Reverse Mortgage in India: Social Implications

Working Paper May 2007

Dr V Chandrasekar, Professor, Executive Director, WCED, ISB Dr. Piyush Tiwari, University of Aberdeen Komal Datta Sanghera, Research Associate, ISB

Additional Information by Ganesh Raj, Partner, Ernst & Young, India Prabkirat Singh Sanghera, Class of 2007, ISB SatyaPriya Tanugula, Researcher, ISB

Indu Projects Real Estate and Urban Studies Chair Wadhwani Center for Entrepreneurship Development Indian School of Business Hyderabad

Table of Contents
Introduction ................................................................................................................................... 3 Reverse Mortgage in the United States ....................................................................................... 5 Single Purpose Reverse Mortgage/ Deferred Payment Loans .................................................... 5 Lender-insured Proprietary Reverse Mortgages ......................................................................... 5 Home Equity Conversion Mortgages (HECMs) ......................................................................... 6 The Indian Context ....................................................................................................................... 7 Social Metamorphosis ................................................................................................................. 7 Working Population ................................................................................................................ 8 Elderly Population .................................................................................................................. 8 Urban Population ................................................................................................................... 9 Latent Need/ Rationale................................................................................................................ 9 Regulatory Infrastructure .......................................................................................................... 10 Income Tax Implications .......................................................................................................... 10 How Reverse Mortgages work .................................................................................................. 11 Eligible Loan Amount ........................................................................................................... 11 Eligible Use of Loan Amount ................................................................................................ 11 Instalment Payment Mode .................................................................................................... 12 Lump Sum Mode ................................................................................................................... 12 Combination Option ............................................................................................................. 12 NHB Assurance..................................................................................................................... 14 Rate of Interest ...................................................................................................................... 14 Eligible Borrowers................................................................................................................ 14 Costs involved ....................................................................................................................... 15 Sample Model .......................................................................... Error! Bookmark not defined. The Elderly Perspective ............................................................................................................ 15 Benefits to the borrower ............................................................................................................ 16 Risks to the borrower ................................................................................................................ 17 Perceived Social Implications in India ...................................................................................... 19 Positive Implications ............................................................................................................ 19 Negative Implications ........................................................................................................... 19 Conclusion .................................................................................................................................... 20 References .................................................................................................................................... 23

Introduction
Reverse mortgage is a financial instrument that allows a homeowner to consume some of his housing equity by converting it into an income stream, yet maintain ownership and residence in the home. This year the government formally introduced the Reverse Mortgage Scheme in India in its budget 2007-08. The National Housing Board has been given the task of drawing up the regulatory mechanism to enable the use of reverse mortgage in the country. This study focuses on the social implications of the concept of reverse mortgage from the perspective of the borrower, viz. the elderly homeowner.

Reverse mortgage is the opposite of a normal forward mortgage. In a forward mortgage loan, the borrower uses his house as collateral and receives a one-time lump sum payment, which he then utilises to purchase the house. Subsequently, the borrower pays his regular mortgage instalments, gradually reducing his outstanding loan amount and increasing his proportion of the equity of the house. Effectively, the borrower steadily buys his house back from the lender.

On the other hand, the reverse mortgage mechanism enables a borrower who owns a house without encumbrance to sell his house to a lender and avail of a steady cash stream based on the valuation of his house. The unique aspect of this model is that the borrower continues to occupy the house until his demise, or until he sells the house to another party, or moves out of the house permanently. If any one of these exception conditions occurs, the borrower has to repay the loan amount availed from the lender. One of the positive features of reverse mortgage is that it is a non-recourse loan and therefore protects assets other than the house of the borrower from being used as collateral. In India, most of the home owners lifetime savings are used to buy or build a house, making reverse mortgage a welcome instrument that helps them convert some or all of their rising but locked home equity into a cash stream that can comfortably sustain them

in their old age. The borrower can enter into a loan disbursement mode that involves a lump sum at the beginning of the loan term, monthly payments for a fixed term or for a lifetime annuity, or a line of credit with or without the accrual of interest on credit balance. Innovative arrangements can also include a suitable combination of these modes of payment.

Since the borrower need not make any payment to the lender, the loan and interest accrued accumulate till maturity (which is subject to a maximum of 15 years in India). Further, since there is no loan servicing requirement from the borrower, consequently there is no credit worthiness or minimum income level hurdles to be crossed to avail of this loan. A safety feature that protects the borrowers heirs from the market risk exposure to the lender is that even if the accumulated loan and interest exceed the realizable value of the house at the time of disposal, the repayment liability of the borrower remains pegged to the market value of the house at the time of loan recovery.

Reverse mortgage as a concept is not a recent one. There is evidence that as far back as 400 years in Europe, investors purchased homes from elderly homeowners and allowed them to continue living in the house for the rest of their lives, without them being liable for any rent payments. Unlocking home equity was seen as a means of boosting income during the 1929 crash in the UK.

Cash flow constraints and increasing expectations on quality of life amongst the elderly would fuel a massive demand for financial products tailored to monetise the locked equity of the asset rich but cash poor elderly homeowners in India. This unlocked equity could be utilised by the elderly for reinvesting into other safe investment avenues, systematic liquidation of assets to finance consumption, and managing increased life expectancy and inflation risks.

Reverse Mortgage in the United States

The concept of reverse mortgage was introduced in the US in the late 1980s. The initial acceptance of the concept was low as far as 1990. To give an idea of the statistics, only 157 people chose the option of taking a HECM (Home Equity Conversion Mortgage) in FY 1990. The HECM makes up about 90% of all reverse mortgages issued in the US. However, the figures have been on a rise with 55,659 senior citizens opting for this product in FY 2006. As per the HUD (US Department of Housing and Urban Development) the total number of HECM reverse mortgages loans is 217,837 [1]. A study conducted in the US by the National Council on the Aging concluded that close to 13 million senior citizen homeowners are candidates for taking advantage of this financial product.

In the US, reverse mortgages can be classified into three different types, based on the kind of institutions that offer this product.

Single Purpose Reverse Mortgage/ Deferred Payment Loans These are mostly offered by state or local government groups to lower income groups, the disabled or the very elderly. Single purpose Reverse Mortgages give out a single lump sum which may be needed for medical emergencies, help pay property taxes, cover home repair bills or allow building repairs to make the residence more disabled friendly and accessible for senior citizens. These generally have low upfront and transaction costs. The homeowner may repay the loan with interest any point in time or the loan may be recovered at the time of sale of the house or the borrowers demise.

Lender-insured Proprietary Reverse Mortgages These are offered by private sector firms, banks or mortgage companies and are for homes that have a high value. These loans can be used for any purpose by homeowners above the age of 62. Since these loans are private and not backed by government refinancing/insurance, lenders charge a risk premium to protect against the eventuality

that the loan balance exceeds the value of the home. This makes proprietary reverse mortgages more expensive than government backed loans.

Home Equity Conversion Mortgages (HECMs) The HECM, instituted by the Department of Housing and Urban Development (HUD) in 1989, is a federally insured loan that can be used by elderly homeowners above the age of 62 for any purpose by converting their home equity into monthly income and/or a line of credit or in the form of a lump sum payment, to be repaid when they no longer occupy their home. These loans can be funded by a lending institution such as a mortgage lender, bank, credit union or savings and loan association. A maximum loan amount is set by law and rises annually. The Federal Housing Administration (FHA) protects the HECM lenders against the risk that the loan plus interest will exceed the homes value. This produces substantial upfront and transaction costs including origination fees (2%), closing costs, insurance premium (2%) and servicing fees. Lenders usually charge a variable interest rate which adjusts annually, but has restrictions such as it cannot change more than 2 percentage points per year, with a cap of 5 percentage points over the life of the loan. The mortgage amount is based on the age of the youngest borrower, the current interest rate and the lesser of the two appraised value and the FHA insurance limit. No income or credit qualifications are required from the borrower.

This type of reverse mortgage has been most popular in the US and implicitly guarantees the borrower a residency guarantee that he can remain in his property until his or his coborrowers demise or till he moves out of his residence, regardless of the loan balance. It also provides an income and repayment guarantee wherein income support continues and there will be no repayment obligations as long as the homeowner is alive and lives in the home. Being a non-recourse loan the homeowners assets cannot be utilised to repay the loan.

Reverse Mortgages in the United States have not gained as much popularity as the studies done to identify potential customers may suggest. However the US has a strong regulatory and financial infrastructure to help in the success and usefulness of this option

for the elderly. Counselling is mandatory to educate the homeowner in completely understanding the financial implications, eligibility requirements and the various complexities of this loan before taking the decision.

The Indian Context

Social Metamorphosis The Indian economic landscape is undergoing an unprecedented metamorphosis, perhaps irreversibly transforming civil society in its wake. As shown as Exhibit 1, the Census of Indias Population Projection Report (over the period 2001 - 2026) reveals the following statistics of interest to our discussion [2]: 1. More than half (57.7%) of Indias population is in the working age-group of 15 59 years, and is projected to increase to 64.3% 2. Due to a falling fertility rate, the proportion of population below 15 years of age is projected to decline from 35.4% to 23.4% 3. Increasing life expectancy is expected to increase the number of older persons (60+ years) in the population from 71 million (2001) to 173 million (2026). Lower fertility rate will be responsible for increasing their representation in the population from 6.9% to 12.4% 4. The urban population is expected to grow from 28% (2001) to 33% (2026), accounting for 49% of total population increase in this period. The increase in urban population is expected to be 182 million

In exploring the social issues that may arise out of the growing economic affluence and changing demographic composition, we make certain assumptions to simplify the externalities that might render our exploratory study ineffective. For instance, we assume that Indias economy continues to do at least as well as it is doing today (2007), regulatory and enforcement frameworks and institutions continue to mature, political stability remains, and that there are no extraneous events that deliver an adverse shock to Indias normal economic progress predicated on current forecasts.

Working Population The increasing proportion of this population segment over the first quarter of the century raises interesting questions on the impact of growing affluence of almost a third of the population on the social fabric of the country. If we base our assumptions of behavioural patterns in an affluent society on apparent western models, then we could assume that Indian society will stratify along similar lines, as affluence grows. This means that rising income could lead to nuclear families, with financially independent offspring living away from their parents. For reasons of proximity or choice, working people living outside their parental home will either live as tenants or will invest in their own homes. Rising incomes and easily accessible home loans will make this transition possible. The disintegration of large joint households into smaller setups implies that the traditional compulsion of the father to leave behind property as a tangible source of wealth or sustenance for his children will diminish substantially.

Elderly Population The declining fertility rate and increase in life expectancy will be the two main causes for an ageing population in India by the middle of this century. The good news is that Indias life expectancy is projected to rise from the current 64.7 years to 75.6 years by 2050, bringing it close to the current US life expectancy figure of 77 years. In 2005 only 7.5 percent of the population (8.5 crore) were above the age of 60. This percentage is projected to increase to 20.2 percent by 2050, bringing the number to 33.5 crores. The current number of 78 lakh people above the age of 80 will increase over six-fold to 5.14 crores [3]. This demographic change is an important factor in understanding the implication of building a sustainable business model targeted at this constituency. It will be reasonable to assume that with an increase in the proportion of elderly, there will be at least a proportional increase in the number of elderly home owners in India. However, the number may also grow disproportionately owing to the increasing trend of the working population investing in their own homes.

Urban Population If we classify the population into rural and urban segments, then for the purpose of this study, we assume that the economic prosperity and demographic change will impact the urban population much more directly than its rural counterpart. The emphasis of our study will therefore be on the urban elderly homeowners.

Latent Need/ Rationale The proportion of urban population is growing steadily, and with families de-linking and becoming independent, the case for an option that allows the urban elderly homeowners to unlock their housing equity without having to let go of the asset, becomes stronger. Other socio-economic factors too indicate the relevance of an option. First, there is no pan-Indian social security apparatus that caters to the basic needs of the elderly. Their support system is largely the integrated family and their children, who lend moral, physical, psychological and financial support. Second, those who do get pension benefits, get an unreasonably low amount governed by archaic pension rules that do not incorporate even basic macro-economic realities such as inflation. As shown in Exhibit 2, less than 10 percent of senior citizens in India receive pension income. For the majority of the elderly population, there are very few other means of supporting themselves financially. A substantial number of the elderly (especially women) continue to rely on their families for support. In order to support themselves financially, a significant portion of the elderly population is forced to continue working in their old age [4].

Most elderly homeowners have spent their working lives saving up enough to finally own property. They have also built a social network around their area of residence through extended periods of time. They develop a strong sense of attachment to an asset that has taken a whole lifetime to build. Consequently, elderly homeowners in crisis situations regard disposing off their property as the last resort. It is a paradox that while they live in highly valued real estate assets, they have no avenue to unlock this equity and are therefore forced to depend on meagre income flows from their pensions or other personal investments.

Regulatory Infrastructure In the first quarter of this century, Indias population will undergo a two-pronged demographic change. Its proportion of working-age population will decline, while its proportion of elderly will increase significantly during the same period. Yet, only 10% of the working-age population is covered by a pension plan today.

There have been two main types of pension plans in existence. One of these is a defined benefit pension plan for civil servants, while the Employees Provident Fund Organization (EPFO) administers the other. The government began reforming the pension system in 1998, and successive political groups have continued to carry on these reforms. The New Pension System is designed to provide coverage to employees of central and state governments, and also to workers in the uncovered sectors across the country [5]. However, these policy changes are only coming into effect now, and thus preclude elderly homeowners from any meaningful benefit from these reforms. Indian policymakers have therefore, recently introduced initiatives towards providing a viable alternative to the family as the primary provider of income security for their elderly household members.

The UPA government in its Budget for 2007-08 has announced that the National Housing Bank (NHB) will launch a reverse mortgage product for senior citizens, which will also include refinancing the reverse mortgage loans of approved housing finance companies. Indias second largest private housing finance company, Dewan Housing Finance Corporation Limited, is the first to launch its reverse mortgage product Saksham [6]. The Kerala State Co-operative Bank also recently announced its decision to introduce a reverse mortgage scheme and is awaiting the laying down of final norms by the NHB [7].

Income Tax Implications The amount of the payments (whether monthly or otherwise) received by the borrower; i.e; the owner of the house go to increase the amount of loan outstanding against the

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house. Further, the borrower is charged interest on the amount of loan extended to him against a reverse mortgage. The proceeds from a reverse mortgage being payments received on capital account should be exempt from taxation. Further, if the borrower chooses to pay any interest which is outstanding against the loan, the same may be allowed as a deduction against other taxable income subject to a ceiling. It is worthwhile to mention that in the USA also; the tax treatment of the proceeds from a reverse mortgage and the interest paid by the borrower against the reverse mortgage is on similar lines (as indicated above). In India the Reverse Mortgage will be treated as a loan hence there will be no tax payable on the regular cash flows.

How Reverse Mortgages work (based on draft operational guidelines set by NHB [8]) A senior citizen above the age of 60 years, independently owning with clear title deed and living in a house or an apartment in India, having inadequate income to meet their needs (day to day expenses, medical, repairs and maintenance etc) can avail this opportunity. A loan is taken against the property owned. The loan amount may be borrowed as a fixed monthly payment or can be taken as a one single payment. The borrower must reside in the property against which a reverse mortgage loan is being availed and must declare it as his/her principle residence. The property should be free from any encumbrances.

Eligible Loan Amount Up to 45% of the market value of the property (house, apartment, estate) - If the borrowers age group is between 60- 70 years. Up to 50% of the market value of the property (house, apartment, estate) - If the borrowers age group is between 71- 75 years. Up to 55% of the market value of the property (house, apartment, estate) - If the borrowers age group is between 76- 80 years.

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Up to 60% of the market value of the property (house, apartment, estate) - If the borrowers age group is above 80 years.

Eligible Use of Loan Amount The reverse mortgage loan amount cannot be used for speculative, trading purposes such as shares etc. It may be used for supplementing income for the purpose of daily personal and family consumption, medical costs, house improvement and maintenance, payment of property tax and insurance. It can also be used for repaying a previous loan on the property to be mortgaged.

Instalment Payment Mode If the borrower opts for the fixed monthly payment option then he can get it in the form of a monthly annuity for 15 years, the amount being fixed irrespective of the borrower who takes the loan. This option holds good for an 80 year old borrower as well. In this monthly payment option, the amount one gets from monthly payment is directly proportional to the age of the borrower, i.e. higher the age, higher the monthly payments. If the borrower outlives his loan tenure of 15 years he can still live in the house as long as one of the co-borrowers is alive, but he will not get any monthly payments after the 15th year. There would be a provision for re-valuation and consequent adjustment of payments under the loan after every five years.

Lump Sum Mode The borrower may opt for a one-time lump sum payment.

Combination Option The borrower can also avail his loan amount as part lump-sum and the balance in the form of annuity. A key point to remember is that this loan amount cannot be taken or used for any other form of investment. The onus of maintaining the property lies solely with the existing owner of the house. In US a senior citizen above the age of 62 is eligible to apply for the reverse mortgage loan. A person can choose from options like:

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1: Get a lump sum payment from the Reverse mortgage as a one time deal/transaction. 2: Get the amount as a fixed monthly payment to a maximum time frame of up to life. 3: As a credit transaction accounting for a partial amount against the total amount that a person is eligible to draw. Line of credit- According to the survey conducted by Alliance Financial Mortgage- More than 60% of the borrowers choose the line of credit option. 4: Or, a combination of the above mentioned options. The amount of money a person gets depends on the factors (age, youngest age of the spouses, appraised home values, current interest rate, the location of the property whether rural/urban). The funds are tax-free and do not effect the social security/retirement benefits. But, if a person gets the reverse mortgage amount in lump sum and retains it with him for more than a month then his Medicaid eligibility can be at stake. Example: A person applies for $8,000 loan towards repairs/maintenance and spends around $2,000 in the first month and retains the remaining balance of $6,000 for the next calendar month, this amount retained would count as a resource and could affect the Medicaid eligibility as the total liquid resource should not exceed $2,000 for a single senior person and $3,000 for couple, the person would be ineligible from retaining the Medicaid option. In United States(USA) there is one more option in the Reverse Mortgage called the Fannie Mae Home Keeper & Home Keeper for Home Purchase1 .under this option a person has an advantage to use the house keeper mortgage towards the purchase of a new house either in the same area or in a different locality. This option reduces the outof-pocket cash needed to pay for the new house as a down payment. This can be better illustrated with an example. Lets say a 72 year old person intend to buy a new home( a retirement home) in some sub urban locale. The house lets say is around $400000. The person sells his old house for $320,000. The remaining balance is $80,000. So, for this
1

Headquartered in Washington, DC, Fannie Mae is the nation's largest investor of home mortgages and a major investor of reverse mortgages, including the federally insured Home Equity Conversion Mortgage (HECM). In 1996, Fannie Mae developed its own proprietary Home Keeper reverse mortgage as a conventional market alternative to the HECM.
The Home Keeper was developed to address unmet needs that could not be served by the HECM program, such as individuals with higher property values, condominium owners, and seniors wishing to use a reverse mortgage to purchase a new home.

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person to buy a new house in cash is beyond his pocket. He has to have a decent bank balance to pay of the remaining $80,000. If he does not have that much amount then he should be eligible to claim a house mortgage loan (which might be difficult considering the age factor and the monthly repayment factor), it is difficult to get a new home under these circumstances. Alternately by using the Home Keeper for Home Purchase program the person can sell off his old home use the sale proceeds plus the money raised from Home Keeper Reverse Mortgage to meet the down payment towards purchasing new house. With this program the person still the owner of the house and will be responsible for any house taxes, insurances and repairs and maintenance accrued towards the house.i

NHB Assurance In a worst-case scenario where the financial companies and bankers may go bankrupt, the NHB takes on the responsibility to make timely payments to the borrowers. Rate of Interest The rate of interest is likely to be fixed at 10%. According to sources, if the borrower wishes to repay the entire loan amount taken and retain his property then the rate of interest charged is 10%. The settlement of loan disbursed along-with accumulated interest (expected to be at 10 % p.a.) will be met from the proceeds of sale of the house.

Eligible Borrowers The owner of the property and the respective legal spouse can be the joint borrowers and can take a loan and be the beneficiaries of the monthly payments. In case of the death of one of the borrowers, the spouse will automatically become the beneficiary of the monthly payment as long as the amount can be drawn over the 15 year loan period. Later she/he is still entitled to stay in the house till his/her death. In case of death of both the partners, the entire amount taken in the form of loan will be settled from the sale proceeds of the property mortgaged and the remaining balance will be given to the heirs.

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Costs involved The borrower bears the costs or charges that are similar in nature of a normal mortgage process that takes place while buying a house or a property. The borrower has to bear interest on the loan. These costs include commitment fees from the lender or financier which are charged towards the under drawn loan amount, documentation costs for initial set up, processing fees on loans charged by banks and other lending institutions, valuation fees charged by the valuator at the time of initial stage and later for appraisal of the home.

The Elderly Perspective A survey was carried out on a sample size of 15 senior citizens between the age of 62 80, living alone or with their spouse in independently owned urban property in Hyderabad, Delhi, Chandigarh and Calcutta. The survey revealed that a majority of respondents had a favourable impression of the concept of reverse mortgage per se, but all had serious concerns regarding the actual implementation and social acceptability of such a concept in India.

Concerns of people with a positive view of reverse mortgage Respondents were inclined towards government administered execution of reverse mortgage since they believed that the government would have less of a profit motive than private sector participants The presence of an active parallel real estate economy was another prime area of concern, in terms of the accurate valuation of properties for the purpose of arriving at the loan value All respondents seemed to regard reverse mortgage more favourably if they could have the flexibility to will/bequeath the right of possession to their heirs, subject to the heirs being able to service the outstanding loan including interest accrued More clarity would be required on the operational, legal and regulatory mechanism of repayment of the loan to repossess the property from the lender

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Another concern related to willing property to heirs was whether the heirs would need to pay additional interest on the loan after the loan term has ended but loan not serviced since the borrower lived beyond the loan term. If the heirs want to buy back the property after the demise of the owners prior to the loan term being completed, respondents were concerned that such a transaction might be subject to foreclosure penalties. Treatment of interest rates on the loan was another concern for potential borrowers Education of the elderly home owners and awareness campaigns via print and visual media relaying accurate information would need to be undertaken by the government to prevent fraud or abuse by unscrupulous lenders.

Concerns of people with a negative view of reverse mortgage Most homeowners who did not view reverse mortgage favourably felt undignified about putting up their house on sale as they perceived it, and extracting an income from it. One respondent said that her husband had spent his entire life saving to build this home and she felt an emotional need to leave their home for their heirs. Another deterrent was that society would not view them favourably if they mortgaged their home to generate income, and they would much rather live in an old age home on a modest pension. Another elderly homeowner was of a similar view and found it humiliating to mortgage her home. It would pinch her conscience to do so, and felt that this would be a public declaration of the inability to live within their means. Benefits to the borrower The reverse mortgage is a mechanism that gives elderly homeowners access to their housing equity and has several beneficial aspects. Reverse mortgage allows the elderly homeowner to convert a single asset into a liquid and hence diversifiable asset that adds security to his wealth portfolio. In case the tax treatment of reverse mortgage proceeds and the interest paid by the borrower as suggested hereinabove is adopted by the Central Government by way of appropriate legislative provisions, the tax free proceeds from a reverse mortgage would go to increase the disposable income of the borrower and he would also gets

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tax benefits on interest payments thus making the reverse mortgage a tax efficient proposition. The knowledge of being financially independent, not running short of money in the case of medical emergencies and not being a burden on their children also affords the elderly a lot of mental peace and a restored sense of dignity. A homeowner has the ability to avail of a mixture of disbursement modes, including upfront cash as well as an annuity payment, which offer longevity protection and a means to preserve some equity that can be used later in exigencies to help pay for unforeseen future medical expenses, or to leave a bequest for their heirs. One positive outcome is that a reverse mortgage can boost consumption and improve living standards of the elderly without a forced sale of their home, which implies that they can remain independent longer or for the remaining years of their life. It also safeguards them from the psychological and financial burden of relocation, which is harder to acclimatize to, as one grows older. Living in their independently owned home also provides a protection from an uncertain real estate market and fluctuations in rental costs. A widespread acceptance of the reverse mortgage concept would help in increasing the liquidity and transparency of the Indian real estate market. Frequent valuations and more accurate housing price information would give the elderly a better understanding of the value of their homes. This concept is especially advantageous in the Indian context as there is no social security provision. Though some private sector employers do give pension fund as an option to its employees, it is not widely available to the majority of the working population who work for the state enterprise. It is also beneficial to the elderly in the dominant agricultural sector, whose resources are limited but who have inherited property from ancestors.

Risks to the borrower In the present form of this proposed policy, there are several risks that the borrower is faced with when he decides to take a reverse mortgage.

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The homeowner may be subjected to unforeseen mental and psychological hardship if the lender defaults on the loan payments and files for bankruptcy. If the borrower had taken a lump sum payment, then this situation may not affect him, but if he had opted for an annuity cash flow, the creditworthiness of the lender would be a key factor in determining the future security of his cash stream. The NHB will provide a guarantee against defaults by lenders such as banks and housing finance companies to protect the elderly borrower. This guarantee is however optional and will be provided at a fee. An elderly homeowner who opts for an annuity payment mode may not be able to avail of the entire unlocked income stream if he dies earlier than anticipated. The reverse mortgage concept is complex and it may be difficult to reliably convey all relevant and important information satisfactorily to the potential borrower, thereby increasing the borrowers chances of basing his decision on unclear information. Worse, this complexity may adversely impact the willingness of elderly homeowners to engage with reverse mortgage, consequently slowing the widespread acceptability of this arrangement. Elderly homeowners may not be aware of the compounding aspect of the loan over time and may believe that their repayment exposure is limited to the principal, which is the assessed value of the property at the time of initiating the reverse mortgage. If the terms are not clearly conveyed, they may not even realise that they are they are effectively entering into a binding agreement to hand over possession of their house to the lender after their demise. The heirs of elderly homeowners may not approve of their parents converting part or all of their home equity to finance their consumption. The heirs will receive less of a bequest if the house is bound by a reverse mortgage loan. Another risk is the lack of concrete guidelines on the tax implications of a homeowner selling a house on which he has taken a reverse mortgage. It is unclear how tax will be levied on the gains from the sale of the house and whether the lender will share tax liability as well. Given that many elderly homeowners who opt for reverse mortgage are those looking to supplement their poor income streams, the upfront transaction costs of reverse

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mortgage may add an unwelcome burden on their already strained incomes. These transaction costs can be due to the valuation exercise of the house, the effective transfer of information to the potential borrower, the added market risk to the lender, the continued creditworthiness of the lender, and the likely stringent regulatory mechanism that the lender would need to abide by.

Perceived Social Implications in India Positive Implications Indians traditionally have expressed the desire to bequeath property to their heirs and this mindset would take time and considerable social conditioning to change. However social behaviour and the fear of debt burden is changing with the economic development and the financial independence of the younger generation. Education and counselling imparted by the government through various media would be key to the success of the launch of the reverse mortgage product. The knowledge, that in the time of medical emergency or other financial need senior citizens can take advantage of the equity in their homes and need not be dependent on their offspring or relatives, lends a lot of confidence and security to the elderly. The implications of this can translate into their gaining more respect and receiving better treatment from offspring who might otherwise ill treat or neglect them as they grow older. Negative Implications Historically, charitable institutions started from the trusts that the older generations have left behind. It is with their generous help that a lot of voluntary work became possible to help the downtrodden. The introduction of the reverse mortgage concept might have direct implications on the growth of similar trusts and other benevolent acts and lead to the decline of charitable institutions. The issues of fraud and the safety of the elderly is another area of concern. Measures would need to be taken and stringent law enforcement would be essential to safeguard the interests of citizens who choose to benefit from the reverse mortgage product.

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To make an impact in improving the lives of senior citizens all across India, and not just in Tier 1 cities where real estate is valued very high, we would need to look at how this concept can be applicable and make financial sense to senior citizens in Tier 2 and 3 cities, towns as well as rural areas. Due to lower real estate values in smaller towns and cities, the senior citizen might not get a very high loan amount from the reverse mortgage scheme. This, added to the additional costs of the various fees levied on the borrower (origination, appraisal and inspection fees, verification charges, title examination fees, legal charges, property survey and valuation fees), might make it a costly concept where the borrower might not be able to extract the true value of their home. The government could look into subsidising the various transaction and additional fees that would be initially incurred by borrowers in the lower income group or those who are looking to take a reverse mortgage against homes of lower value. Conclusion India has the potential for a significant market for reverse mortgage if its economy continues at its current pace of growth, leading to increase in prosperity, real estate prices, disposable incomes, life expectancy and decrease in fertility rates in the population.

Despite the potential for reverse mortgage, there are several issues that may slow its spread as a reliable and acceptable means of income generation. It is a complex instrument and exposes the typical uninformed elderly borrower to fears of a debt burden, eviction and inability to leave a legacy behind by way of a bequest. Further, reverse mortgage has been introduced only this year and thus many pertinent issues regarding legal covenants and safety nets for borrowers, tax treatment under reverse mortgage, and other regulatory uncertainties are yet to be formalised. There is no sufficiently comprehensive secondary database available that could be useful to construct the appropriate environment for reverse mortgage. The real estate market is not mature in India and much longer term trends in home appreciation are required to accurately value homes.

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Reverse mortgage will be a useful tool for the house-rich, cash-poor elderly in India, as it will help them unlock all or part of their working-age savings for their old age needs without any debt or relocation burden. The ability to remain in their social environment and maintain their social standing even after availing of a loan is of great significance to people who have literally spent their entire working lives saving for and then paying regular mortgage payments for years before actually becoming owners of their homes. Reverse mortgage is a novel and socially preferred alternative to selling or moving out of the house in order to generate an income stream. Education and counselling about this concept would make the elderly understand the crucial differences between the vulnerability they feel with traditional loans, as opposed to the emotional, social and psychological advantages that reverse mortgages confer. Key to the efficacy of reverse mortgages is the development of a strong financial and regulatory infrastructure that will minimize loopholes, prevent fraud, and make this product successful in serving the needs of the senior citizens in India.

Exhibit 1

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Source Population 2001-2026. of the

Census of India 2001, Projections for India and States Revised December 2006, Office Registrar General and Census Commissioner, India.

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Website:http://censusindia.net/Projection_Report.pdf

Exhibit 2

Source - Challenge of Pension Reform in India. Rethinking pension provision for India. Robert Palacios. http://www.iief.com/pensions/CHAPTER3.pdf

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An Example of how Reverse Mortgage concept works if the house is valued at Rs.50,00,000.
Monthly Loan Amount : Rs.41,666 Yearly Loan Advance : Rs.5,00,000 Yearly Interest Rate : 10% Original Home Value : Rs.50,00,000 Appreciation Rate of Home Value : 5% per annum Total Home Value (Rs) 52,50,000 5,512,500 5,788,125 6,077,531 6,381,407 Home Equity (Rs)

End of Year 1 2 3 4 5

Principal Amount (Rs) 500,000 10,00,000 1,500,000 2,000,000 2,500,000

Simple Int. 50,000 1,00,000 150,000 200,000 250,000

Loan Amount (Rs) 550,000 1,100,000 1,650,000 2,200,000 2,750,000

(Total Home Value - Loan Amount) 4,700,000 4,412,500 4,138,125 3,877,531 3,631,407

Thus, an increase in the loan balance leads to a reduction in the home equity and therefore reverse mortgages can be regarded as rising debt and falling equity.

References [1] HECM Reverse Mortgage Statistics

Website: http://www.reversemortgagepage.com/topic.php?topID=30 [2] Census of India 2001, Population Projections for India and States 2001-2026. Revised December 2006, Office of the Registrar General and Census Commissioner, India. Website:http://censusindia.net/Projection_Report.pdf [3] Kounteya Sinha. Indias Aging Population to touch a new high by 2050 , The Times of India March 15, 2007 [4] Robert Palacios. Challenge of Pension Reform in India. Rethinking pension provision for India. Website http://www.iief.com/pensions/CHAPTER3.pdf [5] Ajay Shah. A sustainable and scalable approach in Indian Pension Reform. Ministry of Finance, December 5, 2005. Website:http://www.mayin.org/ajayshah/PDFDOCS/Shah2005_sustainable_pension_reform.pdf [6] Venkatachari Jagannathan. Reverse mortgage to go overdrive.1 March 2007. Website: http://www.domain-b.com/economy/budget/union_budget_2007/20070301_overdrive.html [7] Staff Reporter. State Cooperative Bank to launch monthly income scheme for the aged. The Hindu. Saturday, Mar 24, 2007.

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Website: http://www.hindu.com/2007/03/24/stories/2007032425770100.htm [8] National Housing Bank.: National Housing Bank (NHB) was established on 9th July 1988 under an Act of
the Parliament viz. the National Housing Bank Act, 1987 to function as a principal agency to promote Housing Finance Institutions and to provide financial and other support to such institutions. The Act, inter alia, empowers NHB to: Issue directions to housing finance institutions to ensure their growth on sound lines Make loans and advances and render any other form of financial assistance to scheduled banks and housing finance institutions or to any authority established by or under any Central, State or Provincial Act and engaged in slum improvement and Formulate schemes for the purpose of mobilisation of resources and extension of credit for housing

Reverse Mortgage Loan (RML): Draft Operational Guidelines. Website http://www.nhb.org.in/Whats_new/Reverse_Mortgage_Operations_Guidelines.htm [9] The Hindu Businessline - Online Resource [10] US Department of Housing and Urban Development Website:http://www.hud.gov/offices/hsg/sfh/hecm/hecmhome.cfm [11] Olivia S Mitchell and John Piggot. Unlocking Housing Equity in Japan, PRC WP 2003-3. Pension Research Council. The Wharton School, University of Pennsylvania [12] R. Rajagopalan. Reverse Mortgage Products for the Indian Market: An exploration of Issues. T.A Pai Management Institute (TAPMI), Manipal. [13] Sally R. Merrill, Meryl Finkel and Nandinee K. Kutty. Potential Beneficiaries from Reverse Mortgage Products for Elderly Homeowners: An Analysis of American Housing Survey Data. Journal of American Real Estate and Urban Economics Association, 1994. [14] The Aged in India A Socio-Economic Profile. National Sample Survey Organisation, Department of Statistics, Ministry of Planning and Programme Implementation, Government of India, November 1998. [15] Robert J Shiller and Allan N. Weiss. Moral Hazard in Home Equity Conversion. Real Estate Economics, 2000. [16] Thomas P. Boehm and Michael C. Ehrhardt. Reverse Mortgages and Interest Rate Risk. Journal of American Real Estate and Urban Economics Association, 1994. [17] T N Pandey CNBT- Reverse Mortgage A Boon for the Elderly- Website: http://www.blonnet.com/mentor/2007/03/05/stories/2007030501631300.htm [18] Warren Boroson. The Reverse Mortgage advantage The tax Free House-Rich Way to Retire Healthy!

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