Reverse mortgage

Introduction to Banking Sector in India
Banking in India originated in the first decade of 18th century with The General Bank of India coming into existence in 1786. This was followed by Bank of Hindustan. Both these banks are now defunct. The oldest bank in existence in India is the State Bank of India being established as "The Bank of Bengal" in Calcutta in June 1806. A couple of decades later, foreign banks like Credit Lyonnais started their Calcutta operations in the 1850s. At that point of time, Calcutta was the most active trading port, mainly due to the trade of the British Empire, and due to which banking activity took roots there and prospered. The first fully Indian owned bank was the Allahabad Bank, which was established in 1865. By the 1900s, the market expanded with the establishment of banks such as Punjab National Bank, in 1895 in Lahore and Bank of India, in 1906, in Mumbai - both of which were founded under private ownership. The Reserve Bank of India formally took on the responsibility of regulating the Indian banking sector from 1935. After India's independence in 1947, the Reserve Bank was nationalized and given broader powers.

 History of Banks
At the end of late-18th century, there were hardly any banks in India in the modern sense of the term. At the time of the American Civil War, a void was created as the supply of cotton to Lancashire stopped from the Americas. Some banks were opened at that time which functioned as entities to finance industry, including speculative trades in cotton. With large exposure to speculative ventures, most of the banks opened in India during that period could not survive and failed. The depositors lost money and lost interest in keeping deposits with banks. Subsequently, banking in India remained the exclusive domain of Europeans for next several decades until the beginning of the 20th century.
The Bank of Bengal, which later became the State Bank of India.At the beginning of the 20th century, Indian economy was passing through a relative period of stability. Around five decades have elapsed since the India's First war of Independence, and the social, industrial and other infrastructure have developed. Atthat time there were very small banks operated by Indians, and most of them were owned and operated by particular communities. The banking in India was controlled and dominated by

the presidency banks, namely, the Bank of Bombay, the Bank of Bengal, and the Bank of Madras - which later on merged to form the Imperial Bank of India, and Imperial Bank of India, upon India's independence, was renamed the State Bank of India. There were also some exchange banks, as also a number of Indian joint stock banks. All these banks operated in different segments of the economy. The presidency banks were like the central banks and discharged most of the functions of central banks. They were established under charters from the British East India Company. The exchange banks, mostly owned by the Europeans, concentrated on financing of foreign trade. Indian joint stock banks were generally under capitalized and lacked the experience and maturity to compete with the presidency banks, and the exchange banks. There was potential for many new banks as the economy was growing. Lord Curzon had observed then in the context of Indian banking: "In respect of banking it seems we are behind the times. We are like some old fashioned sailing ship, divided by solid wooden bulkheads into separate and cumbersome compartments."

Under these circumstances, many Indians came forward to set up banks, and many banks were set up at that time, a number of which have survived to the present such as Bank of India and Corporation Bank, Indian Bank, Bank of Baroda, and Canara Bank.

During the Wars The period during the First World War (1914-1918) through the end of the Second World War (1939-1945), and two years thereafter until the independence of India were challenging for the Indian banking. The years of the First World War were turbulent, and it took toll of many banks which simply collapsed despite the Indian economy gaining indirect boost due to warrelated economic activities. At least 94 banks in India failed during the years 1913 to 1918. Post-independence The partition of India in 1947 had adversely impacted the economies of Punjab and West Bengal, and banking activities had remained paralyzed for months. India's independence marked the end of a regime of the Laissez-faire for the Indian banking. The Government of India initiated measures to play an active role in the economic life of the nation, and the Industrial Policy Resolution adopted by the government in 1948 envisaged a mixed economy. This resulted

into greater involvement of the state in different segments of the economy including banking and finance. The major steps to regulate banking included:
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In 1948, the Reserve Bank of India, India's central banking authority, was nationalized, and it became an institution owned by the Government of India.

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In 1949, the Banking Regulation Act was enacted which empowered the Reserve Bank of India (RBI) "to regulate, control, and inspect the banks in India."

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The Banking Regulation Act also provided that no new bank or branch of an existing bank may be opened without a licence from the RBI, and no two banks could have common directors.

However, despite these provisions, control and regulations, banks in India except the State Bank of India, continued to be owned and operated by private persons. This changed with the nationalization of major banks in India on 19th July, 1969.

 Development of Banking Sector
Nationalisation By the 1960s, the Indian banking industry has become an important tool to facilitate the development of the Indian economy. At the same time, it has emerged as a large employer, and a debate has ensued about the possibility to nationalize the banking industry. Indira Gandhi, thethen Prime Minister of India expressed the intention of the GOI in the annual conference of the All India Congress Meeting in a paper entitled "Stray thoughts on Bank Nationalisation." The paper was received with positive enthusiasm. Thereafter, her move was swift and sudden, and the GOI issued an ordinance and nationalised the 14 largest commercial banks with effect from the midnight of July 19, 1969. Jayaprakash Narayan, a national leader of India, described the step as a "masterstroke of political sagacity." Within two weeks of the issue of the ordinance, the Parliament passed the Banking Companies (Acquition and Transfer of Undertaking) Bill, and it received the presidential approval on 9th August, 1969. A second dose of nationalisation of 6 more commercial banks followed in 1980. The stated reason for the nationalisation was to give the government more control of credit delivery. With

the second dose of nationalisation, the GOI controlled around 91% of the banking business of India. After this, until the 1990s, the nationalised banks grew at a pace of around 4%, closer to the average growth rate of the Indian economy. Liberalisation In the early 1990s the then Narasimha Rao government embarked on a policy of liberalisation and gave licences to a small number of private banks, which came to be known as New Generation tech-savvy banks, which included banks such as UTI Bank(now re-named as Axis Bank) (the first of such new generation banks to be set up), ICICI Bank and HDFC Bank. This move, along with the rapid growth in the economy of India, kickstarted the banking sector in India, which has seen rapid

growth with strong contribution from all the three sectors of banks, namely, government banks, private banks and foreign banks. The next stage for the Indian banking has been setup with the proposed relaxation in the norms for Foreign Direct Investment, where all Foreign Investors in banks may be given voting rights which could exceed the present cap of 10%,at present it has gone up to 49% with some restrictions. The new policy shook the Banking sector in India completely. Bankers, till this time, were used to the 4-6-4 method (Borrow at 4%;Lend at 6%;Go home at 4) of functioning. The new wave ushered in a modern outlook and tech-savvy methods of working for traditional banks.All this led to the retail boom in India. People not just demanded more from their banks but also received more.
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Current situation
Currently (2007), banking in India is generally fairly mature in terms of supply, product

range and reach-even though reach in rural India still remains a challenge for the private sector and foreign banks. In terms of quality of assets and capital adequacy, Indian banks are considered to have clean, strong and transparent balance sheets relative to other banks in comparable economies in its region. The Reserve Bank of India is an autonomous body, with

minimal pressure from the government. The stated policy of the Bank on the Indian Rupee is to manage volatility but without any fixed exchange rate-and this has mostly been true.

With the growth in the Indian economy expected to be strong for quite some timeespecially in its services sector-the demand for banking services, especially retail banking, mortgages and investment services are expected to be strong. One may also expect M&As, takeovers, and asset sales.In March 2006, the Reserve Bank of India allowed Warburg Pincus to increase its stake in Kotak Mahindra Bank (a private sector bank) to 10%. This is the first time an investor has been allowed to hold more than 5% in a private sector bank since the RBI announced norms in 2005 that any stake exceeding 5% in the private sector banks would need to be vetted by them. Currently, India has 88 scheduled commercial banks (SCBs) - 28 public sector banks (that is with the Government of India holding a stake), 29 private banks (these do not have government stake; they may be publicly listed and traded on stock exchanges) and 31 foreign banks. They have a combined network of over 53,000 branches and 17,000 ATMs. According to a report by ICRA Limited, a rating agency, the public sector banks hold over 75 percent of total assets of the banking industry, with the private and foreign banks holding 18.2% and 6.5% respectively.

Reverse Mortgage

Introduction to Reverse Mortgage

Until recently, there were two main ways to get cash from your home the first one is you could sell your home, but then you would have to move and the second one is you could borrow against your home, but then you would have to make monthly loan repayments. Now there is a third way of getting money from your home that does not require you to leave it or to make regular loan repayments that is “Reverse Mortgage”. A reverse mortgage is a loan against your home that you do not have to pay back for as long as you live there. With a reverse mortgage, you can turn the value of your home into cash without having to move or to repay a loan each month. No matter how this loan is paid out to you, you

typically don’t have to pay anything back until you die, sell your home, or permanently move out of your home. Reverse mortgages is a powerful tool to help eligible homeowners obtain tax-free cash flow. Reverse mortgages enable eligible homeowners to access the money they have built up as equity in their homes. They are primarily designed to strengthen seniors’ personal and financial independence by providing funds without a monthly payment burden during their lifetime in the home. The major eligibility requirements are that the person must be at least 62 years of age and should own a home. Reverse mortgage is emerging as a significant financial security tool for senior homeowners because of the broad range of needs these unique loans can satisfy. Senior homeowners of all income levels have taken out reverse mortgages for many different reasons. For some, reverse mortgages provide the extra money that let them stay securely in their homes throughout retirement. For others, reverse mortgages provide a means to live more comfortably and pursue their dreams. Its a special type of mortgage which allows the senior homeowner to access their equity which they have built up in the form of the home and use the money according to their wish, all this while letting owner stay in his home. It’s called a reverse mortgage because the flow of payments is reversed from a traditional mortgage.

The lender makes payments to the owner, or arranges a line of credit that is available for the owners use. This differs from a traditional mortgage used to purchase or refinance a home in which you must make monthly mortgage payments to the bank.

To qualify for most loans, the lender checks the applicant’s income to see how much he can afford to pay back each month. But with a reverse mortgage, he doesn’t have to make monthly repayments. So the owner or the applicant doesn’t need a minimum amount of income to qualify for a reverse mortgage. He could have no income, and still be able to get a reverse mortgage. With most home loans, if a person fails to make his monthly repayments, he could lose his home. But with a reverse mortgage, he doesn’t have any monthly repayments to make. So he can’t lose his home by failing to make them. Reverse mortgages typically require no repayment for as long as the owner or coowner live in the home. So reverse mortgage differ from other home loans in these important ways, the first one is the applicant don’t need an income to qualify for a reverse mortgage and the second one is he don’t have to make monthly repayments on a reverse mortgage.

Reverse mortgages have a different purpose than forward mortgages do. With a forward mortgage, you use your income to repay debt, and this builds up equity in your home. But with a reverse mortgage, you are taking the equity out in cash. So with a reverse mortgage your debt increases and your home equity decreases. It’s just the opposite, or reverse of traditional mortgage. During a reverse mortgage, the lender sends you cash, and you make no repayments. So the amount you owe (your debt) gets larger as you get more cash and more interest is added to your loan balance. As your debt grows, your equity shrinks, unless your home’s value is growing at a high rate. When a reverse mortgage becomes due and payable, you may owe a lot of money and your equity may be very small. If you have the loan for a long time, or if your home’s value decreases, there may not be any equity left at the end of the loan. In short, a reverse mortgage is a “rising debt, falling equity” type of

deal. But that is exactly what informed reverse mortgage borrowers want to “spend down” their home equity while they live in their homes, without having to make monthly loan repayments.

 Difference between traditional mortgage and reverse mortgage

Item Purpose of loan Before closing

Mortgage to purchase a home

Reverse Mortgage to generate income

borrower has no equity in borrower has a lot of equity the home in the home

At closing

borrower owes a lot, and has little equity

borrower owes very little, and has lot of equity

During the loan, borrower...

makes monthly payments to receives payments the lender from the lender

loan balance goes down

loan balance rises

equity grows

equity declines owes substantial amount

At end of loan, borrower...

owes nothing

has substantial equity has much less, little, or no equity

Type of Transaction

Falling Debt- Rising Equity

Rising Debt- Falling Equity

 History and Origin of reverse mortgage
The history of reverse mortgage goes back to 1961.In the year 1961 the first reverse mortgage loan was made by Nelson Haynes of Deering Savings & Loan (Portland, ME) to Nellie Young, the widow of his high school football coach.In the year 1963 the first property tax deferral program offered in Oregon, financed through Public Employees Retirement Fund.In 1970 Survey research on a "housing annuity plan" was conducted in Los Angeles by Yung-Ping Chen of UCLA. In 1975 Technical monograph on "Creating New Financial Instruments for the Aged" authored by Jack M. Guttentag of The Wharton School.In 1977 First RM loan program, "Equi-Pay", introduced by Arlo Smith of Broadview Savings & Loan in Independence, OH.In 1978 "Reverse Mortgage Study Project" funded by Wisconsin Bureau on Aging, directed by Ken Scholen and First statewide deferred payment loan program offered by WI Dept of Local Affairs and Development, designed by William Perkins.In 1979 First national "Reverse Mortgage Development Conference"sponsored by WI Bureau on Aging in Madison, WI on May 21-22.San Francisco Development Fund's "Reverse Annuity Mortgage(RAM)" program funded by Federal Home Loan ank Board, foundations, and WI Bureau on Aging; directed by Don Ralya . In 1980 Unlocking Home Equity for the Elderly, edited by Ken Scholen and Yung-Ping Chen, published by Ballinger (Cambridge, MA) .Two-year "Home Equity Conversion Project" funded by U.S.Administration on Aging, directed by Ken Scholen FHA reverse mortgage insurance proposal by Ken Scholenendorsed by housing pre-conference to 1981 White House Conference on Aging.In 1981 National Center for Home Equity Conversion (NCHEC) incorporated as independent, non-profit organization in Madison, WI; directed by Ken Scholen U. S. House Select Committee on Aging hears first Cong- ressional testimony on reverse mortgages, by Ken Scholen White House Conference on Aging endorses proposal for FHA RM insurance, recommending that "the FHA should develop an insurance program for reverse mortgage loans" Newsweek, Time, U.S. News, Good Morning America

provide first national media exposure for reverse mortgages San Francisco RAM program closes first loans.In 1982 "National Potential for Home Equity onversion" authored by Bruce Jacobs (University of Rochester) San Francisco RAM program expands to new sites in California,

directed by Bronwyn Belling.U. S. Administration on Aging funds NCHEC research on federal issues - including FHA RM insurance U. S. Senate Special Committee on Aging stages first hearing on reverse mortgages; staffed by John Rother; testimony by Ken Scholen, Jack Guttentag, Maurice Weinrobe, James Firman U. S. Senate Special Committee on Aging issues report citing need for reverse mortgage insurance Garn-St. Germain Depository Institutions Act clears regulatory path for reverse mortgages; first federal statutory recognition of reverse mortgages. In 1983 Federal Council on Aging supports proposal for FHA reverse mortgage insurance. FHA reverse mortgage insurance demonstration program proposed by U.S. Department of Housing and Urban Develop- ment (HUD) in housing bill "RMs: Problems and Prospects for a Secondary Market and an Examination of Mortgage Guaranty Insurance", authored by Maurice Weinrobe (Clark University) "National Development Conference" sponsored by NCHEC with HUD support in Washington, DC; greetings sent by President Reagan and Representative Claude Pepper U.S. Administration on Aging funds NCHEC information and training project "Home Equity Financing of Long-Term Care for the Elderly" byBruce Jacobs (University of Rochester) and William Weissert (Urban Institute)FHA insurance proposal by Sen John Heinz adopted by Senate;House-Senate conference committee mandates HUD study. In 1984 First open-ended, risk-pooling reverse mortgage offered by American Homestead in New Jersey SF RAM program and NCHEC provide training and technical assistance to new reverse mortgage programs in AZ, MA, NY, WI Prudential-Bache announces marketing agreement with American Homestead Social Security Administration releases policy memo on treat- ment of income from HEC plans.

In 1985 HUD sponsors conference on home equity conversion.U. S. Senate & House Aging Committees sponsor joint briefing session for Congressional taffers, moderated by Ken Scholen Line-of-credit development project initiated by United Seniors Health Cooperative (DC), directed by Bronwyn Belling First "split-term" RM offered by CT Housing Finance Agency, designed by Stuart Jennings and Arnold Pritchard . In 1986 "Home Equity Information Center" established by AARP, directed by Katrinka Smith Sloan American Homestead expands into CT,

OH, and PA California Home Equity Conversion Coalition established by RAM program counselors MA Elderly Equity Program funded by Commonwealth of Massachusetts, directed by Len Raymond HUD releases study opposing a federal reverse mortgage insurance demonstration AARP releases analysis by Ken Scholen critiquing HUD study; AARP urges enactment of federal RM insurance demo. In 1987 NCHEC completes studies on home equity financing of long-term care for Minnesota and Connecticut U.S. House Ways and Means Committee hears testimony on HEC and long-term care by James Firman United Seniors) and Ken Scholen (NCHEC) Congress passes FHA reverse mortgage insurance proposal American Homestead expands into DE, MD, and VA "Home-Made Money: A Consumer Guide to HEC" published by AARP, authored by Ken Scholen .In 1988 National survey of members' reverse mortgage needs and preferences by AARP FHA reverse mortgage insurance legislation signed by President Reagan on 2/5/88; Judith V. May named to develop program HUD announces HECM development team including Edward Szymanoski, Jr, Patrick Quinton, Donald Alexander, and Mary Kay Roma "Innovation in Hone Equity Conversion" conference sponsored by AARP; attracts 200 participants from 25 states New plan announced by Capital Holding Corporation (Louisville, KY); 10th largest investor-owned insurance company in America; "Home Income Security Plan" first offered in KY, MD, and VA First line-of-credit reverse mortgage developed by VA Housing Development Authority American Homestead expands into CA Providential Home Income Plan

(San Francisco) offers shared-appreciation plan throughout CA HUD releases proposed regulations for FHA reverse mortgage insurance program Fannie Mae announces intention to purchase reverse mortgages insured by FHA U. S. Administration on Aging announces cooperative agreement with HUD to sponsor training of reverse mortgage counselors. In 1989"A Financial Guide to Reverse Mortgages" by Ken Scholen for NCHEC introduces total loan cost rate method for analyzing costs HUD selects 50 lenders by lottery to make first FHA-insured reverse mortgages. Software for determining reverse mortgage loan

advances developed by FHA and made available to the public Wendover Funding (NC) announces program for servicing FHA-insured reverse mortgages HUD releases "Home Equity Conversion Mortgage" (HECM) Fourteen 2-day HECM counselor training sessions conducted by Bronwyn Belling (AARP) and Ken Scholen (NCHEC) for FHA Capital Holding expands into CA and FL FNMA announces policies for purchasing FHA-insured (HECM) reverse mortgages First FHA-insured HECM made to Marjorie Mason of Fairway, KS by the James B Nutter Co National Center for Home Equity Conversion (NCHEC) moves from Madison, WI to Marshall, MN .In 1990 AARP releases FHA Counselor Training and Reference Manual, by Bronwyn Belling and Ken Scholen American Homestead and Providential suspend lending as recession and falling appreciation expectations dry up debt sources for new loansFourteen more 2-day counselor training sessions conducted by Bronwyn Belling (AARP) and Ken Scholen (NCHEC) for HUD "Reverse Angle" newsletter published for FHA counselors by AARP Home Equity Information Center Congress increases FHA insurance authority to 25,000 loans by 9/31/95; requires disclosure of total loan cost & development of equity reserve option AARP publishes "Model State Law on Reverse Mortgages" HUD publishes "FHA Home Equity Conversion Insurance Demonstration: A Model to Calculate Borrower Payments and Insurance Risk," by Edward Szymanoski Jr.

In 1991 Los Angeles County Employees Retirement Association sponsors information seminar on reverse mortgages as a potential fund investment and member benefit AARP publishes 3rd edition of "Home-Made Money" by Ken Scholen; distribution tops 250,000 New consumer guide developed by Federal Trade Commission in partnership with NCHEC and AARP HUD publishes new regulations making reverse mortgage insurance available to all FHA lenders Interim report on FHA program by Judith V. May Retirement Income On The House: Cashing In On Your Home With A "Reverse" Mortgage, First lifetime reverse mortgage programs proposed by Peter Mazonas of Homefirst (San Francisco) and Robert Bachman of Home Equity Partners (Irvine, CA) FNMA expands funding for expanded HECM program; develops comprehensive "Instruction Package" Wendover Funding announces correspondent program and "starter kit" for lenders First multi-state HECM lending programs developed by

International Mortgage (DE, DC, MD, PA, VA, WV), Directors Mortgage (AZ, CA, NV), and ARCS Mortgage (CA, HI, NY, OR, WA). In 1992 Capital Holding Corporation airs 60-second and 120-second prime-time network television ads in CA and FL for its "Homearnings" plan Initial public stock offering by Providential Home Income Plan attracts strong investor interest AARP publishes 79-page discussion paper on reverse mortgage counseling by Ken Scholen AARP releases videotape for counselor training written and narrated by Ken Scholen U. S. Securities & Exchange Commission issues directive prohibiting interest accrual in reverse mortgage accounting U. S. Securities & Exchange Commission rescinds previous directive; issues directive on effective yield method for reverse mortgage accounting AARP sponsors community coalition-building seminars in support of HECM development in OH, WI, IA, NY, NJ, PA, IL Retirement Income On The House: Cashing In On Your Home With A "Reverse" Mortgage named best book of 1992 on financial services for the elderly by the National Association of State Units on Aging (NASUA) HECM preliminary evaluation released by HUD.

In 1993 Transamerica announces reverse mortgage product including deferred annuity from MetLife Fannie Mae convenes roundtable on developing a conventional reverse mortgage Capital Holding discontinues "Homearnings" plan NCHEC prepares report on taxation of reverse mortgage transactions for AARP Home Equity Partners (Irvine, CA) & Union Labor Life announce new "Freedom" plan including optional immediate annuity from MetLife Wendover convenes 2-day conference of HECM originators AARP sponsors community seminars in support of HECM program development in CA, LA, MI, & MS Fannie Mae initiates series of information sessions for financial planners and elderlaw attorneys Andrus Gerontology Center (USC) convenes national telecon- ference on reverse mortgages National Center for Home Equity Conversion (NCHEC) moves from Marshall, MN to Apple Valley, MN At year's end, the HECM program is all states except AK, SD, & TX); Unity Mortgage offers it in 25 states; Senior Income in 14 states; Directors Mortgage in 14 states; Amerifirst Mortgage in 9 states; ARCS Mortgage in 6 states; & International Mortgage in 4 states. In the year 1994 Household Senior Services offers "Ever Yours" creditline reverse mortgage in FL, GA, IL, KY, MD, MI, OH, and

VA Congress enacts "total loan cost rate" disclosure requirement for all reverse mortgages; Federal Reserve publishes proposed regulations NCHEC prepares report on "Reversing Foreclosures" for AARP New York rescinds mortgage tax on reverse mortgages U. S. Court of Appeals barrier to RM lending in Texas; Rep. Gonzales legislates statutory override of court decision CA Public Employees Retirement System (CALPERS) initiates study of reverse mortgage investment Transamerica introduces creditline plan and expands into NY, NJ, PA, and CT At year's end, Unity Mortgage is offering the HECM in 42 states and Director's Mortgage has merged with Norwest Mortgage . In 1995 HUD releases "Evaluation of the Home Equity Conversion Mortgage Insurance Demonstration" HUD releases first major revision of HECM handbook.HUD approves direct endorsement processing of HECM loans NCHEC publishes Your New Retirement Nest Egg: A Consumer Guide to the New Reverse

Mortgages by Ken Scholen.AARP publishes 5th edition of "Home-Made Money" by Ken Scholen; distribution tops 400,000 HECM program lapses at end of federal fiscal year AARP sponsors national conference on reverse mortgages in MD on 11/14-15 Fannie Mae announces "HomeKeeper" plan; media coverage includes front-page, above-the-fold article in USA Today FHA Commissioner‟s Award resented by Nicolas Retsinas to Ken Scholen for his work on reverse mortgages . In 1996 HECM program re-authorized on January 26, 1996 Fannie Mae begins lender training for "Home Keeper" NCHEC issues Second Edition of Your New Retirement Nest Egg: A Consumer Guide to the New Reverse Mortgages by Ken Scholen, Hartford Life tests annuity complement to HECM and Fannie Mae reverse mortgages HUD initiates counselor training via satellite TV. In 1997 AARP releases consumer videotapes written by Ken Scholen featuring Scholen and Bronwyn Belling AARP sponsors HUD counselor training via satellite TV featuring Belling and Scholen Referral fee scams denounced by AARP, HUD, Fannie Mae Household Senior Services discontinues "Forever Yours" plan AARP announces counselor support fund capitalized

by HUD and Fannie Mae NCHEC initiates "preferred" lender and counselor program and releases "Reverse Mortgage Counselor" software Ibis Software (SF) releases "Reverse Mortgage Originator" Texas approves referendum to permit RMs, but technical errors make impact

uncertain, problematic AARP sponsors national reverse mortgage leadership round- table and conference National Reverse Mortgage Lenders Association (NRMLA) organized by Jeffrey Taylor with Peter Bell as staff . In 1998 NCHEC circulates discussion papers on "Strengthening Cost Disclosures on

Reverse Mortgages" by Ken Scholen AARP releases "HECM Training-in-a-Box" including videotapes, workbook, HECM handbook, and counseling manual Fannie Mae conducts market research to identify reverse mortgage market segments NCHEC publishes "Reverse Mortgages for Beginners: A Consumer Guide to Every Homeowner‟s Retirement Nest Egg”.NCHEC establishes

website.Transamerica HomeFirst (SF) discontinues originating its proprietary "HouseMoney" loans and servicing new HECM and HomeKeeper loans Federal Reserve clarifies inclusion of annuities in TALC disclosures . In 1999 Neighborhood Reinvestment Corporation (NRC) provides HECM training in

cooperation with AARP Texas approves reverse mortgage lending in statewide referendum but prohibits creditline choices preferred by most consumers Fannie Mae announce new consumer protections in 5/22 lender letter NRMLA and AARP support absolute limit on origination fees, refinancing reforms, and research on a single national 203b limit AARP initiates test of HECM counseling by telephone and develops reverse mortgage counselor exam in cooperation with HUD, Fannie Mae, and NRMLA.In 2000 First national reverse mortgage counseling exam is taken by 425 counselors in 43 statesNRC provides 2-day HECM training in Atlanta, Minneapolis, Oakland, Tampa, New Orleans, and San Antonio AARP completes "Model Specifications for Comparing Reverse Mortgages;" Financial Freedom and Fannie Mae agree to develop new software implementing the specifications Congress approves absolute limit on origination fees, refinancing reforms, and research on a single national 203b limit Fannie Mae discontinues "equity share" pricing option AARP Foundation selects 30 HECM counselors to

participate in HUD-supported pilot "telecounseling" project Financial Freedom becomes largest reverse mortgage originator via merger with Unity Mortgage.In 2001 AARP releases new 68page consumer guide, creates new reverse mortgage portal announces new tollfree consumer infoline and availability of HECM counseling by telephone Fannie Mae announces it will waive the equity share fee on all loans in its Home Keeper portfolio Financial Freedom releases counseling software meeting authorized (Reverse Mortgage) AARP model specifications. In 2007 HECM program re-

 The Benefits of a Reverse Mortgage

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Tax-free funds for as long as you live in your home No loan repayment for as long as you live in your home No income, medical or credit requirements Retain ownership of your home for life this is guaranteed as long as you maintain your home, and pay insurance and real estate taxes

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Choose a cash flow plan tailored to your needs No restrictions on how you may use the funds A tax-advantaged way to pass on part of your estate today

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The following are the guidelines given by RBI for Reverse
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 .

Mortgage:-

The borrower can opt for a monthly, quarterly, annual or lump sum payments at any point, as per his discretion.

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The revaluation of the property has to be undertaken by the Bank 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.

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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.

Reverse mortgage in the US
Reverse mortgage was introduced in the US in the late 1980s. Since then, the number of people pledging their property for reverse mortgage has been on the rise. Take a look at the numbers.In 1990, there were just 157 people who had opted for this product. In 2006, 59,781 people opted for reverse mortgage. The concept in India is similar to the one in the US.To be eligible for reverse mortgage, you should be at least 62 years old and own a property."In a reverse mortgage, you borrow money using your home as collateral but there aren't any payments. The interest that is charged is added to the balance owed. That means you owe more each month. When you die or when the house is sold, the debt gets paid off," says Jeffrey D. Voudrie, CFP, CEPP, president, Legacy Planning Group Inc.Once you pledge your property for reverse mortgage, you will receive funds as long as you live in that property. There are three main sources that home owners can tap in the US. One of these is the federally insured Home Equity Conversion Mortgage, administered by the Department of Housing and Urban Development.The majority of people opting for reverse mortgage go for HECM as it offers the best interest rates and loan amount. However, if they opt for government-insured reverse mortgages, then they will also have to pay a fee for Federal Housing Administration insurance that will protect against the value of the home going below the loan amount.There are also single-purpose reverse mortgages, offered by state or local government agencies for a specific reason and, lastly, proprietary reverse mortgages offered by banks, mortgage companies and other private lenders.People planning a property reverse mortgage have to undergo a free mortgage counselling from an independent government-approved "housing agency". Reverse mortgages offered by other financial institutions also require individuals to undergo similar counselling. "Seniors like this product because it allows them to stay in their homes and they are not required to make monthly payments," says Voudrie. However, a concern among most elders is the rising interest rates, which increases the cost of the loan.

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Costs which are to be incurred while going for Reverse Mortgage

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Processing or origination costs: - These are the costs which covers the bank’s operating expenses for making the loan .This cost can be financed as a part of the total loan.

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Mortgage Insurance: - This is the insurance charges of the insurer who guarantees that if the lender that is the banker goes out of business for any reason, the borrower would continue to get his or her payments. The insurer could also guarantee that the borrower will never owe more than the value of his or her home when the loan is finally repaid.

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Appraisal fee: - This fee is to be paid to an appraiser who fixes a value on the borrower’s home which is to be mortgaged. An appraiser must also make sure there are no major structural defects, such as bad foundation, leaky roof, or termite damage. If the appraiser uncovers property defects, you must hire a contractor to complete the repairs. Once the repairs are completed, the same appraiser is paid for a second visit to make sure the repairs have been completed. The cost of the repair may be financed within the loan.

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Other fees which include credit report fee for verifying whether any tax liabilities are there, title search fee, document preparation fee for loan documents, mortgage recording fee, survey fee, etc.

 Risks to RM Lenders
There are some risks faced by a Reverse Mortgage lender. These risks are at the heart of the reluctance of lenders to get into reverse mortgage 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 a reverse mortgage, at the time of origination. The uniqueness is because reverse mortgage is a ‘rising debt’ instrument. Since reverse mortgage 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. The following are the basic sources of this risk:-

 Mortality Risks:This is the risk that a reverse mortgage 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 realised might decline. However, this risk is usually „diversifiable‟, if the reverse mortgage lender has a large pool of such borrowers. Possibility of adverse selection is counterbalanced by the possibility that even borrowers with poor health may be attracted by Reverse Mortgage‟s credit line or lump sum options. However, there is no literature on one possible source of systematic risk. Since reverse mortgage is projected to substantially improve the monthly income and/ or liquid funds of the reverse mortgage borrowers, would it not itself result in a

systematically higher life expectancy amongst them than otherwise, now this is a big question.

 Interest Rate Risks:Said that the typical reverse mortgage borrower is elderly and is looking for predictable sources of income/ liquidity, reverse mortgage 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. 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 reverse mortgage portfolio. Most of the reverse mortgage loans accumulate interest on a floating rate basis to minimize interest rate risks to the lender, like in SBI the interest rates are revised for every 5 years. 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.

 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. In this three risks may be pointed out they are.  RM can be considered as a package loan with a ‘crossover’ put option to the bo rrower to sell his house at the accumulated value of the reverse mortgage loan at the time of repayment which is uncertain. If this option can be valued, it can be suitably priced and sold in the market. However, unlike in the case of traditional mortgages, markets for resale, securitization and derivatives based on reverse mortgages are non-existent or non-competitive. Small market size and predominance of government backed reverse mortgage insurance may dissuade potential entrants. This impedes the flow of funds to finance reverse mortgage 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



Reverse mortgage loans found takers amongst lenders only after the availability of default insurance. Even then, in most of the reverse mortgage loans, interest accumulates at a floating

rate linked to one-year treasury rates. A fixed interest rate reverse mortgage carries an interest rate risk are higher than a conventional coupon bond or regular mortgage. It could be especially high at origination and continues to be higher throughout. The small initial investment under an reverse mortgage is very deceptive. Reverse mortgage creates very large off-balance sheet liabilities, if market rates rise above the rate assumed under reverse mortgage.

 Moral Hazard Risk:Once an RM loan is taken, the homeowners may have no incentive to maintain the house so as to preserve or enhance market value. This might be especially true when the loan balance is more or less sure to cross the sale value. Since the benefit would accrue mainly to the lenders and the cost borne by the homeowner, it is perhaps not sensible to assume otherwise. They conclude that in a competitive market, the lenders will respond by either reducing the loan amount or by charging a risk premium in interest or both. The more important point is that some time during the tenure of a reverse mortgage, an elderly borrower may simply be physically incapable of maintaining the home as per loan requirements. Though the reverse mortgage loan contract provides for foreclosure under such conditions, this seems to be impractical and sure to result in litigation and bad publicity for the lender.

 Liquidity Risks:In Reverse mortgage loans where the borrower draws down on his loan through a credit line, there is a risk of sudden withdrawals.

 Risk Mitigation
Risk mitigation is the key for the success of any financial product including reverse mortgage. Some of the risk mitigation techniques which the providers that is the banker can apply to reduce the risk on their books are as follow

• Proper eligibility criterions The first mitigation of risk can be done at the time of providing loans. This can be done through proper verification of the title of the property, age of the borrower; his/her credit analysis etc. This reduces the risk of default by the borrower

• Variable interest rates loan as compared to fixed interest rate loan To avoid interest rate risk, the lender can go for variable interest rates based on some market benchmark like MIBOR. This will also reduce the risk of Pre-payment as the borrower will not have interest arbitrage on prepayment of the loan

• Proper analysis of mortality trends As the product has significant longevity risk, the lender can do a detailed mortality trend analysis on a macro level and also in the market where it is operating.

• Geographical diversification The lender can look at spreading the business across the country by promoting the product in secondary and tertiary cities also so that the law of large numbers may work properly and if the provider has a bad experience in one market; it can be compensated with good experience in other cities

• Develop the product for lower age groups

The lender can develop home equity conversion mortgages for all households and not just for elderly. This will significantly reduce loan to value ratio and that will take care of many of the risks inherent in the product.

• Securitization One of the most effective ways of mitigation risk is securitization It involves many other financial players and thus it spreads the risk of default/prepayment to many other participants.

• Repayment schedule In the Repayment schedule, some default conditions or changes that affect the security of the loan for the lender that can make reverse mortgages payable should also be added, like Declaration of bankruptcy, Donation or abandonment of the house, Condemnation/ Sovereign Takeover of the property by a government agency, adding a new owner to the home’s title, taking out new debt against the home etc.

 Forces affecting “Reverse Mortgage”
Any financial product is affected by some forces. The following are forces that affect this innovative financial product called “Reverse Mortgage”. 1. Borrowers have to bear very high transaction costs. However, with the latest program we can expect a declining trend in these costs due to growing volumes, increased awareness and learning effects. 2. There is a definite risk of moral hazard in borrowers being responsible for home maintenance and in ultimate home sale. Given the profile of a typical borrower, there are serious questions on both incentives and ability. It is impractical to enforce the foreclosure clause. Negative publicity, potential litigation and likely judgments make it so.

3. Home equity is an important component of precautionary savings. If a homeowner has drawn down on his equity through a reverse mortgage, his ability to meet unforeseen health care costs or move into alternative housing may be more limited. Those who become seriously ill but would like to continue to stay at home may face a severe problem. If they have to be away from home for long for convalescence, they may fail to maintain the home

and pay property taxes. Then, as per the conditions of the reverse mortgage, the lender can foreclose the loan. 4. Many elderly households may be simply reluctant to take on debt, having spent so much of their lifetime saving for their own house. 5. Real estate laws are state specific whereas regulations governing reverse mortgage loans are national in character. If there is a conflict, state laws will prevail unless pre-empted by federal law. 6. Laws in some states are not clear on the lien priority to be granted to reverse mortgage over other secured creditors, in spite of specific provisions in a reverse mortgage contract.
7.

What happens if a household declares bankruptcy, having borrowed through a Reverse mortgage is a big question.

8. Uncertainty exists on taxation of the borrower. If reverse mortgage annuities were considered
taxable as income of the borrower, would accrued interest on the loan be a tax-deductible expense is an issue. 9. The tax authorities may if classify an reverse mortgage as a sale of home rather than a loan, given the high probability that the entire value may ultimately accrue to the lender. If so, the borrower may suddenly find that he has lost out on one-time exemptions on capital gains. 10. The lender has to account for accrued interest as income, without any corresponding cash flow.

 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 populations are covered by formal schemes. This would substantially enlarge the potential target market for RM.  A much lower proportion of urban households, and by implication, less scope for reverse mortgage.



A much larger proportion of elders co-living with their family members of subsequent generations and hence less scope for reverse mortgage.

 

A possibly stronger hand over motive, reducing the scope for reverse mortgage. A possibly higher real rate of appreciation of real estate and housing prices, making reverse mortgage more attractive to the lender.



Widespread under valuation of real estate properties to accommodate transactions involving unaccounted money and evasion of taxes on property and real estate transactions



Complexity, variety and location specific variations in types of home ownerships like Benami holdings that is Irrevocable power of attorney, Leasehold, freehold, Land use conversion regulations, Floor space regulations, rent, tenancy controls, Disposal of ancestral property.



Absence of competitive suppliers for immediate life annuity products. This, in turn, is a consequence of Lack of data on old age mortality rates, Lack of long-term treasury securities for managing interest rate risks of annuity providers.



India specific legal and taxation issues like License/ Permission required under insurance/ banking regulation for offering reverse mortgage ,Income tax treatment for reverse mortgage lender and borrower, Capital gains on property, Reporting and provisioning by the lender as per banking/ insurance regulation, Status of RM loan in case of insolvency.

 Old Age Population
Though the Indian population is still comparatively „young‟, India is also „ageing‟. According to some demographic survey conducted for India indicated the following outcomes.



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

 Sources of Income Support for the Elderly in India
As of 1994, the estimated percentage among the elderly, dependent on various sources of income was as follows:

Source Pensions/Rent Work Transfers Of which,

Men 9-10% 65% 30% from 22%

Women 5% 15% 72% 58%

All elderly 7-8% 40% 52% 40%

Children

In addition, as per a survey of the National Sample Survey Organization (NSSO) in 1994, less than 4% of the elderly lived alone. A 1995-96 National Sample Survey of the elderly reported that about 5% of them

lived alone, another 10% lived with their spouses only and another 5% lived with relatives/ nonrelatives, other than their own children. In other words, co-residence with children and other relatives is predominant. However, the following aspects are worrisome:  The extent and adequacy of support, especially for widows



Vulnerability of such support to shocks to family income



As incomes and life expectancy rose in the now developed countries, simultaneously there was a decline in co-residence rates and intergenerational support. It may happen in India too



Strains due to demographic trends seem inevitable: fewer children must support parents for longer periods of time. In a recent survey covering 30 cities, 70% of the respondents did not expect their children to take care of them after retirement.



Job related migration of youth within the country and emigration.

 Potential Market Segments
Now let us see specification of the potential target segment for Reverse Mortgage.



Age Group

Above 58 years, assuming 58 is the typical retirement age. Older the individual, more attractive will be reverse mortgage. Additional considerations will include the minimum age specified for preferential treatment as „senior citizens‟ in matters such as income tax or the recently introduced Varishta Bima Yojana.



High House Equity

The current monthly annuity payout by LIC under its immediate annuity product Jeevan Akshay is 844 Rs for a single premium payment of Rs 1 lakh, for a person aged 65. The annuity will be lower in case of joint life or annuity certain options. If we were to use a minimum of Rs 5000 as the monthly annuity that makes reverse mortgage a worthwhile activity, we need an RM loan of around Rs 6 lakhs. Assuming a loan to home value ratio of 60%, this implies a current market value of Rs. 10 lakhs.



Low Current Incomes Relative to Desired Standard of Living

Amongst such households, we are looking for those whose current levels of income are insufficient to afford their desired standard of living. The salary replacement rates suggested in the literature, for maintaining the same standard of living after retirement as before, is around 60%. This implies a preretirement take home salary or income (after-tax) of around Rs 9000-10000 a month. A potential reverse mortgage borrower would be one who had such a pre-retirement income but no substantial pension benefits. Therefore, he would be employed in the private sector or self-employed.



Long Tenure at Current Home

Reverse Mortgage is attractive to a borrower especially when he values continued stay in his current residence and plans to do so for a long term into the future. This is likely when he has already stayed in his current home for a relatively longer period- say a minimum of 10 years. Additional indicators for such a desire could be a person currently resident in one’s home town/ state.



Lack of Other Supports

If such an individual is living alone, as in the case of a widower or widow, reverse mortgage can make a substantial contribution to his/ her standard of living. Alternatively, the next generation may be living far away, either in India or abroad.



No Significant Bequeath Motive

It can be said that there is a basic conflict between taking an reverse mortgage loan and a desire to bequeath property to one’s heirs. If an elderly homeowner has no children, this question may not arise.

Otherwise, we need to look for attributes indicating a weak bequeath motive. For example, in the Indian context, it could mean ‘no sons’. Or it could be that the entire next generation of the family has migrated to

another metro or abroad with no intention of coming back. They may be much better off than the older generation and may not value bequests, if any.



Independence and Quality of Life

A potential reverse mortgage borrower must be an elderly person who values his financial independence. He must be interested in maintaining his desired quality of life rather than curtailing consumption for lack of current cash income. This implies he must be mentally prepared to consider borrowing in old age, let alone through innovative financial products like reverse mortgage. This implies certain minimum education and exposure to financial savings/ assets/ markets.

 Considerations in Product Design
Now let’s see what are the aspects which need to be focused for a product design likely to be attractive from the perspective of a potential reverse mortgage customer and a lender.

 Customer Perspective:
Empathetic counseling from professionally competent and independent counselors- NGOs like Help Age, Dignity Foundation, Indian Association of Retired Persons (IARP) etc., may be interested in providing such services  Ratio of reverse mortgage Loan limit to current market value of property: This will be a function of borrower’s age, projected long term interest rates and property appreciation rates.



Flexibility in drawdown: The line of credit with interest credit for unutilised portion is the most popular choice in the U.S context. The same might be true in India too. Cash may be withdrawn as and when needed, especially large amounts to meet medical and other emergencies, in contrast to a

regular monthly amount. However this is vulnerable to myopic withdrawals or under pressure from relatives.   Minimum possible reverse mortgage closure costs. Clarity in borrower’s responsibility for property maintenance and paying property taxes, insurance etc. Strong legal protection against foreclosure and/ or forcible eviction based on fine print may be desirable. Alternatively, the reverse mortgage lender should be willing to take over such a responsibility against deduction from reverse mortgage loan limit/ annuity.    Clarity in tax treatment of reverse mortgage receipts, accrued interest, capital gains etc. Option to refinance in case interest rates decline substantially Protection against lender defaults- though not very critical.

 Lender Perspective:The major concern is with respect to the risks of longevity, interest rates and property appreciation rates. There is no simple way to explore these except through financial modelling. Some alternatives for limiting risks in the learning phase can be suggested as below.



Purchasing a life annuity through an insurance tie-up so that a part of the mortality risk is transferred to the insurer with the necessary core competence. Their expertise may also be used to decide on the lump sum reverse mortgage loan.



Based on the U.S experience so far, it seems better for the lender to assume responsibility for property maintenance/ taxes against deduction from reverse mortgage loan limits/ annuity payments.



Though insurance against default risk is unlikely in India, an reverse mortgage lender has to charge an equivalent additional interest spread of 2-2.5%, if not more, as a default risk premium



It seems worthwhile to explore and lobby for concessional refinance for reverse mortgage loans from agencies like the National Housing Bank and for lower reverse mortgage related transaction taxes.



Given the requirement of property market related expertise at the micro-level, it might be worthwhile to focus on only one or two cities in the initial phase.



There might be a need for tie-ups with agencies for various services- property valuation, title search, property maintenance and so on.



Myths about Reverse Mortgages

The following are some of the myths about reverse mortgage in the minds of the people which need to be clearly addressed in order to make this product more attractive and popular.  The lender will own the home The applicant and his family will continues to retain ownership of the home. The Lender does not take control of the title. The lender's interest is limited to the outstanding loan balance.



Reverse Mortgage lenders just want to sell your house The lenders are in the business of helping to keep owners home and meet whatever financial needs he may have in order to help him to maintain financial independence. Reverse Mortgage borrowers may remain in the home for as long as they wish. However, should they decide to sell the home for any reason, the loan would then become due and payable.



Owner’s heirs will be saddled with the loan The Reverse Mortgage is a non-recourse loan. This means that the lender can only derive repayment of the loan from the proceeds of the sale of the property.



Owner need a certain level of income, good credit, or good health to qualify A Reverse Mortgage has no income, credit, or health requirements.



Owner

has

to

make

monthly

payments

on

his

Reverse

Mortgage

There are never any monthly payments. Payment of taxes, insurance and general upkeep of the home are the only responsibilities of the homeowner.



Home must be debt free to qualify for a Reverse Mortgage Owner may have a mortgage or other debt on his home. The mortgage or debt however, must be paid off first with the proceeds of the reverse mortgage.



Only the "cash poor" or desperate senior citizens can benefit from the Reverse Mortgage Even though some seniors may have a greater need than others for the cash or monthly income, the Reverse Mortgage can also be an excellent financial or estate planning tool.

 SWOT analysis on reverse mortgage loans Under this scheme, any senior citizen owning unencumbered residential property in India can mortgage such property for a loan, to tide over expenses in their twilight years. Here's a SWOT analysis of the same. Strengths  The senior citizens are entitled to regular cash flows at their choice - monthly, quarterly, half yearly and annually.



The loan is given without any income criteria at an age where normal loans are not available.

 

No loan servicing or repayment required during the lifetime of borrower and spouse. If the borrower dies during the period, the spouse will continue to get the loan amount for 15 years.



Tax treatment of a RML will be as loan, not income, so no tax will be payable on the regular cash flows

  

The borrower and their spouse can continue to stay in the house till both die. Heirs of the borrower will be entitled to get the surplus of sale value of the property. Borrower/heir can get mortgage released by paying loan with interest without having to sell property at any time.



Reassessment of property value will be done periodically say once every 5 years.

Weaknesses  This loan product has a maximum tenure of only 15 years. If the borrower outlives this period, the regular cash flows will stop.    Basis of property valuation is not clear. Requirement of clear title to property in the name of the borrower to get the loan. Various fees to be added to borrower’s liability, which can be quite substantial.

Opportunities    Partial substitute for a social security scheme for senior citizens. Increasing number of nuclear families. Medical expenses and cost of living going up, increasing the need for additional income in old age.



Most Indians have strong preference for own home. Therefore many eligible citizens may opt for the scheme.

Threats   Property valuations are ambiguous. There is a non-recourse guarantee, which means that loan plus interest should never exceed realizable value of property. In case of fall in property value or loan with interest exceeding assessed property value, banks may resort to strong-arm tactics to force the borrowers to move out, if they live too long after the loan period is over.  Rate of interest is at the discretion of lender. Any increase in the rate, if floating, will increase the burden of the borrower.  Lender has discretion to raise loan amount on revaluation. However, if it does not do so, borrower doesn't get loan according to proper value of property.  Lender has right to foreclose loan by forcing sale of property if borrower doesn't pay for insurance, property taxes or maintain and repair house.

 The following factors are considered while determining the amount of loan.

     Age of the borrower and any co-applicant. The current value of the property and expected property appreciation rate. The current interest rate and interest rate volatility (interest rate risk). Closure and servicing costs. Specific features chosen like fixed or floating interest. Whether the payment is taken as lump sum, or monthly payments or quarterly payment. Lump sum provides the cash immediately, but the interest fees are the highest.  The location of the property and whether the maximum loan amount is subject to the maximum loan limits.



Steps to followed for getting a Reverse mortgage

The following are the important steps which are to be followed by every person who is going for reverse mortgage. 1.
EDUCATION

The applicant must first educate himself about the reverse mortgage by visiting this website; this will the beginning of reverse home mortgage learning process. Many banks nowadays send their representatives to the home of the applicants to explain the benefits of a reverse home mortgage to the homeowner and family or friends. Any doubts regarding reverse mortgage may be cleared at that time. If the homeowner has already had HUD counseling OR is ready to proceed with the process, an application is to be completed. Government has developed some websites like HUD or AARP which can be visited for details of reverse mortgage.

2.

HUD

COUNSELING

Counseling by a HUD approved counselor is required. This can be taken as a first step or after the application has been completed. HUD counseling can be done via the telephone or at a fixed location. The HUD counselor will sign and date a HUD Counseling Certificate at the conclusion of the meeting. The borrower(s) then sign and date the HUD counseling certificate and give it to their Loan Officer to start the loan process.

3.

APPLICATION

The loan officer takes the application before or after HUD counseling. The loan officer carefully explains the Reverse home mortgage program features and benefits. Some of the forms are Good Faith Estimate, Tax & Insurance

Disclosure, Loan application, Privacy Policy Disclosure. The loan officer will collect copies of Drivers License or other form of Picture ID, Social Security Card or Medicare Card, Most

recent Property tax statement, Homeowners Fire Insurance Policy, Most recent mortgage statement. 4.
PROCESSING THE LOAN

When both the application and HUD counseling have been completed, you are ready to start processing the loan. The next step is to order a HUD appraisal and a termite inspection. If either report reveals things that require fixing, according to HUD guidelines the borrower can fix these within six months after the close of escrow. If there are repairs required, a separate “Repair Set Aside” account is created. Fire insurance is required. In some cases the current policy may be less than the lender requires and therefore it is necessary to increase the insurance policy to the current value.

5.

CLOSING

When the loan documents are ready to be signed, the loan officer will schedule a convenient time to come to the home of the applicant in some case with a notary to go over the documents and sign and date the loan papers. If you choose to have monthly payment, the funds are wired to your account on the first day of every month. If you choose a credit line, the funds are wired within five business days of receiving the request in writing.

6.

AFTER CLOSING

You must continue to pay property taxes and insurance. You must also maintain your home in good repair. Any repairs that are required must be done within six months of the close date. Proof of required repairs must be sent to the Lender.

 Termination of Reverse Mortgage Contract:-

The following are the cases where in the reverse mortgage contract may be terminated that is terminating the contract of giving regular payouts to the borrower by the bank before the tenure gets over:

The borrower has not stayed in the mortgaged property for a continuous period of one year.



The borrower fails to pay property taxes, home insurance or maintain and repair the residential property.

 

The residential mortgaged property is donated or abandoned by the borrower. The borrower makes changes in the residential property that affect the security of the loan for the lender. For example, renting out a part or the entire 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 taking out new debt against the residential property or alienating the interest by way of a gift or will.



The government, under legal provisions, seeks to acquire the residential property for public use.



The government condemns the residential property.

Reverse Mortgage in SBI

The State Bank of India (SBI) has started offering reverse mortgage products for senior citizen on October 12, 2007. Joint loans will be given if the spouse is alive and is over 58 years of age. The loan is be offered by all branches of SBI from October 12, 2007. The loan is offered at an interest rate of 10.75% pa 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 installments, if it is needed, depending on market conditions and loan status. In an press report 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 be avail payment against the security of their houses on monthly or quarter 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. DHFL and Punjab National Bank are the other competitors along with the SBI. Reverse mortgage is very popular product in many countries. The scheme offers old persons with less income to offer their house as mortgage security. The old person will get a loan from the bank and the bank will keep on paying them for a fixed period. After the time of loan is over, the bank may either, acquire the property and give the remainder to the customer’ heirs or they can pay back and keep the property. The scheme is very good for some people looking for additional money to support their needs at old age.

Reverse Mortgage in SBI, main branch Belgaum:As reverse mortgage is offered by all the branches of SBI from October 12 2007, SBI main branch in Belgaum also started providing the facility of Reverse Mortgage. Due to lack of knowledge about reverse mortgage in Belgaum there are no any customers for this product in SBI main branch Belgaum. Recently one customer is willing to take reverse mortgage from SBI main branch. This deal has not yet been finalized, it is in process.

The bank pays installments monthly, quarterly and even lump sum. The loan amount is paid in installment for 10 years or for 15 years as per the requirement and wish of the borrower.

The following is the table showing the installments on monthly, quarterly basis for the period of 10 tears and 15 years for a loan amount of Rs 100000 at a interest rate of 10.75%.

10 years Loan Tenor

15 years

468 Monthly instalments

225

(Rs.)

Quarterly instalments

1,423

687

(Rs.)

36,022 Lump sum payment

21,619

(Rs.)

In SBI main branch recently one customer showed willingness to take up reverse mortgage. As due to the privacy policy of the bank hence forth the name of the customer will be taken as Mr. A. Mr. A is of 64 ages and owns a house with its title. After the e valuation of the house, the value of the house is estimated to be Rs 10, 00,000. As per the SBI guidelines only the loan is given on 90% of the property value so in this case Mr. A can take a loan of Rs 9,00,000 (that is 90% of 10,00,000). MR .A wants to get the installment on monthly bases for a period of 15 years. So his monthly installment for the period of 15 years for the loan amount is Rs 2,025.

Guidelines for “Reverse Mortgage” in SBI
Objective of the scheme To provide a source of additional income for senior citizens of India who own self-acquired and selfoccupied house property in India.

Eligibility    No. of borrowers: - Single or jointly with spouse in case of a living spouse. Age of first borrower :- Above 60 years No. of surviving spouses on date of sanction of loan :- Should not be more than one. Borrowers will have to give an undertaking that they will not remarry during the currency of the loan. If the borrowers choose to remarry, the loan will be foreclosed.   Age of spouse :- Above 58 years Residence :a. Borrower should be staying at self-acquired and self owned house / flat against which loan is being raised, as his permanent primary residence. b. Mobile/Telephone/Credit Card bills/Certificate from the Housing Society where the borrower is staying /Affidavit made before the Executive Magistrate may be accepted as proof of residence. c. Borrowers will be required to inform the Bank when they cease to use this residence as their permanent residence.  Title of the Property :a. Borrowers should have a clear and transferable title in their names b. Title verification and search report for a period of 30 years will be required to be obtained from the Bank’s empanelled advocate at borrowers’ cost.



Title of the property and number of borrowers.- In case if the title in single name and loan number of borrowers. availed jointly with spouse. Title holder should make a Will in favour of the other spouse. The Will should confirm that this is the last Will and that it supersedes all earlier wills, if any. The borrower to undertake that no fresh Will shall be made during the currency of the loan



Encumbrances: - The property should be free from any encumbrances. However in case of property purchased by availing Home Loan from SBI and mortgaged to SBI, it will be considered for RML, subject to closure of the Home Loan account out of the proceeds of RML



Residual Life of property: - Should be at least 20 years in case of single borrower and 25 years in case of spouse being below 60 years of age. Certificate from empanelled engineer/ architect will be required to be obtained for this purpose, in addition to valuation of property.

Security The Reverse Mortgage Loan shall be secured by way of equitable mortgage of residential property.

Tenor    Age of the younger of the borrowers between 58 and upto 68 years: 15 years Age of the younger of the borrowers above 68 years: 10 years OR till death of the borrower(s),

Whichever is earlier

Disbursement By credit to an SB account in the joint names of the borrowers operated by E or S.

Periodicity of availing loan

  

Monthly payment. Quarterly payment Lump sum payment

Quantum of loan The loan amount would be 90% of the value of property. Loan amount would include interest till maturity. The maximum loan amount is kept at Rs. 1 Crore and minimum Rs.3 lacs

Purpose of Loan Supplementing income, any personal expenses, house repairs, etc. Loan amount should not be used for speculative, trading and business purposes.

Repayment/Settlement  The loan shall become due and payable only when the last surviving borrower dies or opts to sell the home, or permanently moves out of the home for to an institution or to 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. Bank 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 or prepayment by borrowers and his next of kin.  The borrower(s) or his/her/their legal heirs/estate shall be provided with the first right to settle the loan along with accumulated interest, without sale of property.

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A reasonable amount of time, say up to 6 months, may be provided when RML repayment is triggered, for house to be sold.

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The balance surplus (if any), remaining after settlement of the loan with accrued interest and expenses, shall be passed on to the borrower or the estate of the borrower/legal heirs.

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Borrowers will be required to submit annual life certificates in the month of November every year. This certificate will also include clauses regarding marital status, and permanent residence of the borrowers, in addition to the balance confirmation as on 31st October of that year.

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List of legal heirs will be obtained at the time of sanction of loan. With a view to avoiding disputes at the time of settlement of loan amount by legal heirs, specific instructions about inheritance of the property and payment of balance amount, if any, of the sale proceeds after settling the Bank’s dues , will be required to be part of the borrowers’ Will.

Foreclosure The loan shall be liable for foreclosure due to occurrence of the following events of default.   If the borrower(s) has/have 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 Bank reserves the right to insist on repayment of loan by bringing the residential property to sale and utilizing the sale proceeds to meet the outstanding balance of principal and interest.   If borrower(s) declare himself/ herself/themselves bankrupt. If the residential property so mortgaged to the Bank is donated or abandoned by the borrower(s).

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If the borrower(s) effect changes in the residential property that affect the security of the loan for the lender.For example: renting out part or all of the house by creating a tenancy right; 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 acquire the residential property for public use.  If the Government condemns the residential property (for example, for health or safety reasons).  Any other event such as re-marriage of the borrower(s) etc. which shall have an adverse impact on the loan settlement prospects.  Borrowers do not accept the revised terms on revaluation of property and interest reset at the end of every 5 years from sanction.  Any violation of the terms and conditions of RML.

Pre-payment of loan   The borrower(s) will have option to prepay the loan at any time during the loan tenor. There will be no prepayment penalty.

Valuation/Revaluation of property and option for the Bank to adjust payments.  After the initial valuation to determine the loan amount, subsequent revaluations will be done at intervals of 5 years.  The Bank shall have the option to revise the periodic/lump-sum amount every 5 years along with revaluation. In the scenario of fall in property prices, the Bank may decide to revise the amount at any time earlier than 5 years. At every stage of revision, it should be ensured that the Loan to Value ratio does not exceed 90% at maturity.

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If the Borrower does not accept the revised terms, no further payments will be effected by the Bank.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 9 and 10.

Interest Rate 10.75% p.a. (Fixed) subject to reset every 5 years.

Processing fee 0.50% of the loan amount, minimum Rs. 500 and maximum of Rs. 10,000

Right of Rescission As a customer-friendly gesture and in keeping with international best practices, after the documents have been executed and loan transaction finalized, borrowers will have right of rescission up to seven days to cancel the transaction. If the loan amount has been disbursed, the entire loan amount will need to be repaid by the borrower within this period. However, interest for the period may be waived. Processing fee shall not be refunded in such cases.

Insurance and maintenance of house property  The house property will be insured by the borrower at his cost against fire, earthquake and other calamities.   The borrower shall ensure to pay all taxes, charges etc. Bank reserves the right to pay insurance premium, taxes, charges etc. by reducing the loan amount to that extent.  The borrower shall maintain the property in good condition

Operational issues  Type of facility: - Non-renewable Overdraft without ledger folio charges. No cheque book/debit card will be linked to this account.  Availability of product :- All branches

Reverse Mortgage in IDBI BANK
IDBI Bank introduces Reverse Mortgage Loan for senior citizens. Senior Citizens are an imperial component of the Indian society. There is significant increase in cost of good health care facilities along with little social security. Senior Citizens require a regular cash flow stream for supplementing pension/other income and addressing their financial needs. Reverse Mortgage seeks to monetize the house as an asset and specifically the owner‟s equity in the house. The scheme involves the Senior Citizen borrower(s) mortgaging the house property to IDBI Bank, in return of periodic payments to the borrower(s) during the latter‟s lifetime to help them in sustaining themselves .The senior citizen borrower is not required to service the loan during his lifetime and therefore does not make monthly repayment to the Bank. RML facility can be extended to senior citizen borrowers owning inherited property provided the property has a clear title.

Advantages
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Maximum Funding Services at doorstep Simple documentation Personalized services Attractive rate of interest

Features

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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. Tenor - The maximum tenor of the loan shall be upto 20 years, which will be subject to age of the borrower. Loan Amount - The minimum loan amount is Rs. 5 lacs and the maximum loan amount is Rs.2.00 crore. The quantum of loan will be 60% to 80% of the assessed value of property, which will depend upon the age of the borrower. Disbursement - Periodic payments (monthly, quarterly, half yearly, annually) to be decided mutually between the Bank and the borrower. The maximum monthly payments shall be capped at Rs. 50000/-. Payment of lump sum amount for medical treatment for self, spouse and dependents can be considered, which is restricted to 50% of the total eligible loan amount , subject to a cap of Rs. 15 lacs. Repayment of loan - Outstanding loan (principal + interest) amount shall become due and payable 6 months after the death of the last surviving borrower/spouse or the borrower permanently move out of the property, whichever is earlier. Settlement of loan along with interest is to be met out of the proceeds received from sale of residential

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property. The borrowers or his /her legal heirs shall be provided with the first option to settle the loan along with interest without sale of property. Security- Equitable mortgage of property by way of deposit of original title deeds. Prepayment/foreclosure - The borrower(s) will have option to prepay the loan at any time during the loan tenor. There will not be any prepayment levy/penalty/charge for such prepayments. Right of Rescission - After the loan is sanctioned senior citizen borrower(s) shall be given up to 10 days time to re-look into his requirements and if he so wishes to cancel the transaction for any reason whatsoever.

Applying for a Reverse Mortgage Loan against Home is absolutely simple. Just call our Phone Banking numbers or Visit our nearest Retail Asset Centre/Branch. Our representative will contact you at the earliest.

Reverse mortgages by Bank of Baroda

Baroda Ashray (Reverse Mortgage Loan)

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

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

The Commercial property will not be taken as a security under the product. 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. 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. 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.
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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.

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Security: Simple / Equitable mortgage of the Residential property. Tenure: 15 years. The tenure may further be extended till survival of the borrower/s subject to advance value of the property. Insurance: Insurance of the residential property mortgaged to the bank shall be regularly taken. The premium charges are to be borne by borrower. Reverse Mortgage Loan (RML) enables a Senior Citizen i.e. above the age of 60 years to avail of periodical payments from a lender

against the mortgage of his/her house while remaining the owner and occupying the house. The Senior Citizen borrower is not required to service the loan during his/her lifetime and therefore does not make monthly repayments of principal and interest to the lender. RMLs are extended by Primary Lending Institutions (PLIs) viz. Scheduled Banks and Housing Finance Companies (HFCs) registered with NHB. The loan amount is dependent on the value of house property as assessed by the lender, age of the borrower(s) and prevalent interest rate. The loan can be provided through monthly/quarterly/halfyearly/annual disbursements or a lump-sum or as a committed line of credit or as a combination of the three. The maximum period of the loan is 20 years. (The maximum period over which the payments can be made to the reverse mortgage borrower). The loan amount may be used by the Senior Citizen borrower for varied purposes including up-gradation/ renovation of residential property, medical exigencies, etc. However, use of RML for speculative, trading and business purposes is not permissible. Valuation of the residential property would be done at such frequency and intervals as decided by the reverse mortgage lender, which in any case shall be 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. The borrower(s) will continue to use the residential property as his/her/their primary residence till he/she/they is/are alive, or permanently move out of the property, or cease to use the property as permanent primary residence. The lender will have limited recourse i.e. only to the mortgaged property in respect of the RML extended to the borrower.

All reverse mortgage loan products are expected to carry a clear and transparent „no negative equity‟ or „non-recourse‟ guarantee. That is, the Borrower(s) will never owe more than the net realizable value of their property, provided the terms and conditions of the loan have been met. On the borrower‟s death or on the borrower leaving the house property permanently, the loan is repaid along with accumulated interest, through sale of the house property. The borrower(s)/heir(s) can also repay the loan with accumulated interest and have the mortgage released without resorting to sale of the property. The borrower(s) or his/her heirs also have the option of prepaying the loan at any time during the loan tenor or later, without any prepayment levy.