Synopsis

Project Report On Reverse Mortgage -- Indian scenario

Under Guidance of Prof. Ravinder Bhatia Asia-Pacific Institute of Management New Delhi

Submited By: Ritwik Mahapatra Roll no: 2K10A45

Introduction:

My project is on reverse mortgage. A reverse mortgage is a loan available to senior citizens, and is used to release the home equity in the property as one lump sum or multiple payments. The homeowners obligation to repay the loan is deferred until the owner dies, the home is sold, or the owner leaves the property. Reverse mortgage encompasses a range of non-recourse mortgage loans which help a borrower get liquid funds against his home equity, without having to move out or having to make any repayments, till he dies or sells the house or moves out. Since bulk of the savings at retirement is typically locked in home equity, it is a powerful device to increase the incomes of the elderly. In a typical mortgage the homeowner makes a monthly amortized payment to the lender; after each payment the equity increases within his or her property, and typically after the end of the term the mortgage is paid in full and the property is released from the lender. In a reverse mortgage, the home owner makes no payments and all interest is added to the lien on the property. If the owner receives monthly payments, then the debt on the property increases each month. Literature review: Seniors: Tax plan not much help In addition, an administrative charge of 2 percent of the amount of taxes deferred is included to cover expenses of county auditors and treasurers working on the deferrals. http://www.rtgconsultants.com/reverse-articles/cincinnati-tax-plan.html Seniors consider reverse mortgage Rate at which 65-year-old borrowing on a home appraised at $145,000 could get a loan of $73,000, Stone said. A 73-year-old on the same home could get $84,200. Several attendees wanted to know if a reverse mortgage would affect benefits such as Social Security, Medicare or veteran's benefits, or whether borrowers get hit with the capital gains tax. http://www.rtgconsultants.com/reverse-articles/consider-reverse-mortgage.html The Evolving Reverse Mortgage Less than 1 percent of seniors 65 or older now have reverse mortgages, but 5 percent should by 2010, Mahoney predicts. http://www.rtgconsultants.com/reverse-articles/revolving-reverse-mortgage.html Objective: To study the market, regulations, impact and guidelines of RBI for Reverse Mortgage. Concept: A borrower starts with a very high equity in his house. The lender extends a non-recourse loan secured by the house property. The borrower may choose to receive the proceeds through A lump sum at the beginning Monthly payments till a fixed term or a lifelong annuity Establishing a credit-line with or without accrual of interest on credit balance A combination of the above The borrower need not move out of the house or make any payment to the lender, as long he is alive and continue to live in the house or does not sell it. Therefore the loan and interest accumulates till maturity. There is no credit or income requirement to be satisfied. Even if the accumulated loan and interest goes above the realizable value of the house at disposal, the repayment is capped at that value only. Hence reverse mortgage is a case of raising debt, falling equity.

The Indian scenario: India is a young country. The average age of its citizens is about 26. Moreover, according to the 2001 census, the number of senior citizens (60 and above) in the country was 7.9 crore 7.5 per cent of the population and the number is slated to grow substantially in the coming years with better quality of life and better medical services at least in the urban areas. A study by the National Commission on Population projects that senior citizens will comprise 8.3 per cent of the population by 2011, 9.3 per cent by 2016, 10.7 per cent by 2021 and 12.40 per cent by 2026. The total population of India is expected to grow at 1.6 per cent annually. The proportion of the working-age population will rise for a long time and remain at a high plateau for a longer time. Therefore, Indias economy would continue to grow at over 6.5 per cent at least until 2040. The demand for housing, as a result, will remain high. The capital value of seasoned housing stock will rise at least as fast as incomes. Insurance companies would not have to dread any decline in home values for the next 35 years. This also means that those who are 60 now will enjoy rising incomes or very certain incomes until they are 95. Homeowner in reverse mortgages will be protected against inflation. When capital value adjusts to inflation, incomes too can be adjusted upwards. Goods and services will remain affordable to retirees. Guidelines The National Housing Bank (NHB): A subsidiary of the Reserve Bank of India (RBI), is preparing the guidelines on reverse mortgage. Although the finer aspects of reverse mortgage have still not been finalized, some things have been made public Loans will be given only to those who have a clear title on their property. This rule applies to both stand-alone houses as well as flats. In case of inherited property, all claimants to it will need to give their consent in writing. Sridhar says that if the property is inherited, the lender (banks or HFCs) will be guided by legal advice on the borrowers clear rights or title. Another requirement is that prospective borrowers will be able to pledge their house only if they are using it as their permanent primary residence. Sridhar says it may not be possible to provide reverse mortgage for houses on power of attorney. As per the present rule, the lender will take possession of the house, sell it and adjust its dues if the borrower dies. It doesnt specify what course would be taken if the children of such borrowers neither have the financial means to reclaim the house nor are willing to vacate it. To take into account any change in the value of the property during the tenure of the loan, there will be a provision for its revaluation at least once in five years. The rules, however, might need a few modifications to ensure smooth operation of the scheme. One clause that is drawing a lot of criticism is the one that fixes the maximum loan tenure at 15 years. Basic guidelines for reverse mortgage: 1.When applying for a reverse mortgage, all owners must apply and sign the papers. The applicants must be at least 62 years old, own the home, and must generally live in the dwelling. One note though, mobile homes are usually not eligible for reverse mortgages. 2. A borrower must seek counseling from a HUD approved counseling agency prior to applying for a reverse mortgage. This counseling is mandatory. During this meeting, the process is explained and a determination of eligibility is made. 3. A borrower can request regular monthly payments, a credit line, or a lump sum distribution of cash. A combination of these payment plans can also be requested.

4. Typically, a reverse mortgage loan requires no repayment for as long as you live in your home. If the home is sold, the borrower moves, or the last living borrower dies, the loan must be repaid. Usually the home is sold to repay the mortgage. 5. Since you still own your home, you are responsible for repairs, taxes, and insurance. A default on any of these could cause your loan to become payable in full. 6. There are certain costs involved in a reverse mortgage. The lowest cost mortgages are through the state and local governments and the highest through private lenders. Some costs include application fees, closing costs, insurance, appraisal fees, credit report fees, and possibly a monthly service fee. 7. A reverse mortgage could affect eligibility for federal or state assistance. There could also be an impact on an estate when the owner dies. The home is usually sold to repay the loan or the heirs can choose to repay. If the home is sold and the selling price exceeds the amount of the balance owed, the excess goes to the heirs. 8. Money received from a reverse mortgage is tax-free and does not affect social security or Medicare benefits. It could affect Medicaid or other state assistance programs. Many senior adults are finding it hard to live on their fixed retirement incomes and are looking for ways to supplement those incomes. For some, the largest asset they own is their home, but they do not want to sell their home and move. For these individuals, there is an option called Home Equity Conversion (HEC). Research methodology: Research by secondary data available on National Housing Bank (NHB) and other banks Limitations: Time Constraint Availability of data in secondary source Conclusion: References: