is why
these people built houses sometimes more than one. The whole thinking of the
current senior citizens is “What will I do with the extra monthly income, for
which I need to sell my house?”, rather when I die, I will give these houses as
assets to my children and my grandchildren.The scheme would make sense for
people who are currently in their 40s-50s, and hence the banks should actually
make these schemes available to people above 40s (definitely lot of
varieties/conditions can be included for different age-brackets)
• The scheme is not marketed very well and very few people actually understands
it. I feel that most financial institutions feel that dealing with senior citizen is
very risky. The risk arises from multiple factors especially from the fact that they
have not much alternate source of income (and exactly the reason they enter into
reverse mortgage in the first place) and hence these people can not be pulled into
other schemes of the bank. It is also important to note that the value of a house
over a period of time will be sustainable when it is maintained properly, but with
senior citizens having health issues and not much available cash, it would be
difficult to do so. This may cause a deterioration of the house value over long
periods of time. Also it is very difficult for marketing/sales people to deal with
their idiosyncrasies and the paranoia. The fact that a banking institution while
giving loan typically prefers a longer duration (in normal loans they have pre-
payment penalty for early loan closure), but for senior citizen the risk of the
scheme getting closed early is high and hence their is less chance to earn profits.
Then their may be multiple issues of dealing with legal heirs in case of a death.
So, all in all, senior citizens are not worth looking forward for in terms of making

27
 a customer base and hence banks have very little in marketing these products. In
fact, I see very few schemes targeting the senior citizens and even if their are,
they are not marketed enough.
• The legal framework is not very strong in India and which makes this scheme
much more risky. There are moral issues related to these schemes, for example, if
an old widowed lady is not able to maintain the house causing deterioration of
the value of the house, would a bank take a legal recourse for ensuring say the
roof be made leak-proof or to paint the entire house etc. It is very difficult to
handle legal issues related to old people where the legal heirs are all settled
outside the country especially when either the legal heirs are not interested or
when the residual amount to be gained by them is miniscule. Also there may be
issues of corruption when a broker/legal heir/bank employee may seek money
outside the agreement (under-hand dealing) and sell the house at a very low-
price, thus making a loss for the bank but a personal monetary gain. There could
be issues where an elderly person discovers a major health hazard (not everything
is covered by medical insurance) and which may require them to sell the house
for treatment (or may be to move to a smaller house and use some money for
treatment). In such a case, both the bank and the borrower may set to loose the
benefit. Then their are multiple legal issues with priority of liens.

• It is a legal claim by one person on the property of another as security for

payment of a debt.), in terms of taxes on the sale of the house and to prove the
legal heir claims. The laws are not clear when a person or household declares
bankruptcy, the issues of senior citizens mortgaging the ‘other’ house and also
putting it on rent (so essentially gaining money through rent as well as selling the
part equity till they are alive).

• The upfront charges are typically high and these loans are rising debt loans. A
typical loan, when repaid through EMI is a decreasing debt loans. So if you
carefully understand how EMI is calculated, you would notice that some part of
EMI goes towards lowering the principal as well, but with reverse-mortgage, the
interest paid out get added to the principal and hence the debt keeps rising. The
psychological barrier to this scheme is the loss of house equity as time
progresses. Also since the ownership still remains with the borrower, the wealth

28
tax, insurance, water charges etc have to be borne by the owner itself thus
lowering the cash flow.

If I consider all the above scenarios, I would advice that this scheme is helpful
only for those who do not have any legal heirs to pass-on the assets or to those
who are desperate for some cash-flow (may be because their kids are no longer
looking after them). This should not be considered as a means to fill the
retirement goal corpus. Also it will take some time for the schemes to become
more customer friendly.
The finance minister's budget proposals last year included the introduction of the
reverse mortgage facility for senior citizens in India. Recent reports seem to
indicate that less than150 people have taken advantage of the facility since its
inception, and it is, therefore, likely to be considered a failure. This is unfortunate
because the facility simply has not been adequately explained. It was also
unattractively packaged. The reverse mortgage facility allows senior citizens to
unlock the value of their most valuable asset, their home by mortgaging it and
enjoying the use of the money in their lifetime while continuing to live in it until
their deaths.

It is a well-entrenched idea in many developed countries in the West where its

terms are such that only home-owners above a given age (typically 60-65 years)
may apply. The bank makes an evaluation of the current value of the home,
decides the likely lifespan of the applicant home-owner (and his/her spouse), and,
decides what percentage of the current value they are willing to loan them. The
bank also fixes the interest rate it wishes to apply. Typically, the loan amount
seldom is lower than 60-70 per cent of the market value of the Property. The
applicants have the option of taking the loan principal in a single lump-sum
amount or by a fixed monthly amount instead. From time to time, the value of the
property is re-visited by both parties. If the valuation has increased, the
applicants are given the option of increasing the quantum of the loan, and should
they do so, are given the incremental amount in lump-sum. If they have opted for
the monthly payment scheme, this amount is appropriately increased. The
principal plus interest charges accrue at the bank while the applicants live on in
the home for the lengths of their lives - or until they decide to sell the home,

29
whichever comes earlier. If they choose to sell it, they have to pay the bank all
the accrued amounts. On the death of the second of the two spouses, the heirs to
the property decide either to redeem the loan and keep the property, or sell the
property and take the residential amount that may accrue from the sale after
settling with the bank. Should the sale proceeds be lower than the accrued
principal plus interest amount, the bank takes the loss. (This could happen if the
real estate market has not moved up in the manner the bank had estimated
originally. However experience of the past indicates that the banks seldom lose,
as they factor this likelihood in setting the percentage of the current value they
loan the applicants.)
The Indian banking industry must not complicate the scheme as it has done. The
industry's offer caps the available loan amount at Rs 50 lakh, instead of providing
for an equitable percentage of the property's value, and limits the loan period to
tenure of 15 years. Which 60-year-old couple would wish to put themselves in a
position to have to redeem the principal plus interest amount when they are 75 or
more, at which age they are unlikely to have the stamina to sell out and move to a
new home, which would inevitably be their only option? Inadequate clarity and
inappropriate terms have led the reverse mortgage loan facility in India to have
limited takers.

It is possible that most Indians will not sell the family home, and would prefer
passing it on to the next generation, even if they have to live in relative penury
during their waning years because of the small income. However, many Indian
traditions and values have changed in the last 15 years. This is like many other
things. For example, we hated debt and dreaded living on borrowed funds. The
Diners Club credit card was introduced in India in the 1960s. It never ever took
off. But today's new generation has upturned that. More credit cards are issued in
India per month than in most countries in the world, and cards have changed the
way life is lived. The increasing GNP and the surge of the manufacturing and
service sectors owe much to the great surge in consumer purchasing,
including of expensive aspirational goods and real estate. The urge for a better
life NOW is almost fundamental to the way the younger generation
perceives its goals. Another example has to do with the tradition that parents
moved in with one or the other of their children when they grew old. That too is
changing. Work opportunities are moving young people away to new cities, even

30
 new countries, where their parents cannot or will not follow them. And even in
the same cities, many "modern" parents prefer to live on their own.

Further, in many cases, the children do not want to inherit the parents' home.
Should they do so, they sell it anyway because they have moved on to bigger and
better things. There are also old folk without children, and old folk out of luck
with their children. In both cases, they are short of the cash to even pay essential
bills.

So while the reverse mortgage idea may not take off in India as it has in the
West, where social and parent-child behaviour usually dictates that the old folk
live off their very last penny before they die, there are sufficient demographic
and psychographic data to indicate that in India there are takers in the millions
who, for one reason or another, are likely candidates for the reverse mortgage
idea.

In any event, the proposal should be given the opportunity to fail for the right
reasons. And that means it should be packaged and marketed in a way that makes
sense to the likely customer.

• Reverse Mortgage Scams:

Staying vigilant against computer scams and other fraud has become a natural
part of life for many consumers, yet scams are successfully perpetrated every
day. One reason: Individuals who intend to commit fraud have become more
creative than ever, and they choose their targets with care. One group of people
that scammers like to target is the elderly, believing that older people are less
quick to catch on to a potentially harmful scheme than younger people may be. In
recent years, as the number of senior homeowners who opt for a reverse
mortgage has risen and so has the prevalence of reverse mortgage scams.

The Home Equity Conversion Mortgage (HECM) is the FHA's reverse mortgage
program, which is available to homeowners age 62 and older and can be a
valuable financial tool for tapping into home equity and providing income for
retirees. Homeowners working with a legitimate reverse mortgage lender will be
required to participate in financial counseling to ensure that they understand the
loan and how it works.

31
 If you are considering a reverse mortgage, watch out for these potential scams:
o Foreclosure Scams:
In this scam, the perpetrators go after seniors who are in danger of losing their
home to foreclosure. They artificially inflate the value of the home with the
help of a dishonest appraiser, and then obtain a reverse mortgage on the
property. After the mortgage approval, the scammers have the seniors transfer
the title to them and the seniors are left without a home and without the funds
from the reverse mortgage. Another way of defrauding the senior homeowners
is to work with a fake financial institution that will inform the owners that they
cannot qualify for a reverse mortgage but that they can have a different type of
loan. During the closing, the title to the property will be transferred away from
the homeowners.

o Equity Theft Scams:

These complicated schemes often involve several individuals who work together
to buy a distressed property or a foreclosure, then obtain an inflated appraisal and
then recruit a senior to repurchase the property and take out a reverse mortgage
on the property. Usually the settlement attorney for the reverse mortgage is also
in on the scam, so all of these individuals abscond with funds from the reverse
mortgage at settlement, leaving the seniors with little or no equity and no cash.

o Free Homes:
Scammers and con-artists use advertising to recruit seniors to live in a home so
that a reverse mortgage can be obtained on the property. The scammers keep the
reverse mortgage proceeds and the seniors pay the property taxes and insurance
on the home.
Generally, the reverse mortgage is obtained on a false, inflated appraised
value. Once the seniors pass away or move, the reverse mortgage lender is stuck
with a loss due to the lack of true value in the home.

o Document Fraud:
Some con artists simply send letters to seniors about their loan documents,
such as a "Reconveyance Deed", requesting money in order to provide them
with copies of the deed, a document that should be on file with the lender. Other

32
 scam artists charge money to seniors, sometimes thousands of dollars, for
information about a reverse mortgage that is available free from the Department
of Housing and Urban Development (HUD).

o Investment Scams:
While there are hundreds, perhaps thousands, of investment-scams run on individuals
all the time, some are specifically geared to getting the target to "invest" in an
annuity or real estate fund affiliated with reverse mortgages. The victims will lose
the
money they invested when the con-artist, usually someone associated with a
fraudulent reverse mortgage lender, will walk away with the funds.

 FBI Tips for Avoiding Reverse Mortgage Scams

 Do not respond to unsolicited advertisements.
 Be suspicious of anyone claiming that you can own a home with no down payment.
 Do not sign anything that you do not fully understand.
 Seek out your own reverse mortgage counselor.
 Reverse Mortgage Tips:
Seniors interested in learning more about their options for a reverse mortgage should
start by going to the HUD website that explains the basics of these loans and has a
link for finding a HUD-approved HECM counselor. Another option to try is the
National Council on the Aging website. Homeowners can call 800/510-0301 for a
free booklet from the National Council on the Aging about reverse mortgages.
Reverse mortgage proceeds can be received as a lump sum, in monthly payments or
as a line of credit. The amount to be borrowed depends on the age of the
homeowners, the value of the home and how much equity is available. The loan will
be repaid when the home is sold or the homeowners passes away. If any equity
remains in the home after the loan is repaid, the funds go to the homeowners or their
heirs. Homeowners cannot be forced out of their home because of a reverse
mortgage, however, they are obligated to keep the property maintained, pay their
property taxes and pay for homeowners insurance.

33
 Avoiding scams and obtaining legitimate information on a reverse mortgage can
make this loan product a valuable financial tool for seniors and their families. Like
any mortgage, before you sign the dotted line, you need to consult the appropriate
professionals and do your own homework or you risk being taking advantage of by
financial predators.

• Conclusion

 Reverse Mortgage, if available, offers an attractive option to the elderly to finance

their consumption needs on their own, without the necessity of moving out or
worrying about indebtetness or repayment.

 If designed properly and offered by an empathetic lender, RM might turn out to be

the vanguard product to build up brand equity for the lender in this niche segment.
Demographic projections indicate that this segment is the fastest growing segment all
over the world.

 RM, if widely available, might in fact encourage more people in the working
population to increase the proportion of their savings invested in housing.

 This segment is likely to attract increasingly favorable public policy attention, given
the projected importance of this segment in the electoral politics of all democratic
countries.

 However, the actual size of the RM market is nowhere near its estimated potential for
a variety of reasons from the demand, supply and regulatory considerations.

 Any interested RM lender in the Indian market must proceed with caution.

 The necessary steps before a pilot RM product seem to be the following:

(a). Assessment of potential demand in a limited geographical area through

(i). A scientific market survey amongst the specified target segment.

(ii). Qualitative research to explore borrower concerns and expectations.

(b). Precise assessment of legal, taxation and regulatory issues related to RM.

(c). Exploratory financial modeling to assess lender risk and option for managing it.

• Suggestions

34
 Following steps may be taken to make the facility of Reverse Mortgage workable:

 End Use of loan should be monitored. An explicitly allowed under ‘income from
House Property’ to give tax advantage to the borrower.

 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
premium paid will keep appreciating and at the same time eventuality of death, the
sum assured will likely make any good deficit.

 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.

 A pool account may be operated by the 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. Counseling to be mandatory
could be free as in the US and should be done by advisors carrying NHB
certificates.

35
36
37