Reverse Mortgage : Towards Social Security

It's a new avenue for the cash poor but asset rich senior citizens to monetize their equity in residential property to meet their increased living expenses.

- Jaishankar Padmanabhan Raja
National Housing Bank,
Regional Manager,
National Housing Bank

In India, reverse mortgage programs have not yet been launched. Reverse mortgage assumes importance because in the absence of any other product for senior citizens to obtain loans, reverse mortgage is one such option where they can avail some kind of partial social security in terms of mortgaging their house property and obtaining the reverse mortgage loan. The reverse mortgage loan is mainly meant for the cash poor and asset rich senior citizens.

In India, the National Housing Bank (NHB) has formulated the basic features of the product and is in the process of encouraging all the banks and housing finance companies to offer the product. The Scheduled Commercial Banks (SCBs) and Housing Finance Companies (HFCs) would be the main agencies that are expected to implement the product and offer the same to the eligible retail individual senior citizens. These institutions are also in the stage of adopting the features of the product in their respective credit policies. So far, in India, the product has not yet been launched formally by any institution. So, at present, there are no agencies offering reverse mortgage.

Issues behind reverse mortgage

Reverse mortgage is not a conventional loan product. It is a loan product where the senior citizen mortgages his/her own residential property to a primary lending institution such as an SCB or an HFC, and gets entitled for the payment of a loan either for a fixed period, or on a lump sum basis, or by a line of credit, or a combination of all. This is dependent on three major parameters viz. age of the borrower, value of the property, and the interest rates prevailing in the economy. The interplay of all these factors determines the quantum of reverse mortgage loan and eligibility for the loan. With increase in the age of the borrower or the value of the property, the senior citizen will be entitled for a higher loan. For a relatively younger senior citizen, or with the fall in value of the property, it will be vice versa. In the Indian context, an element of revaluation of the residential property has been introduced, which is not quite common in the West or anywhere else. This will ensure that the interests of both the borrower and the lender are protected significantly.

In terms of generics of the product, the product in the US is a niche product. In India, it is likely that the product will serve the niche market comprising house owning senior citizens. In the absence of base level real estate data, it is difficult to draw econometric models in India to determine the future impact or projections on the trends of reverse mortgage loans. Considering that interest rate movements and real estate values in the economy will have a direct impact on the loan, the reverse mortgage borrower will have to make a careful selection of the product based on the value of the property as well as a possible assumption of future prices of the real estate and future directions of interest rates. In the case of fixed interest rates, the borrower will be certain about the interest accumulations, and the risk due to uncertainty of interest rate fluctuations would be less. In the case of floating interest rates, it will be a deadly combination of uncertain real estate price fluctuations and uncertain interest rate fluctuations. Further, in the Indian context, insurance products for covering property price fluctuation risks are absent. In view of these high complexities, it is essential for senior citizens to make a careful evaluation of the reverse mortgage loan.

Implications

In India, the social security benefits are generally not available, except for a few measures such as pensions, medical insurance, etc. Since reverse mortgage is entirely a commercial proposition, it is not likely to affect any other government benefit already being availed by a potential reverse mortgage loan borrower.

Regulatory, legal and tax issues are very critical for the success of a reverse mortgage loan. There are certain issues for the reverse mortgage lenders in India which have to be carefully addressed. NHB is already taking up these issues with the authorities concerned for the successful implementation of the product.

One crucial legal issue to be addressed is that the house which is mortgaged is to be eventually brought to sale in case the senior citizen and his/her spouse passes away or moves permanently out of the house. It is opined that in the case of self-acquired house properties, the process of enforcement and sale would not pose complications.

Apart from this, taxation is also a critical aspect, which means that the cash payments to the reverse mortgage borrower must be exempted from taxes. If a person purchases annuity from an insurance company with the proceeds from the reverse mortgage loan, the annuity would be subjected to taxation. Further, if he/she does not purchase an annuity and directly takes the loan, then the loan cannot duly fulfill the person's perpetual needs throughout his/her lifetime. It can only serve for a part of a lifetime. Apart from this, there are other tax issues which a reverse mortgage lender has to consider very carefully. These issues would have to be addressed on a holistic basis by the regulatory authorities and government.

Risks associated with reverse mortgage

For a lender, the main risk is longevity. The longer a person lives, the more difficult it will be for the financial institution as it will have to source long-term funds to match its assets. At the same time, the property price fluctuation risk will be another major risk—if the property value drops to such an extent that it becomes less than what they have extended as a reverse mortgage loan, the lenders will have to risk facing a loss. Interest rate risk is a major risk. In addition to this, there is legal risk i.e., the risk of not being able to bring the property to sale. These are some of the risks associated with reverse mortgage lender.

The solutions for primary lending institutions to address these risks lie in strategically devising the product with appropriate limits for financing reverse mortgage loans and incorporating prudent appraisal, monitoring and recovery mechanisms.

Is it suitable for India?

This is more of an emerging social issue. While opinions may vary on this issue based on culture, traditions and socio-economic issues pertaining to different regions of the country, in relatively highly urbanized centers like Mumbai, Delhi, and Hyderabad, senior citizens may prefer to monetize the equity in their property during their lifetime rather than passing it on to their heirs. This is because, in many households, the children may have moved out to different places/countries for their livelihood and may not be interested in returning. Besides, there are many senior citizens without children or who live alone. Further, with increased inflationary trends reverse mortgage loan will serve as a monetary buffer for meeting increased expenses. Thus, in India, where the population is in billions, this product would go a long way in attracting such segments of the society.

The market potential

It is considered that there is a huge market for reverse mortgage. There are different pockets where such requirements are felt very strongly in India. Looking at the US' or any other country's statistics may not be entirely appropriate because of the different composition of population of the US as compared to that of India. Firstly, the US population is composed of mostly people over the age of 50. Secondly, most of the senior citizens in the US own a house or a mortgage.

As there are defined social security benefits for the US citizens, the proportion of reverse mortgage loans in the US is relatively very less compared to the overall population. Reverse mortgage is growing in popularity in the US mainly due to the support provided by the government for encouraging these loans. The US government not only guarantees the liabilities for the primary lending institutions to the senior citizens—thus assuming the longevity and property price fluctuation risks—but has also enabled a secondary reverse mortgage market, whereby the primary lenders can securitize the reverse mortgage loans once they are originated.

Considering the population of India, even a small proportion of house owning senior citizens are expected to be a potentially huge niche market for the product. Further, this would open an avenue for the cash poor but asset rich senior citizens to monetize their equity in residential property to meet their increased living expenses. On the whole, there is a good potential for reverse mortgage loans in India.