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Should we promote Reverse Mortgage in India?
Thursday, December 27, 2012
 
Reverse Mortgage as a concept is well known to mortgage professionals in Indian retail financial services market. The product has been in existence in some of the western markets for more than three decades. In India, the product was introduced in financial budget presented in 2007-08 by then Finance Minister Shri. P. Chidambaram with a vision to bring smile to the elders of the society.  In a country devoid of any social security, this product is well thought out for Senior Citizens enabling them to release the equity of their self-acquired and owned residential property.

The product “Reverse Mortgage” in simple terms is unlocking the value of a self-owned residential property with a major difference being that the individual availing this product can get lump sum funds or periodic payments or combination of both unlike the need to repay periodic installments when you avail a home loan or home equity loan. Thought behind this product is that a senior citizen can supplement his/her income and continue to stay in the property till his/her death or the death of the spouse. The loan amount availed gets settled by sale of the property by the financial institution and any amount received excess of the outstanding loan amount is given to the legal heirs. The customer can foreclose at any point of time during the loan tenor and release the mortgage.

In this human saga of survival on this earth, this product innovation can help elderly members of the society to live with dignity, respect and honor. The government’s world over are increasingly finding difficult to manage their scarce resources in social security programs. Adding to the pressure of the national budgets of developing & developed economies, the social fabric of the community is also being tested. Now the concept of joint families and supporting parents in their old age is giving way to nuclear families and old age homes. Increasingly, it is seen that elderly parents are living all alone fending for themselves emotionally and financially.

It may be essential to make some of the readers coming to this page of the blog to understand the concept with an example. Let us say, Mrs. & Mr. Kryo wants to purchase a new home or home on resale by availing housing loan from a bank or mortgage finance institution. Based on the property cost, their credit history and norms of the institution they would avail a loan for tenor of say 15-20 years probably at fixed or variable rate. In this scenario they would be paying monthly installment for the next 20 years or till they foreclose the loan. Typically we may also call it as forward mortgage.

If the same couple after foreclosure wishes to avail a loan against the market value of the property, the financial institution would probably extend Home Equity Loan based on the property value and credit history of the customer. The couple would be repaying the loan as per the periodic installment for the tenor availed.

Now, interestingly the same couple at the age of 60+ approaches for a loan with no income source can still avail a reverse mortgage wherein instead of repaying periodic installments, the mortgage finance institution would extend funds as a line of credit or lump sum payment or periodic annuity payment for a fixed tenor or for life time. This sounds good when you look at the life cycle of the property it undergoes in tandem with life cycle of the owner of the property complementing each other as a true companion.

Scenario in Developed Economies:

The product was formally institutionalized around 1960 in USA and it has been reasonably well accepted in UK, Canada and Australia only in the last two decades. In USA, the government’s federal housing administration’s backed project Home Equity Conversion Mortgage (HECM) is popular and the entire product is probably 1% of the total mortgage market.

It has taken almost two decades for this product to get reasonable response. The reasons are not very different in each of the markets. It all starts with consumer education and acceptance. The reasons largely noted are fear of not losing roof over head to emotional attachment to property and desire to leave behind the property for children. From the lending institutions perspective the product has number of risks associated and it needs government support in terms of funding considering the long term nature of the product.

Indian Context

The product has been in existence only for the last five years. In terms of the product life cycle it is still in infancy stage in India.

It is quite appreciable that within five years the National Housing Bank (NHB) has played a pivotal role in shaping the product from various legal and taxation perspective to get it presented in the parliament. The effort of NHB needs accolades as within these five years the basic version of the product was introduced for tenor of 20 years and now it has promoted Reverse Mortgage loan enabled Annuity(RMLeA) in joint association with Star Union Daichi Life Insurance Company and banks i.e, Union Bank & Central Bank. Since 2008, NHB has conducted more than 55 seminars educating and promoting this product across the country amongst the target group and also counseling centers are operational in joint association with Helpage India in multiple locations.

The last count indicated that nearly 25 banks have been promoting this product in India. The Press Trust of India carried news on May 21, 2010 stating that nearly 7000 RMLeA amounting to Rs.1400 Cr were sanctioned by various prime lending institutions in India. The Indian Express newspaper dated Nov 26, 2011 carried an article stating that only handful of 150 customers have availed out of 80 million population of senior citizens in this country. The purpose to quote the above news is only to bring home a point that such products will take its own due course for acceptance and it is good to take small steps in the progress.

For a detailed understanding of the operational guidelines issued by NHB, one can click on the link given here http://nhb.org.in/RML/RML_Index.php

Opportunities & Challenges for Reverse Mortgage in Indian Market

The opportunities for Reverse Mortgage s is bound to grow in coming years with awareness and education by multiple institutions. Let us look at the population distribution and population projection as per Indian Census figures. 

Table -1: PROJECTED POPULATION 2001-2016

                                                      PROJECTED POPULATION                       (,000)

Age

2001

2006

2011

2016

group

Persons

%

Persons

%

Persons

%

Persons

%

0-4

121395

11.8

115239

10.36

114878

9.63

114101

8.99

5-9

123311

11.99

119290

10.73

113486

9.52

113309

8.93

10-14

119876

11.65

122469

11.01

118577

9.94

112880

8.9

15-19

104038

10.11

119056

10.7

121727

10.21

117928

9.29

20-24

91034

8.85

103048

9.27

118038

9.9

120774

9.52

25-29

82941

8.06

89963

8.09

101956

8.55

116887

9.21

30-34

75838

7.37

81858

7.36

88905

7.46

100854

7.95

35-39

67971

6.61

74700

6.72

80759

6.77

87811

6.92

40-44

57518

5.59

66711

6

73464

6.16

79536

6.27

45-49

46911

4.56

56073

5.04

65211

5.47

71954

5.67

50-54

37159

3.61

45169

4.06

54195

4.54

63204

4.98

55-59

29933

2.91

35032

3.15

42837

3.59

51624

4.07

60-64

25691

2.5

27442

2.47

32405

2.72

39886

3.14

65-69

20514

1.99

22506

2.02

24397

2.05

29097

2.29

70-74

15996

1.56

16860

1.52

18943

1.59

20851

1.64

75-79

5308

0.52

12011

1.08

13092

1.1

15025

1.18

80+

3176

0.31

4761

0.43

9633

0.81

13238

1.04

Total

1028610

100

1112188

100

1192503

100

1268959

100

Source: MOSPI - Office of Registrar General of India, Ministry of Home Affairs.

Interesting Fact:

1.  You will observe that India is very young country with more than 45% of its population projected to be below 25 years even in 2016. At the same time the target segment for reverse mortgage i.e, 60+ is gradually growing from 6.567% in 2001 to 8.26% in 2016.

Projected_Growth.jpg

It is an opportunity even from risk perspective for every player including the government to learn and perfect this product as the growing population ages with grace.

2.  For availing reverse mortgage the senior citizen should have primarily self-acquired residential property with no encumbrances. It would not be possible to avail on ancestral property as the ownership has to be passed on to the legal heirs.

Secondly, home ownership has registered steep growth only from early 2000. Please find the status of home ownership and condition of houses shown in the Table –II A & B given below. We have identified only two important factors i.,e houses having concrete roof and households having bank accounts as parameter to filter the customer segment that possibly may avail Reverse Mortgage. It looks like that segment may not be more than 70 - 90 million as of today considering initial acceptance in urban pockets. 

Even addressing 10% of this segment every year would mean a large pie of 7 to 9 million customers to be catered.  If the reverse mortgage loan size is just Rs.20 lacs, we are talking in terms of trillions. A comparison with housing demand of 24.7 million units puts this figure at 28% to 37% of new homes. This segment will only increase.

Table – II-A: Houses, Household Amenities and Assets

House list Item

Absolute number

Percentage

Total

Rural

Urban

Total

Rural

Urban

Total households

246,692,667

167,826,730

78,865,937

100.0

100.0

100.0

Good

131,019,820

77,041,343

53,978,477

53.1

45.9

68.4

Livable

102,470,426

79,855,814

22,614,612

41.5

47.6

28.7

Dilapidated

13,202,421

10,929,573

2,272,848

5.4

6.5

2.9

Table – II-B: Houses, Household Amenities and Assets

 

Absolute number

Percentage

Households by ownership status

Total

Rural

Urban

Total

Rural

Urban

Total number of households

246,692,667

167,826,730

78,865,937

100.0

100.0

100.0

Owned

213,526,283

158,983,956

54,542,327

86.6

94.7

69.2

Rented

27,368,304

5,644,581

21,723,723

11.1

3.4

27.5

Others

5,798,080

3,198,193

2,599,887

2.4

1.9

3.3

Households by Predominant material of roof

Concrete

71,659,299

30,746,938

40912361

29

18.3

51.9

Households availing banking services

144,814,788

91,369,805

53,444,983

58.7

54.4

67.8

Source: Census of India 2011 : Houses, Household Amenities and Assets

3.  It is important work on this product and perfect the mechanism as the generation that will flowing in to this segment would rise with government expecting people to do their own retirement planning with life time pension even for government servants being out of question. I think it is perfect case for banks, HFCs, Insurance companies, PFRDA along with the government and NHB to create a road map for synergy

4.There are two ways to look at the Life Expectancy Table –III shown below.

It really indicates that it is a rising trend with better medical facilities. However, the medical facilities would come with a cost requiring more investment into medical care and also expenses for basic living which the population will face as they age with depleting resources.

On the other hand from the risk perspective this throws a challenge for the lenders as the portfolio may have adverse age group. The property would be available only after the death of the joint owning spouse which may end up having negative equity and there is no recourse to recovery other than the property.

Table: III Projected Values of Expectation of Life at Birth

Sr. No.

Indices (Expectation of Life at Birth)

2001-05

2006-10

2011-15

2016-20

2021-25

1.

Male

63.8

65.8

67.3

68.8

69.8

Female

66.1

68.1

69.6

71.1

72.3

2.

Projected Population

1112.2

(2006)

1192.5

(2011)

1269.0

(2016)

1339.7

(2021)

1399.8

(2026)

  • Census India, Population Projection

 Challenges

 There are three challenges in this product segment

Challenges.jpg

1.  Resources: While it is becoming increasingly difficult to raise long term resources for mortgage finance institutions for new home loans, one may wonder how they would address for the reverse mortgage product where the interest accrued as income may be realizable only after 10 to 15 years. 

That actually brings to a question as how the accounting is being done and what are the tax implications for such mortgage finance or banking institutions on income shown in its books. One should also consider the regulatory norms for provisioning and capital allocation in this product segment.

2.   Property: Considering the quality of present day construction it is possible that age of the property may be substantially reduced at the time of valuation reducing the customer’s eligibility. At the same time from the institutional perspective it is essential to do so to avoid market risk on the realizable property value. 

Today, we really need to usher in the building construction codes in true sense so that an individual in old age is able to release sufficient equity in the property 

3.  Customer: From the customer perspective it is essential to have extensive educational programs. However, the seminars should include the family members of Senior Citizens to set the fears to rest and be good influencers in this product segment. Taking a leaf from the adage “catch them young”, we probably need to address the segment while at 55+. We will definitely find more innovation in communication as we go ahead.

The community programs have to be sustained to penetrate 10% of the population in the target segment.

Further, from the income tax perspective there is an anomaly in the treatment of annuity received through an insurance company and if the same is received as lump sum amount or periodic payments from a lending institution. The same has been reproduced here(Source: NHB Website).                                   

1.   All payments under reverse mortgage loan are exempt from income tax under Section 10(43) of the Income-tax Act, 1961. However, periodic annuity payments are subject to tax under Section 17, 56 and 80CCC of the Income Tax Act and taxable in the hands of the annuity recipients.

2.   Section 10 of the Income tax Act, 1961 has been amended to provide that any amount received by an individual as a loan, either in lump-sum or in installment, in a transaction of reverse mortgage referred to in clause (xvi) of Section 47 of the Income-tax act shall not be included in total income.

We believe that there is a big market waiting to be tapped and the players would have done their homework. As consultants in the mortgage financial sector we look forward to be of assistance to institutions in promoting this product. 

As industry professional, we feel further research from the perspective of all the stakeholders can be done. We look forward to partner with any Institution or individual to conduct further research or if some work is in progress we would be more than glad to be associated with the project.

We look forward to your response and valuable comments. You can look forward to more articles on Reverse Mortgage on this blog in the days to come
 
 
Sitaraman says: Tuesday, March 5, 2013
 
Hi Kalyan, At the outset,I must say that it is researched in a very innovative way...in the sense, you go on to link the basic definition of the product with the life expectancy and the sociological phenomenon of 'growing population'. Your argument that the time now is right to push the product and create awareness, with the intent that in the coming years, the market would benefit is a visionary thought. I completely agree that this product will take its time to entrench itself into the market...what with all the challenges that you mention and the fears. I really liked the different stages of mortgages that you spoke of earlier in your note - forward mortgages, home equity and then reverse mortgage. Really good... The experience of developed economies was also helpful. There is a lot that all stakeholders such as financiers, government, beneficiaries, of this product need to do in terms of structuring. From whatever I have read and known of this product, some action has happened though not impactful. I somehow feel that it is going to be really long, before we see some real action on this product. From a lenders' perspective, cost of funds and accounting issues will dominate the thinking. With no cash to show as revenue, it is going to be a major challenge...even if we were to look at only the annuity option. How do we go about addressing psychological deterrants such as unwillingness to think of my property being sold off by a third-party entity after my death. That is something which will change as a sociological phenomenon and I feel there is very little that 'educating' can do here. Kalyan..in all honesty and frankness, I feel, it is going to be a long wait and watch for this product. Much as I would wish that we have another solution / product in hand to alleviate the old-age related issues, for commercial organisations to be interested in this, it has to make good commercial sense. I would really love to see that getting established in the future....sooner than later. Thanks for this wonderful article, which surely set me thinking for a while. I look forward to more articles and more traffic in your blog. Cheers... Sita
 
Durga Prasad Mohapatra says: Thursday, January 31, 2013
 
Very well presented atricle. Needless to say a well thought product, where property is also being treated as any other asset class, and its value is being realised, to provide financial independence, to the segment of society, where it is much needed. Considering the social transformation in India, where people have moved from a joint family structure, to a Nuclear family structure, this product would provide the much needed financial support. The Sad part is how many of us know of this product, I believe public at large are not aware of this product. The need here, as rightly mentioned in the Article, and some activity has also been done by NHB here, is educating the targeted segment. Does any of the bank poster/ ad campaing talks about this product, here I am not talking about promoting the product as a business strategy, but the basic information should be avaialble to public at Large to avail this product. simple steps like, a financial advisor while discussing investment startegy can talk about this product. In India where the Investmnet habit is much restricted to properties instead on financial instruments,information about this product would work wonders. This will promote viable investment, in properties by the young generation and this would basically form an investment startegy toward financial independence going forward.
 
Anand Kulkarni says: Saturday, January 12, 2013
 
Very informative, in-depth and very well researched article. Thanks. I agree with Subhash - there undoubtedly is a huge market potential for reverse mortgage; also for some disruptive product innovation. Although notional, property ‘ownership’, especially at old age, is more about emotions and more often than not is associated with pride. I know you touched upon some of the reasons for slow uptake of reverse mortgage such as fear of losing roof over head, emotional attachment and desire to leave behind the property for children. However, I would be interested to know more about your market research on specifics of how Senior Citizens in India perceive this product. I don’t think the reasons are any different even in the Indian market. The very fact that this product gives lenders a right to sell off the property (at expiry of loan tenure or death) acts as a physiological deterrent / acceptance barrier. It would also be interesting to know how NHB awareness programs aim to put these fears to rest. In my view, we certainly need an innovative variant of the existing product for reverse mortgage to take off. Looking forward to more research papers. Dear Anand I agree. We can do further research.
 
Subash @ Regal Unlimited says: Saturday, January 5, 2013
 
Well compiled. Useful for someone from mortgage industry and very informative for others. Indeed, this may be a big opp waiting to be tapped, in spite of reluctance & constraints
 
 
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