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1 INTRODUCTION TO REVERSE MORTGAGE

Old age comes with its own share of problems. As a person grows older, and his
regular source of income dries up, his dependency on others can increase
significantly. With health care expenses on the rise and little social security, living the
golden years respectfully can be quite a challenge for senior citizens. In such a
scenario, a regular income stream that can help them meet their financial needs and
maintain their current living standards becomes important. One typical feature with
most senior citizens is that their residential property accounts for a significant portion
of their total asset pie. And, given its illiquid nature, property fails to aid senior
citizens on the liquidity front.

In the Union Budget 2007-08, a proposal to introduce 'Reverse Mortgages' was put
forth. To understand the concept of reverse mortgage, first let us understand what a
regular mortgage is. In a regular mortgage, a borrower mortgages his new/existing
house with the lender in return for the loan amount (which in turn he uses to finance
the property); the same is charged at a particular interest rate and runs over a
predetermined tenure. The borrower then has to repay the loan amount in the form of
EMIs (equated monthly installments), which comprise of both principal and interest
amounts. The property is utilized as a security to cover the risk of default on the
borrower's part. In the reverse mortgage, senior citizens (borrowers), who own a
house property, but do not have regular income, can mortgage the same with the
lender (a scheduled bank or a housing finance company-HFC). In return, the lender
makes periodic payment to the borrowers during their lifetime. Inspite of mortgaging
the house property, the borrower can continue to stay in it during his entire life span
and continue to receive regular flows of income from the lender as well. Also, since
the borrower doesn't have to service the loan, he need not bother about repaying the
'borrowed amount' to the lender.

1.1.1 REVERSE MORTGAGE IN INDIA

The concept of reverse mortgage, although new in India, is very popular in countries
like the United States. Recently, National Housing Bank (NHB), a subsidiary of the
Reserve Bank of India (RBI), released draft norms of reverse mortgage (the final

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guidelines are awaited). Following are some of the key features of the scheme from
the draft norms.

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.

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 :

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 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 re-valuation 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 trenches
 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, up-gradation,
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. 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.

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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.

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.

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 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
judgment, 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 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.

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 Periodicity: The loan will be extended as regular monthly, quarterly, half-yearly
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
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.

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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.
 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.

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 Loan Agreement:The PLIs shall enter into a detailed loan agreement setting out
there in 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.
 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 favor 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 favor of the PLI,
meaning thereby that in the event of death of the borrower (and co-borrower, 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.
 The PLI will ensure that borrower(s) pay all taxes, electricity charges, water
charges and statutory payments.
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 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 endeavor 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.
 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.

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 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.

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.
 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.

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 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.

As the old saying goes, “there are no free lunches in life”. In case of reverse
mortgage, there exist a few guidelines, which may not 'appeal' to the house property
owner i.e. the borrower.

1. As per the guidelines, the maximum loan tenure can be 15 years. So, if the
borrower outlives the loan tenure, he can continue to stay in the house. However he
will no longer be eligible for any payments from the bank/HFC.

2. The bank/HFC shall have the option to revise the periodic/lump sum amount at
such frequency or intervals based on revaluation of property, or at least once every 5
years. The borrower will be provided the option to accept the revised terms and
conditions to continue the loan. However, if he refuses to accept the revised terms and
conditions, no further payments shall be made by the bank/HFC. Interest at the rate
agreed before the review will continue to accrue on the outstanding loan amount.

3. Since the reverse mortgage can be either at fixed or floating rates, it will be prone
to the interest rate movements. Hence, in the scenario when interest rates are moving
northwards, a floating rate reverse mortgage would add to the borrower's liability.

4. Under the reverse mortgage, the legal heirs of the owner are not entitled to take
control over the mortgaged property up to the extent of the outstanding loan. They are
required to first repay the outstanding loan amount along with the interest to stake a
claim on the property.

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5. The banks/HFCs at their discretion may levy penalty or other charges on the
prepayment of loan. So, if the borrower or his heirs wish to prepay the loan amount,
they may have to bear an additional cost.

The most important advantage offered by the reverse mortgage scheme is that despite
mortgaging the house, the house owner retains its ownership, is entitled to live in the
same throughout his lifetime and also has access to a regular income stream, which
can help meet his day-to-day needs. From the banks/HFC's perspective, the mortgage
on the property in its favour ensures that there is no scope for default. Having said
that, individuals who wish to opt for the reverse mortgage scheme would do well to
acquaint themselves with the nitty-gritty’s of the guidelines. Also, the final guidelines
will aid in providing more clarity to individuals who wish to participate in the reverse
mortgage scheme.

1.1.2 HOW REVERSE MORTGAGE WORKS

MrPatil has retired after what can be called a very fulfilling career with a leading
engineering company. His only daughter is married and well settled in Bangalore. He
owns a large house in Thane -- worth about Rs 80 lakh (Rs 8 million), but he has
limited savings (including PPF and EPF) of Rs 10 lakh (Rs 1 million) to generate any
major income.He is not expecting any pension either. His worry now is to pay for his
modest monthly expenses of Rs 20,000. His financial assets can at best generate Rs
10,000 per month for him and the income thus generated will not keep pace with
inflation -- meaning that after five years, when he will require Rs 30,000 per month,
while his financial assets will still generate only Rs 10,000 per month.The only option
he had earlier been to rent his house and move to a smaller house himself or to sell his
house altogether and invest the proceeds to earn a higher monthly income. Either way,
in his old age, he will be forced to look around for accommodation and keep on
worrying about the rising rents -- not a very happy prospect.This is where reverse
mortgage can be of great value.

Here is how it works. Reverse mortgage as its name indicates operates in a manner
opposite to that of the typical mortgage such as a home loan. In a typical mortgage,
we borrow money in lump-sum right at the beginning and then pay it back over a
period of time. In our payback -- the EMI -- a portion goes towards paying the interest

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and the remaining goes towards paying back principal.All along, we pledge the asset -
- namely the home we have bought with the loan -- to the bank. This asset is the
security against which the bank is lending to us. In reverse mortgage, we pledge a
property we already own (with no existing loan outstanding against it). The bank in
turn gives us a series of cash-flows for a fixed tenure. These can be thought of as
reverse EMIs.There are various forms of reverse mortgage available in the developed
countries. The specific format National Housing Board (the facilitator for housing
finance in India) is promoting is one in which the tenure is 15 years and the owner of
the house and his/her spouse continue to live in the house till their death -- which can
occur later than the tenure of the reverse mortgage.Simply put, in case of Mr and
MrsPatil, if they were to opt for reverse mortgage for tenure of 15 years, they will get
annuity (the reverse EMI) from bank for 15 years. After that, the annuity payments
stop.However, they continue to live in the house. Assume that MrPatil dies after 17
years. MrsPatil can still live in the house till she is alive. After her death, the bank will
give their heirs two options -- settle the overall outstanding loan and retain the house
or the bank will sell the house, use the proceeds to settle the outstanding loan and give
the rest to the heirs.The bank bears the risk that the outstanding will exceed the
market value of property then and will not ask for the difference from the heirs.

1.2 Different reverse mortgage offerings in India

1.2.1 Offering by SBI
The State Bank of India (SBI) started offering reverse mortgage products for senior
citizen on October 12, 2007. Joint loans are given if the spouse is alive and is over 58
years of age. The loan is offered by all branches of SBI from October 12, 2007. The
loan is offered at an interest rate of 10.75% pa and is subject to change at the end of
every five years along with revaluation of security. Every five years, bank may even
re-adjust the loan installments, if it is needed, depending on market conditions and
loan status. The Chief General Manager for Personal Banking (SBI), Mr.
SangeetShukla told that there is no upper limit of amount of loan. Also, the maximum
period for availing this benefit is 15 years. Under this loan, borrowers can be avail
payment against the security of their houses on monthly or quarter installments or
either he/she can go for as a lump sum payment at the beginning. During their
lifetime, the borrower does not have to pay the loan and will continue to stay in their
house. Thereafter, either the legal heirs can repay the loan and redeem the property

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but if this option is not exercised, bank will sell the property and liquidate the loan.
Surplus, if any, will be passed on to the legal heirs. DHFL and Punjab National Bank
are the other competitors along with the SBI.

1.2.2 Reverse Mortgage Loan – “PNB Baghban’ For Senior Citizens

PNB is the first Public Sector Bank to come out with a Reverse Mortgage concept
based product for senior citizen titled "PNB Baghban". The product addresses one of
the very important requirements of the society in the fast changing culture of Indian
society. The salient features of the product are given hereunder:

Objective

To address the financial needs of senior citizens owning self occupied property
(house), for leading a decent life.

Eligibility

The residential house/flat owner, who is resident of India, of the age of 60 years&
above, is eligible to raise the loan under this Scheme.

Qualifying/Maximum Amount of Loan/Margin

The qualifying amount of loan will depend on the realizable value of residential
property, after maintaining margin of 20%. The maximum qualifying amount of loan,
along with interest, shall be restricted to Rs.100 lac.

Rate of Interest
10% p.a. (fixed) subject to re-set clause of five years (as applicable for Housing Loan
Borrowers)

Disbursement/tenor of loan
The loan shall be extended as regular fixed monthly payments during the loan period.
i.e. 10-20 years or till the death of the last surviving spouse, whichever is earlier.
Depending on the age of the beneficiary a chart containing the amount of monthly
installments ( calculated on ‘Reverse Annuity Mortgage” basis) to be paid to the
senior citizen borrower for different tenors of loan per lac of rupees is as under :

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Table 1.2:Qualifying Loan Amount (Rs.1.00 lac)

Tenor (yrs.) 10 11 12 13 14 15 16 17 18 19 20

Monthly
490 420 360 315 275 240 215 190 170 150 135
Installment(Rs.)

Security

The loan shall be secured by way of equitable Mortgage of self acquired / self
occupied Residential Property in favour of the Bank. The property to be revalued
every 5 years and monthly loan installment to be re fixed keeping in view applicable
ROI and valuation of property.

Repayment of Loan
Settlement of loan, along with accumulated interest, to be met by the proceeds
received out of sale of residential property and any surplus to be paid to heirs. The
loan will, as such, become due for recovery and payable six months after death of the
last surviving spouse. However the legal heirs/legatee of the deceased borrowers will
be given first option to settle the loan, along with the accumulated interest, without
sale of the property.

Upfront fee/Documentation Charges

Upfront fee – Amount equivalent to half+ month’s loan installment subject to
Maximum of Rs.15, 000/-.
Documentation Charges/Inspection Charges - Nil

Right of Rescission

After the loan is sanctioned senior citizen borrower(s) shall be given upto 10 days
time to relook into his requirements and if he so wishes to cancel the transaction for
any reason whatsoever.

1.2.3 Reverse Mortgage by DHFL

India's second-largest private housing finance company, Dewan Housing Finance
CorporationLimited (DHFL), is the first off the block In India with a reverse

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mortgage scheme. The scheme, called 'Saksham' is targeted at retired senior citizens
above 60 years of age. The scheme is similar to a housing loan except that in a home
loan the borrower pays a fixed EMI to the lending institution, while in reverse
mortgage the lender pays the borrower a fixed sum of money on a monthly (or
quarterly) basis, the total payment being equal to the value of the property and the
interest on the loaned amount. After the death of the borrower and the borrower's
spouse, the housing company sells the property to recover the amount paid out along
with interest at a rate similar to interest on housing loans. The scheme is designed to
supplement the monthly income of senior citizens. This scheme is offered to retired
people above the age of 60 years who own property and have been living in it for at
least one year.

The loan amount is sanctioned based on the:

 Age of the borrower

 Average value of the property
 Rate of interest on the loan
 The payment method chosen by the borrower

The eligibility for a reverse mortgage loan is simple. The borrower should be 60 years
of age, living in self-owned property, which is free of any other encumbrances, and is
an approved construction. The amount loaned would depend on the estimated value of
the property (minus the interest cost) its condition and life. The loan does not apply to
ancestral property. Saksham allows customers and their spouses to live in the property
as long as they are alive, without the fear of eviction even after the tenure expires. The
surplus amount is then paid to the legal heirs of the borrower. The legal heirs also
have the option to re-possess the property after the demise of both customers and their
spouses. According to Shivkumar Mani, head, marketing, DHFL, "As per the
guidelines laid down by NHB, DHFL is the first company to launch this scheme in
India. This unique scheme is designed to help senior citizens to sustain their lifestyle
and also help them maintain their monthly expenditure without being dependent on
anyone. It is a social security scheme designed to benefit the senior citizens post
retirement." DHFL will first launch Saksham in Mumbai and its adjoining areas
before making it available nationally.

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1.2.4 Reverse Mortgage by Union Bank
Union Bank of India on 4 April, 2008 launched its "Union Reverse Mortgage
Scheme", a loan product designed exclusively for the benefit of senior citizens. The
bank is the fourth in the country to launch the scheme through which the loan seeker
need not worry about re-payment and be assured of monthly income; the Bank's
Bangalore Zone Field General Manager L N V RaoThe loan will be available to
homeowners who are 60 years of age or more and can be availed jointly with the
spouse, provided he or she is more than 55 years old, he said. Unlike other loan
products, there are no income criteria to be met for availing loan. On the demise of the
last surviving owner, the legal heirs have the right to repay. If they do not wish to do
so, the bank will sell the property, set off the loan outstanding .The surplus, if any,
will be given to legal heirs. The minimum loan amount that can be availed is Rs one
lakh and maximum Rs 50 lakh, Rao said. Seventy per cent of the assessed value of the
building would be the loan amount. The maximum tenor of a loan under this scheme
is 15 years. The loan carries a fixed interest of 10 per cent per annum. Typically, for a
loan of Rs 10 lakh, the monthly pay off to the owner on ten year loan will be Rs 4880
and on a 15 year loan, it will be Rs 2410, Rao said. The property is revalued every
five years and adjustments will be made to the monthly payments accordingly, he
said. Rao said the borrower has to comply with certain conditions which include that
he bear the cost of property insured against fire, earthquake and other calamities. If
the borrower ceases to stay in the house which has been mortgaged, the loan will be
cancelled.

1.2.4 LIC Housing to combine reverse mortgage with insurance plan

LIC Housing Finance is looking to combine its reverse mortgage plan with a whole-
life annuity provided by a life insurer. This will allow home owners to use their
property to generate income for life as against for only 15 years as provided under the
present reverse mortgageschemes. The housing finance arm of the Life Insurance
Corporation on Thursday announced the launch of its reverse mortgage scheme. This
product is available across the country for senior citizens above 60 years. The loan
can be availed of either singly or jointly with a spouse, if the spouse is also above 60.

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The shortcoming of most reverse mortgage schemes is that it is available only for 15
years. With the increased life expectancy, most borrowers are expected to outlive the
term of their reverse mortgage. Under present schemes while income from the reverse
mortgage dries up after 15 years, the borrowers end up with the lender having a lien
on their property. LIC Housing Finance chief executive SK Mitter told ET that the
company was in talks with insurance companies to work out a scheme where home
equity could be used to buy an annuity that provides income for the entire life span of
the borrower. “We are working out how to merge an annuity plan with this product”
said MrMitter. The reverse mortgage loan by LICHF will be offered at a fixed interest
rate, subject to reset every five years. Under the scheme, senior citizens can avail of
the loan either on a monthly payment or on a lump sum payment or a combination of
both. The property evaluated for the loan should have at least 20 years of residual life.
The maximum loan balance shall be 90% of the value of the property and the loan
balance will include interest till maturity.The amount of the loan will take into
consideration the property value, age of the borrower, and the rate of interest. The
loan will become due and payable only when the last surviving borrower dies or opts
to sell the home, or permanently moves out of the home.

1.3 RISKS TO RM LENDERS

Szymanoski is a good starting point to appreciate the risks faced by an RM lender.
These risks are at the heart of the reluctance of lenders to get into RM lending, in the
absence of public policy support. The principal and unique problem facing the lender
is that of predicting accumulated future loan balances under an RM, at the time of
origination. The uniqueness is because RM is a ‘rising debt’ instrument. Since RM is
a non-recourse loan, the lender has no access to other properties, if any, of the
borrower. Even if the collateral property appreciates in value, it might still be lower
than the loan balance at the time of disposal of the property. There are three basic
sources of this risk:

1.3.1 Mortality Risks

This is the risk that an RM borrower lives longer than anticipated. The lender might
get hit both ways: he has to make annuity payments for a longer period; and the
eventual value realized might decline. However, this risk is usually ‘diversifiable’, if
the RM lender has a large pool of such borrowers. Possibility of adverse selection (of

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predominance of relatively healthier borrowers) is counterbalanced by the possibility
that even borrowers with poor health may be attracted by RM’s credit line or lump
sum options.However, there is no literature on one possible source of systematic risk.
Since RM is projected to substantially improve the monthly income and/ or liquid
funds of the RM borrowers, would it not itself result in a systematically higher life
expectancy amongst them than otherwise? Perhaps this lacuna is due to the relatively
short experience with RM so far.

1.3.2 Interest Rate Risks

Given that the typical RM borrower is elderly and is looking for predictable sources
of income/ liquidity, RM loans promise a fixed monthly payment / lump sum / credit
line entitlement. However, for the lender, this is a long-term commitment with
significant interest rate risks.While fixing the above, the lender has to account for a
risk premium and thus can offer only a conservative deal to the borrower. This
interest rate risk is not fully diversifiable within the RM portfolio. Most of the RM
loans accumulate interest on a floating rate basis to minimize interest rate risks to the
lender. However, since there are no actual periodic interest payments from the
borrower, these can be realized only at the time of disposal of the house, if at all.

1.3.3 Property Market Risk

This risk may be partly diversifiable by geographical diversification of RM loans.
However, property values may be a non-stationary time series.

1.3.4 Moral Hazard Risk

Once an RM loan is taken, the homeowners may have no incentive to maintain the
house so as to preserve or enhance market value. This might be especially true when
the loan balance is more or less sure to cross the sale value. Since the benefit would
accrue mainly to the lenders and the cost borne by the homeowner, it is perhaps not
sensible to assume otherwise. Miceli and Sirmans model this risk. They conclude that
in a competitive market, the lenders will respond by either reducing the loan amount
or by charging a risk premium in interest or both. However this fear of moral hazard
in maintenance does not square with the findings of Leviton discussed earlier, on the
intensity of the attachment of the elderly to their homes. The more important point is
that some time during the tenure of an RM, an elderly borrower may simply be

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physically incapable of maintaining the home as per loan requirements. Though the
RM loan contract provides for foreclosure under such conditions, this seems to be
impractical and sure to result in litigation and bad publicity for the lender. These
problems have begun to crop up already.

1.3.5 Liquidity Risks

In RM loans where the borrower draws down on his loan through a credit line, there is
a risk of sudden withdrawals.

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