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MARKETING OF FINANCIAL SERVICES ASIGNMENT On “REVERSE MORTAGAGE” By

Mohit Gyanchandani A0102211082 B-20 MBA – M&S Class of 2013

In Partial Fulfillment of the Requirements for the Degree of Master of Business Administration – Marketing & Sales At

AMITY BUSINESS SCHOOL AMITY UNIVERSITY UTTAR PRADESH SECTOR 125, NOIDA - 201303, UTTAR PRADESH, INDIA

INTRODUCTION TO REVERSE MORTGAGES A reverse mortgage is a form of equity release (or lifetime mortgage). It is a loan available to home owners or home buyers over 62 years old, enabling them to access a portion of the subject home's equity. The home owners can draw the mortgage principal in a lump sum, by receiving monthly payments over a specified term or over their (joint) lifetimes, as a revolving line of credit, or some combination thereof. In a conventional mortgage the homeowner makes a monthly amortized payment to the lender; after each payment the equity increases by the amount of the principal included in the payment, and when the mortgage has been paid in full the property is released from the mortgage. In a reverse mortgage, the home owner is under no obligation to make payments, but is free to do so with no pre-payment penalties. The line of credit portion operates like a revolving credit line, so a payment in reduction of a line of credit increases the available credit by the same amount. Interest that accrues is added to the mortgage balance. Title to the property remains in the name of the homeowners, to be disposed of as they wish, encumbered only by the amount owing under the mortgage. If a property has increased in value after a reverse mortgage is taken out, it is possible to acquire a second (or third) reverse mortgage over the increased equity in the home in some areas. However most lenders do not like to take a second or third lien position behind a reverse mortgage because its balance increases with time. It is rare to find reverse mortgages with subordinate liens behind them as a result. A reverse mortgage may be refinanced if enough equity is present in the home, and in some cases may qualify for a streamline refinance if the interest rate is reduced. A reverse mortgage lien is often recorded at a higher dollar amount than the amount of money actually disbursed at the loan closing. This recorded lien is at times misunderstood by some borrowers as being the payoff amount of the mortgage. The recorded lien works in similar fashion to a home equity line of credit where the lien represents the maximum lending limit, but the payoff is calculated based on actual disbursements plus interest owing.

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.

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.

The draft guidelines of reverse mortgage in India prepared by RBI have the following salient features:
      

Any house owner over 60 years of age is eligible for a reverse mortgage. The maximum loan is up to 60% of the value of residential property. The maximum period of property mortgage is 15 years with a bank or HFC. The borrower can opt for a monthly, quarterly, annual or lump sum payments at any point, as per his discretion. The revaluation of the property has to be undertaken by the Bank or HFC once every 5 years. The amount received through reverse mortgage is considered as loan and not income; hence the same will not attract any tax liability. Reverse mortgage rates can be fixed or floating and hence will vary according to market conditions depending on the interest rate regime chosen by the borrower.

The whole idea is entirely opposite to the regular mortgage process where a person pays the bank for a mortgaged property. Hence it is called reverse mortgage. This concept is particularly popular in the west. The lender will recover the loan along with the accumulated interest by selling the house after the death of the borrower or earlier, if the borrower leaves the mortgaged residential property permanently. Any excess amount will be remitted back to the borrower or his heirs. Reverse mortgage thus, is very beneficial for senior citizens who want a regular income to meet their everyday needs, without leaving their houses

Reverse Mortgage Lenders in India
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State Bank of India Punjab National Bank Bank of Baroda Central Bank of India Union Bank of India LlC Housing Finance Indian Ban Andhra Bank Corporation Bank Canara Bank

Eligibility to get the Loan
   

Up to 45 percent of the market value of the property for citizens within the age group of 60- 70 years. Up to 50 percent of the market value of the property for citizens within the age group of 71- 75 years. Up to 55 percent of the market value of the property for citizens within the age group of 76- 80 years. Up to 60 percent of the market value of the property if the senior citizen is above 80 years of age.

Features of Reverse Mortgages



Minimum Age Limit: Typically the borrowers should be more than 60 years of age. Lenders fix this age limit duly considering the guidelines in the social security system and other welfare measures offered by the government and also the, retirement age of the working class. Loan Amount: Maximum Loan Amount to borrowers depends on the house value, borrower‟s age, cost of the loan and the payment plan selected by the borrower. Typically, the loan amount or the Principal Limit is the maximum lump-sum payment a borrower can receive or the net present value of monthly payments or Line of Credit. The loan amount is restricted to percentage of the property value. In Roll up type of Reverse Mortgages offered in UK, higher amounts are granted in return for a higher interest loan. In some other cases, when the borrower get fewer amounts initially, further amounts will be made available depending on the property value. However, there are some restrictions which limit the time at which the borrower can apply for further advance. Loan Interest: Loan interest charged on the debt of the borrower can be fixed or adjustable. For Fixed Rate Reverse Mortgages, the loan interest would remain same until it is repaid. In case of adjustable rates, the rates are adjusted at defined time periods based on some reference rate like T-Bill rate. Interest rate caps for the period as well as for life time are typically specified for these adjustable rates. In some cases as in Fixed Repayment Mortgage in UK, there is no explicit interest rate, but borrower agrees that when the house is sold, he will be pay the lender a higher sum than the amount borrowed. The higher amount will depend on the age and life expectancy. However, when borrower





dies, the lender may charge interest on this higher sum from the date borrower die until the mortgage is actually repaid.



Payment Options: Once the loan amount is determined, it will be disbursed according to the payment option chosen. The borrower will have the typical options like receiving a lump sum amount or a series of monthly payments or access line-of-credit.



Repayment: No repayment is required on Reverse Mortgages as long as the borrower lives in the house as a principal residence. The full loan balance becomes due and payable when the sells the house or permanently moves away or when the borrower dies. When the loan is payable due to death of the borrower, borrower‟s heirs can repay the outstanding loan and take title to the property or lender can sell the property and pay off the loan. If the property value is more than the outstanding loan balance, the difference is paid to the heirs.



Debt Limit: The debt on a Reverse Mortgage equals all the loan advances received including any advances used to finance the loan costs or pay off prior debt, plus all the interest that is added to loan balance. Even if the loan balance grows to be greater than the home‟s future value, the borrower‟s debt is limited by the value of the home. This feature is called the “Nonrecourse” or “No Negative Equity Guarantee” and it protects the borrower, his estate and heirs from “deficiency judgments,” that is, from being required to pay back more than the home‟s value.

Perceived Social Implications in India

Positive Implications Indians traditionally have expressed the desire to bequeath property to their heirs and this mindset would take time and considerable social conditioning to change. However social behavior and the fear of debt burden is changing with the economic development and the financial independence of the younger generation. Education and counselling imparted by the government through various media would be key to the success of the launch of the reverse mortgage product. The knowledge, that in the time of medical emergency or other financial need senior citizens can take advantage of the equity in their homes and need not be dependent on their offspring or relatives, lends a lot of confidence and security to the elderly. The implications of this can translate into their gaining more respect and receiving better treatment from offspring who might otherwise ill-treat or neglect them as they grow older.

Negative Implications Historically, charitable institutions started from the trusts that the older generations have left behind. It is with their generous help that a lot of voluntary work became possible to help the downtrodden. The introduction of the reverse mortgage concept might have direct implications on the growth of similar trusts and other benevolent acts and lead to the decline of charitable institutions. The issues of fraud and the safety of the elderly is another area of concern. Measures would need to be taken and stringent law enforcement would be essential to safeguard the interests of citizens who choose to benefit from the reverse mortgage product.

Conclusion India has the potential for a significant market for reverse mortgage if its economy continues at its current pace of growth, leading to increase in prosperity, real estate prices, disposable incomes, life expectancy and decrease in fertility rates in the population. Despite the potential for reverse mortgage, there are several issues that may slow its spread as a reliable and acceptable means of income generation. It is a complex instrument and exposes the typical uninformed elderly borrower to fears of a debt burden, eviction and inability to leave a legacy behind by way of a bequest. Further, reverse mortgage has been introduced only this year and thus many pertinent issues regarding legal covenants and safety nets for borrowers, tax treatment under reverse mortgage, and other regulatory uncertainties are yet to be formalized. There is no sufficiently comprehensive secondary database available that could be useful to construct the appropriate environment for reverse mortgage. The real estate market is not mature in India and much longer term trends in home appreciation are required to accurately value homes. Reverse mortgage will be a useful tool for the house-rich, cash-poor elderly in India, as it will help them unlock all or part of their working-age savings for their old age needs without any debt or relocation burden. The ability to remain in their social environment and maintain their social standing even after availing of a „loan‟ is of great significance to people who have literally spent their entire working lives saving for and then paying regular mortgage payments for years before actually becoming owners of their homes. Reverse mortgage is a novel and socially preferred alternative to selling or moving out of the house in order to generate an income stream.

Education and counselling about this concept would make the elderly understand the crucial differences between the vulnerability they feel with traditional loans, as opposed to the emotional, social and psychological advantages that reverse mortgages confer. Key to the efficacy of reverse mortgages is the development of a strong financial and regulatory infrastructure that will minimize loopholes, prevent fraud, and make this product successful in serving the needs of the senior citizens in India

MARKETING STRATEGIES STATE BANK OF INDIA  Participation in various consumer exhibition and meetings

SBI multi‐product sales team regularly participates in the exhibitions / melas organized by various sponsors (e.g., SSI‐Small Scale Industries). SBI finances loans to the entrepreneurs through this channel. SBI also sets us booking counters are various trade‐fairs and industrial fairs where it offers loans at concessional rates to borrowers for booking at those counters. Apart from financing loans to the borrowers, SBI uses these meets as an opportunity to educate people about its various personal segment (p‐segment) products and services.  Advertising in TV and Newspapers

The advertising strategy is centralized at Mumbai office for advertisements in TV and Economic Times/ The Times of India. SBI campaigns also attempts to explain why it is better than other banks. For advertisement into other National dailies and local dailies their advertisement strategy is decentralized at the local head‐office level. SBI has launched an education initiative to educate its customers about ATMs, its account opening services, its wide



Oral Marketing

SBI has appointed various customer relationship officers and assistants at the branches of SBI. These officers take care to provide the relevant information to the customers who visit their offices. They help the customers with various products and services of SBI.

PUNJAB NATIONAL BANK  Promotion: 1. Television Radio 2. Personal Selling: Cross-Sale (Selling At Competitors Place) 3. Personalized Service 4. Print Media: Newspaper Magazines 5. Sales Promotion: Gifts BANK OF BARODA   PRODUCT NAME – BARODA AASHRAY Publicity to build its brand equity, the bank has organized hosts of seminars nationally and internationally- latest being Basel II. Bank has actively managed its public relations through media.  Customer Focus The bank has built its brand around superior customer services and international focus which are also the point of differentiation of the bank from other PSU banks.



Recent Marketing Initiatives • Communication Campaigns : Shukriya Sau Salon Kaa and Baroda Next • Use of Sybase 365 Marketing Information System • 50 city sales offices opened



Advertisements The advertising campaigns in both print and television media emphasize on the bright orange corporate colors of the bank and the „rising sun‟. The promotion strategy of utilizing customer awareness sessions with the display of the standard corporate visuals like the bright logo and the tagline with stills from the supporting print and television advertisements is also heavily relied on.

CENTRAL BANK  Agents Through this tie-up we will be able to introduce multiple customer centric initiatives. The partnership strengthens and enhances Central Bank of India‟s reach to provide comprehensive solutions to a widespread customer base.  Personal Selling Selling to the already existing customer base which visits the bank.

ALLAHABAD BANK  Housing Finance Banking Boutiques Allahabad Bank came out with a strategy for marketing its reverse mortagage by putting in place dedicated Housing Finance Banking Boutiques at potential centers across the country to act as exclusive delivery channels of various Finance Schemes. The Bank posted young & dynamic officers in these boutiques and delegated them with adequate authority to sanction proposals related to the various schemes on the spot. These officers

were also exposed to specialized training not only to serve the customer better but also to sell the retail products, if need be, by adopting door to door campaign.

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