Reverse Mortgage

GATE Assignment For August and September

“Reverse Mortgage” In Housing Finance

Submitted by Nirajbhan K Mahajan

Gate Assignment “Reverse Mortgage” Page 1

Nirajbhan K Mahajan

Table of Contents Reverse Mortgage Introduction: .........................................................................................3 Need of Reverse mortgage: ................................................................................................4 Reverse mortgage workability: ...........................................................................................5 Benefits of lender: ..................................................................................................................6 Risk factors: ............................................................................................................................7 The Pros ..................................................................................................................................7 The Cons .................................................................................................................................8 A SWOT analysis on reverse mortgage loans ................................................................9 Types of reverse mortgage: ............................................................................................. 12 Reverse Mortgage in America & Australia: ................................................................... 12 Taxation: ............................................................................................................................... 13 Reverse Mortgage Loan (RML): Operational Guidelines by NHB........................... 14 1. Reverse Mortgage Loans (RMLs) .......................................................................... 14 2. Eligible Borrowers: ..................................................................................................... 15 3. Determination of Eligible Amount of Loan:........................................................... 15 4. Nature of Payment:.................................................................................................... 16 5. Eligible End use of funds .......................................................................................... 18 6. Period of Loan: Maximum 15 years....................................................................... 18 7. Interest Rate: .............................................................................................................. 18 8. Security: ....................................................................................................................... 19 9. Valuation of Residential Property: .......................................................................... 19 10. Provision for Right to Rescission: ........................................................................ 19 11. Loan Disbursement by Lender to Borrower: ..................................................... 21 12. Closing: ...................................................................................................................... 21 13. Settlement of Loan .................................................................................................. 22 14. Prepayment of Loan by Borrower(s) ................................................................... 23 15. Loan Covenants:...................................................................................................... 23 16. Title Indemnity/Insurance....................................................................................... 25 17. Foreclosure: .............................................................................................................. 25 18. Option for PLI to Adjust Payments: ..................................................................... 26 19. Counseling and Information to Borrowers: ........................................................ 26 Conclusion:........................................................................................................................... 28

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Nirajbhan K Mahajan

Reverse Mortgage Introduction: The Union Budget 2007-2008 has introduced a novel product for senior citizens called as 'Reverse Mortgage' and has asked the National Housing Bank (NHB) to draft Guidelines. The Guidelines have now been framed and issued by NHB and many banks / financial institutions are slated to introduce the 'Reverse Mortgage Scheme' in the coming months. The Budget Speech Para, 89 says:

"The National Housing Bank (NHB) will shortly introduce a novel product for senior citizens: a 'reverse mortgage' under which a senior citizen who is the owner of a house can avail of a monthly stream of income against the mortgage of his/her house, while remaining the owner and occupying the house throughout his/her lifetime, without repayment or servicing of the loan."

Relatively a new concept for the Indian financial services industry, introduction of this scheme is expected to give scope for financial innovation and an opportunity to bank upon the Senior Citizens by making their physical asset i.e. property, a hen laying golden eggs.

Reverse mortgage can be defined as "an agreement by which a home owner borrows against the equity in his home and receives regular tax free payments from the lender.'' Here equity is the value of the property over and above any mortgage or other liabilities relating to it. Thus reverse mortgage is a contract between a homeowner and a financier, which enables the homeowner to receive a stream of income, especially in retirement, from the future realizable value of the home. It is also known as lifetime mortgage in UK.

The market for reverse mortgage could be around Rs. 5,000 crores in India at present. In case of a mortgage loan the borrower gets a lump sum amount and earns by investing the same in business etc. and repays the same in monthly installments or as per the agreed terms. In reverse mortgage the borrower Gate Assignment “Reverse Mortgage” Page 3

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receives the money in monthly installments and the dues are recovered from the sale proceeds of the property after the death of last surviving spouse. The heirs who are interested in retaining the property can also repay it. Reverse mortgages are aptly so called because instead of paying the monthly loan installments, the borrower actually receives money from the lender in monthly installments.

Need of Reverse mortgage: All over the world, one of the chief concerns of the elderly is that they will outlive their savings. Seniors in India are no exception. A lack of sufficient income can affect their retired life substantially, unless their children take on the responsibility of supporting them, fully or partly. Although old values still prevail in India and children do support the parents in many instances, this is fast changing in a system where nuclear families are becoming the order of the day. Improved health care and better nutrition have been primarily responsible for increased life expectancy. Today, those who cross the age of 60 are expected to live till 75 and will increase to around 20 by 2020.

According to the 1991 census reports, India has an estimated 314 million workers, of which a mere 11 % are covered by the formal pension system. For the majority, personal savings are their only source of retirement income. Though the Indian population is still comparatively ‘young’, India is also ‘ageing’. Some demographic projections for India indicate that 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. In Tamil Nadu and Kerala >60 yrs old will reach about 15% of the total population of their states by 2020 itself against 2046 for India.

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Most retirees, especially from the middle class in India are unlikely to have big savings, they are often called "asset-rich, but income-poor" at retirement, meaning that they are by no means penniless, but that their wealth is tied up in their homes and they do not have enough liquidity to meet their daily needs.

Reverse mortgage is a way to borrow against one's house to create a regular stream of income while continuing to live in that house.

Reverse mortgage workability: The amount available is based on several factors, such as the applicant's age, appraised value of the house, and projected rate of house price appreciation and the current interest rates. In addition, there are other costs involved, which can go up to 5 % of the value of the house.Generally speaking, the higher the age of the retiree, the higher the value of the house, and the more the money available. Studies in different countries have indicated that based on benchmark scenarios, reverse mortgages are likely to achieve about 50 % income replacement ratios. Let us consider a hypothetical example of a retired couple living in their own flat (valued at Rs 10 lakh) but not receiving any pension income. Further, let us assume that their requirement towards living expenses is, on an average, Rs 6,000/- a month (No expenditure towards rent since they are living in their own house). A 9 % return on investment available under various Senior Citizens Saving Scheme means they should have another investment of app. Rs 6.70 lakh to achieve this monthly return of Rs. 6,000/-. Considering that they do not have any other investment and a host of other important factors, such as inflation and capital expenditures, the investment requirements would only go much higher where as they have no money. So to survive, either they would be dependent on their children (instances of ill treating the aged parents are on rise) or they sell the property and invest the amount in 9% investment to earn Rs. 7500/- per month (Rs 10 lakhs would fetch Rs 90000/-annually @ 9% interest). Under reverse mortgage if they are eligible for a loan of Rs 8 lakh (80 % of Gate Assignment “Reverse Mortgage” Page 5

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market value) this would yield Rs. 4,900/- per month for a ten year term starting from age 61. This monthly installment is calculated by considering the total liability of Rs 8 lakhs for 10-year term at 10% interest there upon. The bank/financial institution can sell the house, take what is owed and pay the excess, if any, to the heirs. In the rare case when the value of the property does drop below the amount owed on the reverse mortgage, the lender must absorb the loss. The heirs have the option to pay off the bank directly and keep the house

themselves.

Under

another method

of

calculating

the

monthly

installments, the future value of the property is taken into consideration and interest up to the loan term is then worked out. The borrower gets the difference amount in equal monthly installments thus the monthly installment amount becomes more. In the above example the property worth Rs 10 lakhs will fetch Rs 2400/- every month for 15 years under the first method whereas it would be Rs 5752/- under the second method. Here the amount to be repaid would be approximately Rs 17.38 lakh — Rs 10.35 lakh towards principal and Rs 7.03 lakh towards interest thereon (at 9 %) after 15 years. If the borrower survives beyond 15 years then the property can be revalued and amount available after adjusting the outstanding liabilities can be considered for further lending. The borrower may even avail the option to sell the property and reinvest the balance amount available. Considering the appreciation in real estate in the past, it would not be unrealistic to presume that property values will go up to six times in 15 years, even in nonmetropolitan locations. If this trend continues, it is very likely that even after repaying the mortgage amount there would still be a hefty sum left for them or their heirs.

Benefits of lender: It would be a profitable proposition for the lenders since they would be able to get their expected return on capital invested. No NPA on account of default since repayment will be made only after the term (generally 15 years) or the death of the couple. Provisioning and capital adequacy norms are yet to be defined by Gate Assignment “Reverse Mortgage” Page 6

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RBI for this product. For the lender, it is definitely more profitable to offer mortgages to older people due to reduced life expectancy.

Risk factors: Life expectancy/ mortality risks - Age of the borrower and any co-applicant. The lender has to pay annuity for longer period if borrower or spouse lives longer. This risk is mitigated by fixing a term, generally 15 years. Interest rate risk - The current interest rate and interest rate volatility. This risk is more to the lender when rate of interest moves upwards. It is managed by entering into a floating interest rate contract. Real estate market risk - The current value of the property and expected property appreciation rate. The lender will be at risk if the property value declines. The lenders arrive at the loan amount based upon the present market value of the property. It is rarely heard of decline in real estate value.

The Pros  Reverse mortgage can supplement retirement income. Particularly when there is a shortage of monthly income, this equity reduction may be preferable to a reduction in the standard of living.  With the burgeoning real estate market in India, there is every possibility of the value of the house appreciating more rapidly than the mortgage loan increasing. In such a scenario, there could be better equity left over for heirs.  There is no upper age limit for getting the benefit of the reverse mortgage facility. On the contrary, the older one is, the easier it would be to get the loan.

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 From the retirees' angle, this is a good option. Particularly if they are comfortable during the initial years of retirement and may wish to opt for this in their latter years when their savings have dwindled or are inadequate to cater to their needs on account of increased cost of living due to inflation.

 It is a non-recourse loan where lender does not have legal recourse to anything other than the value of the home when the loan is to be paid off.

The Cons  Reverse mortgage is still treated as an unconventional retirement tool. Even in countries like US where it has been around for quite a while, acceptance has been very cautious.  Pricing the product is extremely complex as it involves a number of uncertainties, such as future value of houses, life expectancy, and interest rate risks.  Closure and servicing costs – From the angle of the borrower, the upfront cost, servicing cost and the closure costs are very high. Hence it is recommended that they should go for this product only if they want annuity for 15 years or so.  On the borrower's side, the biggest challenge would be balancing the need for supplementing retirement income and the desire and wish to bequeath homes to children.  For many seniors who have worked a lifetime to pay off a housing loan, to go back into debt would be difficult irrespective of the merits of the scheme.

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A SWOT analysis on reverse mortgage loans The draft operational guidelines circulated by National Housing Bank (NHB), lays down the various aspects of reverse mortgage loans for senior citizens. 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.

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

Borrower/heir can get mortgage released by paying loan with interest without having to sell property at any time. Prepayment of loan is allowed.



NHB to guarantee obligation of banks/housing finance companies to pay the committed loan amount as regular sums over a period of time.



Reassessment of property value will be done periodically or at least once every 5 years.



Borrower

can

cancel

the

mortgage

within

three

days

of

approval/disbursement, subject to return of loan amount.

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.



Three days period to cancel loan is too less. Should be at least 15 days to go through the fine print.



Various fees to be added to borrower’s liability, which can be quite substantial.

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Opportunities



Partial substitute for a social security scheme for senior citizens.



Longevity increasing with nuclear families. However, 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.



Quantum of loan can increase favorably for borrower on revaluation of property.

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.

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

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. Can lead to further harassment.



This product seems very good in theory and can be of great help to senior citizens who can live in their own houses and yet avail of a loan against it. However, the norms need to be fine-tuned and made watertight so that these borrowers are not harassed or short-changed in their old age.

Types of reverse mortgage: 

There are three types of reverse mortgages - federally insured, lender insured and uninsured.



Three distinct reverse mortgage products are - Home Equity Conversion Mortgage (HECM), Fannie Mae Home Keeper® reverse mortgage, and Cash Account. These products differ by type of residential property for which a reverse mortgage can be taken, payment types, loan amount, processing fees, and interest on the loan balance.

Reverse Mortgage in America & Australia: 'Reverse Mortgage' scheme has been in existence in the Western countries and particularly famous & quite successful in United States of America. It can be gain said that, this concept has been taken from America and is being customized to suit Indian needs. In US, National Reverse Mortgage Lenders Association (NRMLA) was established in 1997. NRMLA is the national voice for lenders and investors engaged in the reverse mortgage business. NRMLA fulfills several roles, which include educating consumers about the opportunity to utilize reverse mortgages, training lenders to be sensitive to the needs of older Americans, Gate Assignment “Reverse Mortgage” Page 12 Mahajan

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developing Best Practices and enforcing a Code of Conduct to make sure lenders participating in the program treat seniors respectfully, and promoting reverse mortgages in the media. However, since there are already established 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.

In Australia, reverse mortgages were tried in the 1990s but the concept was withdrawn due to a lack of consumer demand. But now the reverse mortgage market in Australia is more than $1.1 billion at 30 June 2006.

Taxation: The Central Board of Direct Taxes (CBDT) is yet to clarify whether the payments received by the mortgagee (senior citizen) should be treated as 'income' of 'loan'. In many countries, the payment received is considered as a 'loan' and not as 'income' from the tax angle. It would be beneficial if the 'payments' could be treated as 'Income' and made tax-exempt under Section 10 of Income Tax Act, 1961, considering the very narrow scope of earning returns from investments for senior citizens.

Further, there still remains an ambiguity and anomaly regarding the 'age' at which a person is to be treated as a 'Senior Citizen'. The Income Tax Act considers a Senior Citizen as a person of and above the age of 65 years, however this scheme says that, citizens over the age of 60 years are eligible. This aspect needs to be fixed and uniformity is much needed at an earliest.

Dewan Housing Finance Limited (DHFL) was the first to launch the 'Saksham Scheme' on reverse mortgage in September 2006.

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Reverse Mortgage Loan (RML): Operational Guidelines by NHB Introduction Senior Citizens are an increasing component of the Indian society and dependency in old age is increasing in the country. While on the one hand, there is significant increase in longevity and low mortality, on the other hand cost of good health care facilities is spiraling and there is little social security. Senior Citizens need a regular cash flow stream for supplementing pension/other income and addressing their financial needs. Secular increase in residential house prices has created considerable “home equity “wealth. For most Senior Citizens, the house is the largest component of their wealth.

Conceptually, 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 a lender, who then makes periodic payments to the borrower(s) during the latter's lifetime. The Senior Citizen borrower is not required to service the loan during his lifetime and therefore does not make monthly repayments of principal and interest to the lender. 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 or prepay the loan with accumulated interest and have the mortgage released without resorting to sale of the property. Reverse mortgages are one product within the “Equity Release” category.

1. Reverse Mortgage Loans (RMLs) are to be extended by Primary Lending Institutions (PLIs) viz. Scheduled Banks and Housing Finance Companies (HFCs) registered with NHB. The PLIs reserve their discretion to offer Reverse Mortgage Loans. Prospective borrowers are advised to consult PLIs regarding the detailed terms of RML as may be applicable to them. Gate Assignment “Reverse Mortgage” Page 14 Mahajan

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2. Eligible Borrowers: 

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



Married couples will be eligible as joint borrowers for financial assistance. In such a case, the age criteria for the couple would be at the discretion of the PLI, subject to at least one of them being above 60 years of age. PLIs may put in place suitable safeguards keeping into view the inherent longevity risk.



Should be the owner of a self- acquired, self occupied residential property (house or flat) located in India , with clear title indicating the prospective borrower's ownership of the property.



The residential property should be free from any encumbrances.



The residual life of the property should be at least 20 years.



The prospective borrowers should use that residential property as permanent primary residence. For the purpose of determining that the residential property is the permanent primary residence of the borrower, the PLIs may rely on documentary evidence, other sources supplemented by physical inspections.

3. Determination of Eligible Amount of Loan:



The amount of loan will depend on market value of residential property, as assessed by the PLI, age of borrower(s), and prevalent interest rate.



The table given hereunder may serve as an indicative guide for determining loan eligibility: Age

Loan as proportion of Assessed Value of Property

60 – 65

40%

66 – 70

50%

71 – 75

55%

Above 75

60%

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

The above table is indicative and the PLIs will have the discretion to determine the eligible quantum of loan reckoning the ‘no negative equity guarantee' being provided by the PLI. The methodology adopted for determining the quantum of loan including the detailed tables of calculations, the rate of interest and assumptions (if any), shall be clearly disclosed to the borrower. The PLI may consider ensuring that the equity of the borrower in the residential property (Equity to Value Ratio - EVR) does not at any time during the tenor of the loan fall below 10%.



The PLIs will need to re-value the property mortgaged to them at intervals that may be fixed by the PLI depending upon the location of the property, its physical state etc. Such revaluation may be done at least once every five years, the quantum of loan may undergo revisions based on such revaluation of property at the discretion of the lender.

4. Nature of Payment:

Any or a combination of the following:



Periodic payments (monthly, quarterly, half-yearly, annual) to be decided mutually between the PLI and the borrower upfront



Lump-sum payments in one or more tranches



Committed Line of Credit, with an availability period agreed upon mutually, to be drawn down by the borrower

Lump-sum payments may be made conditional and limited to special requirements such as medical exigencies, home improvement, maintenance, upgradation, renovation, extension of residential property etc. The PLIs may be selective in considering lump-sum payments option and may frame their internal policy guidelines, particularly the eligibility and end-use criteria. However, these conditions shall be fully disclosed to potential borrowers upfront. Gate Assignment “Reverse Mortgage” Page 16 Mahajan

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It is important that nature of payments be decided in advance as part of the RML covenants. PLI at their discretion may consider providing for options to the borrower to change. 5. Eligible End use of funds

The loan amount can be used for the following purposes:



Up gradation, renovation and extension of residential property.



For uses associated with home improvement, maintenance/insurance of residential property



Medical, emergency expenditure for maintenance of family



For supplementing pension/other income



Repayment of an existing loan taken for the residential property to be mortgaged



Meeting any other genuine need

Use of RML for speculative, trading and business purposes shall not be permitted

6. Period of Loan: Maximum 15 years.

7. Interest Rate:

The interest rate (including the periodic rest) to be charged on the RML to be extended to the borrower(s) may be fixed by PLI in the usual manner based on risk perception, the loan pricing policy etc. and specified to the prospective borrowers. Fixed and floating rate of interest may be offered by the PLIs subject to disclosure of the terms and conditions in a transparent manner, upfront to the borrower.

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8. Security:



The RML shall be secured by way of mortgage of residential property, in a suitable form, in favour of PLI.



Commercial property will not be eligible for RML.

9. Valuation of Residential Property:



The residential property should comply with the local residential land-use and building bye laws stipulated by local authorities, with duly approved lay-out and building plans.



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



The valuation of the residential property is required to be done at such frequency and intervals as decided by the PLI, which in any case shall be at least once every five years. The methodology of the revaluation process and the frequency/schedule of such revaluations shall be clearly specified to the borrowers upfront.



PLIs are advised not to reckon expected future increase in property value in determining the amount of RML. Should the PLIs do so in their best commercial judgement, they may do so under a well defined Policy approved by their Board and based on professional advice regarding property prices.

10. Provision for Right to Rescission:

As a customer-friendly gesture and in keeping with international best practices, after the documents have been executed and loan transaction finalized, Senior Citizen borrowers may be given up to three business days to cancel the transaction, the “right of rescission,”. If the loan amount has been disbursed, the Gate Assignment “Reverse Mortgage” Page 19 Mahajan

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entire loan amount will need to be repaid by the Senior Citizen borrower within this three day period. However, interest for the period may be waived at the discretion of the PLI.

11. Loan Disbursement by Lender to Borrower:



The PLI will pay all loan proceeds directly to the borrower, except in cases pertaining to retirement of existing debt, payments to contractor(s) for the repairs of borrower's property, or payment of property taxes or hazard insurance premiums from the borrower's account set aside for the purpose.



In case the residential property is already mortgaged to any other institution, the PLI may, at its discretion, consider permitting use of part proceeds of RML to prepay/repay the existing housing loan. The loan amount will be paid directly to that institution to the extent of the loan outstanding with that institution with a view to release the mortgage.



Periodicity: The loan will be extended as regular monthly, quarterly, halfyearly or annual periodic cash advances or as a line of credit to be drawn down in time of need or in lump sum.



The PLI will have the discretion to decide the mode of payment of the loan including fixation of loan tenor, depending on the state and market value of the property, age of the borrower and other factors. The rationale behind the decision of mode of payment and fixation of the loan tenor shall be clearly disclosed to the borrowers.

12. Closing:

The PLIs will provide in writing, a fair and complete package of reverse mortgage loan material and specimen documents, covering inter-alia, the benefits and obligations of the product. They may also consider making available a tool kit to

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illustrate the potential effect of future house values, interest rates and the capitalization of interest on the loan.

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



Origination, Appraisal and Inspection Fees. The borrower may be charged pro-rata origination, appraisal and inspection fees by the PLI /appraiser.



Verification Charges of external firms



Title Examination Fees



Legal Charges/ Fees



Stamp Duty and Registration Charges



Property Survey and Valuation charges

A detailed schedule of all such costs will clearly be specified and provided to the prospective borrowers upfront by the PLIs.

13. Settlement of Loan



The loan shall become due and payable only when the last surviving borrower dies or would like to sell the home, or permanently moves out of the home for aged care to an institution or 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. PLIs 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.

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

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 amount of time, say up to 2 months may be provided when RML repayment is triggered, for house to be sold.



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

14. Prepayment of Loan by Borrower(s)



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.

15. Loan Covenants:



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.



Non-Recourse Guarantee: The PLIs shall ensure that all reverse mortgage loan products 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.



Loan Agreement : The PLIs shall enter into a detailed loan agreement setting out therein the salient features of the loan mortgage security and other terms and conditions, including disbursement and repayment of the loan, in addition to the usual provisions, which are ordinarily incorporated in a mortgage loan document.

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

The loan agreement may also include a provision that the borrower shall not make any testamentary disposition of the property to be mortgaged and even if it does so, it would be subject to the mortgage created in favour of the lending institution. In such a case, the borrower shall make a testamentary disposition of the mortgaged property in favour of any of his/her relatives, subject to the discharge of the mortgage debt by such legatee and a statement that the heirs shall not be entitled to challenge the validity of the mortgage as also the right of the mortgagee to enforce the mortgage in the event of death of the borrower unless the legal representative is willing to undertake the responsibility for discharging in full the amount of loan and accrued interest thereof.



In addition, the PLI may also consider obtaining a Registered Will from the borrower stating, inter-alia, that he/she has availed of RML from the PLI on security by way of mortgage of the residential property in favour of the PLI, meaning thereby that in the event of death of the borrower (and coborrower, if any), the mortgagee is entitled to enforce the mortgage and recover the loan from the sale proceeds on enforcement of security of the mortgage. The surplus, if any, has to be returned to the heirs of the deceased borrower(s).



The PLIs may consider taking an undertaking from the prospective borrower that the “Registered Will” given to the PLI is the last “Will”, prepared by him/her at the time of availment of RML facility as per which the property will vest in his/her spouse name after his/her demise. The borrower will also undertake not to make any other ‘Will' during the currency of the loan which shall have any adverse impact on the rights created by the borrower in the PLI's favour by way of creation of mortgage on the immoveable property mentioned under the loan documentation for covering loan to be allowed to his/her spouse and interest thereon, even after the borrower's death.



The PLI will ensure that the borrower(s) has insured the property against fire, earthquake, and other calamities.

Gate Assignment “Reverse Mortgage” Page 24 Mahajan

Nirajbhan K



The PLI will ensure that borrower(s) pay all taxes, electricity charges, water charges and statutory payments.



The PLIs will ensure that borrower(s) are maintaining the residential property in good and saleable condition.

* The PLI may reserve the option to pay for insurance premium, taxes or repairs by reducing the homeowner loan advances and using the difference to meet the obligations/expenditures. * The PLI reserves the right to inspect the residential property/premises or arrange

to

have

the

residential

property/premises

inspected

by

its

representatives any time before the loan is repaid and borrower(s) shall render his/her/their cooperation in respect of such inspections.

16. Title Indemnity/Insurance



The PLI shall obtain legal opinion for ensuring clarity on the title of the residential property.



The PLI shall also endeavour to obtain indemnity on title related risks, as and when such indemnity products are available in India .

17. Foreclosure:



The loan shall be liable for foreclosure due to occurrence of the following events of default.



If the borrower has not stayed in the property for a continuous period of one year



If the borrower(s) fail(s) to pay property taxes or maintain and repair the residential property or fail(s) to keep the home insured, the PLI reserves the right to insist on repayment of loan by bringing the residential property to sale and utilizing the sale proceeds to meet the outstanding balance of principal and interest.



If borrower(s) declare himself/herself/themselves bankrupt.

Gate Assignment “Reverse Mortgage” Page 25 Mahajan

Nirajbhan K



If the residential property so mortgaged to the PLI is donated or abandoned by the borrower(s).



If the borrower(s) effect changes in the residential property that affect the security of the loan for the lender. For example: renting out part or all of the house; adding a new owner to the house's title; changing the house's zoning classification; or creating further encumbrance on the property either by way taking out new debt against the residential property or alienating the interest by way of a gift or will.



Due to perpetration of fraud or misrepresentation by the borrower(s).



If the government under statutory provisions, seeks to acquiring the residential property for public use.



If the government condemns the residential property (for example, for health or safety reasons).

18. Option for PLI to Adjust Payments:



The PLI shall have the option to revise the periodic/lump-sum amount at such frequency or intervals based on revaluation of property, which in any case shall be at least once every five years.



Borrower shall be provided with an option to accept such revised terms and conditions for furtherance of the loan.



If the Borrower does not accept the revised terms, no further payments will be effected by the Lender. Interest at the rate agreed before the review will continue to accrue on the outstanding amount of the loan. The accumulated principal and interest shall become due and payable as mentioned in clauses (13) and (17).

19. Counseling and Information to Borrowers:



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

Gate Assignment “Reverse Mortgage” Page 26 Mahajan

Nirajbhan K



The PLIs shall clearly and accurately disclose the terms of the RML without any ambiguity.



The PLIs should clearly explain to the prospective borrowers the terms and conditions of RML, the methodology followed for valuation of the residential property, the method of determination of eligible quantum of loan, the frequency of re-valuation and review of terms and all related aspects of the RML.



The PLIs may suggest to the Senior Citizens to nominate their ‘personal representatives' usually a close relative who the PLI can contact in the event of any potentialities.



The PLIs may counsel the prospective borrowers about the possible impacts to the borrowers due to adverse movements in interest rates and property price fluctuations.



The PLIs shall clearly specify all the costs to the Borrower(s) that are associated with the transaction.



The PLIs shall in no way assert or imply to the borrower(s) that the borrower(s) is/are obligated to purchase any other product or service offered by the PLI or any other associated institution in order to obtain a reverse mortgage loan.



Take reasonable steps to check out the background and procedures of third parties before accepting referrals of business from them, and refuse to accept referrals from those that are found unacceptable. Members shall disclose to clients any third party with a financial interest in the reverse mortgage transaction.



Overall, the PLIs shall treat the Senior Citizen borrower fairly.

Gate Assignment “Reverse Mortgage” Page 27 Mahajan

Nirajbhan K

Conclusion: With the changing social milieu in India and the collapse of the joint family system, introduction of reverse mortgage products could be a worthwhile experiment. Instead of being dependent on their children for monetary support, this would be a good option for the elderly to continue with a graceful lifestyle. Banks and housing finance companies have already started launching this product and in the near future, they would come out with the reverse mortgage products based on American experience with features like, fixed or floating interest, shared appreciation, interest earning credit-line and mortgage insurance.

Gate Assignment “Reverse Mortgage” Page 28 Mahajan

Nirajbhan K