Reverse mortgage (RM), an obvious product for India’s aging and senior citizen population, which is often asset-rich and cash poor, needs to be made more viable by improving product design and structure. This includes following international practices, where the government bears part of the risk (easily covered through an insurance product), as a social security initiative and also puts in place a strong regulatory mechanism including protection to borrowers from unscrupulous lenders.
These are some of the key findings of a "Report on Reverse Mortgage", by Moneylife Foundation, which was released by Hardeep Singh Puri, Union minister of state for housing and urban affairs (independent charge) on Saturday. The study was released at a function to mark Moneylife Foundation's 9th Anniversary at the Bombay Stock Exchange (BSE) Convention Centre.
"Due to poor financial literacy and extremely high property prices in India (relative to the income levels), millions of savers are likely to retire with a large chunk of their savings locked up in the apartments that they live in. They may not be poor in terms of net worth, but would not have the cash required to meet the rising cost of retirement living. In other words, they would be asset rich but cash poor. This is where reverse mortgage is useful," the study says.
The research was supported by Housing Development Finance Corp (HDFC). Two bankers, Shrinivas Marathe and Pradeep Bhave, did the research for the Report.
A reverse mortgage is a type of home loan for older homeowners that requires no monthly mortgage payments but gives them a monthly payment instead.
The Report includes the demand and supply scenario, analysis of the currently available reverse mortgage products, analysis of the present regulatory framework, misconceptions about the scheme and incentives required to make reverse mortgage a popular product for both customers and banks, and how reverse mortgage schemes can be made affordable and popular among borrowers and lenders.
Here are the findings of the Report...
- It is difficult to evaluate the reliability and effectiveness of all the schemes by various lenders as these have been in existence only for the past 10 years or so.
- None of the loans under the schemes have come to a stage of ensuing security as yet.
- Also, the response and behaviour of the legal heirs is not tested to get an idea of the extent to which repayment in this manner would be acceptable to them.
- In most cases, however, where the loan-to-value (LTV) is less than 100%, it can be safely assumed that the heirs would be more than glad to settle the loan if they are financially sound.
- Whereas the risk to the lenders of the loan amounts exceeding the value of security (LTV in excess of 100%) reduces with a drop in interest rates, the borrowers benefit with higher annuity payments.
- Whether it is China, UK or India, the psychology of the seniors remains the same: 'leaving legacy to the next generation'. This thinking is preventing this section of the society, susceptible to financial woes, from exploring the power of their hard-earned asset, their HOME, from supplementing their income in case of need.
The Report suggested some new designs of reverse mortgage product suitable for Indian conditions. It says, "The negative emotional response of borrowers to reverse mortgage is not India centric. Anywhere in the world, where reverse mortgage has not gathered momentum, this phenomenon is held responsible for its failure of the scheme. The supply side i.e. the lenders also need to shed their overcautious approach and shift their strategies to make reverse mortgage work."
According to the Report, a little more acceptability of the reverse mortgage loan scheme can be brought about with implementation some suggested schemes like discounted monthly payments rising yearly or with other suitable periodicity, providing a line of credit to borrowers, reduced payout to the surviving borrowers, share in future gains, providing reverse mortgage in tranches, periodical review of payouts with property valuation, insurance for property value, interest subvention by the government, funding by the government for payouts or part of the loan and raising the eligibility criteria for age of the borrower.
"The government actually should be actively involved in reverse mortgage product and needs to do a lot in this regard from the social security angle for senior citizens. However, unfortunately, except for a couple of amendments in the Income-tax law, the government seriously lacks on legislative front," the Report concludes.