DISSERTATION SYNOPSIS

ON
CUSTOMER PERCEPTION TOWARDS REVERSE MORTGAGE IN
DELHI-NCR

SUBMITTED TOWARDS PARTIAL FULFILLMENT

OF
POST GRADUATE DIPLOMA IN MANAGEMENT
(Approved by AICTE, Govt. of India)
Academic Session
2013 2015

INSTITUTE OF MANAGEMENT STUDIES GHAZIABAD

SUBMITTED TODR. ANURAG PAHUJA

FACULTY-FINANCE

SUBMITTED BYTARANG AGARWAL

(BM: 013097)

INTRODUCTION

Life is unpredictable at every step and this is why in order to face the future
contingency we generally save money, especially for those days when due to the
age people are not able to work also. Now a days more than saving people are
more interested in investment. Many plans are available that gaze into the future
and foresee financial stability during old age. The concept of reverse mortgage is
also getting popular in India.
A reverse mortgage provides income that people can tap into for their retirement.
The advantage of a reverse mortgage is that the borrower's credit is not relevant,
and is often unchecked, because the borrower does not need to make any
payments, because the home serves as collateral, it must be sold in order to repay
the mortgage when the borrower dies (in some cases, the heirs have the option of
repaying the mortgage without selling the home). These types of mortgages have
large origination costs relative to other types of mortgages. These costs become
part of the initial loan balance and accrue interest. Senior citizen borrowers with
good credit should carefully analyze the options of a more traditional mortgage,
such as a home equity loan, against a reverse mortgage
A reverse mortgage is loan available to homeowners who are 62 years or older that
enables them to convert part of the equity in their home into cash. The product was
conceived as a means to help retirees with limited income use the accumulated
wealth in their homes to cover basic monthly living expenses and pay for health
care. However, there is no restriction for how reverse mortgage proceeds can be
used.
The loan is called a reverse mortgage because the traditional mortgage payback
stream is reversed. Instead of making monthly payments to a lender, as with a
traditional mortgage, the lender makes payments to the borrower. You are not
required to pay back the loan until the home is sold or otherwise vacated. As long
as you live in the home, you are not required to make any monthly payments
towards the loan balance, but you must remain current on your property taxes,
homeowners insurance and condominium fees.

Nearly all reverse mortgages are insured by the Federal Housing Administration
(FHA) through its Home Equity Conversion Mortgage (HECM) program. FHA
insurance guarantees that borrowers will be able to access their authorized loan
funds in the future even if the loan balance exceeds the value of the home or if the
lender experiences financial difficulty. Lenders are guaranteed that they will be
repaid in full when the home is sold, regardless of the loan balance or home value
at repayment. Borrowers or their estates are not liable for loan balances that exceed
the value of the home at repayment. The amount a senior can borrow is based on
their age, the current interest rate, the appraised value of the home.
The fall of joint family system and rise in nuclear family system has brought new
dimension to the care and welfare of Elderly. The population of aged people above
60 years as on 2009 is estimated at 90 million, i.e. around 8% of total population.
According to UN the population of 60+ in 2050 will be around 20%. Life
expectancy has increased 60% in last 60 years from 42 years in 1950 to 69yrs in
2009.

HISTORY

The concept of reverse mortgage was introduced in India in early 1990s, but the
growth of reverse mortgages has increased over the past decade. Reverse
mortgages have been actively promoted in India by few Nationalized banks and
LIC of India. In certain overseas markets the reverse mortgage product has been
accepted due various reasons. The reverse mortgage allows an older person to
retain ownership and access some of the previously inaccessible capital without
selling, but mortgaging their property. The actual loan period is unknown as the
commencement of the reverse mortgage.
Now we will consider following two factors: (a) the older person/s or senior who
has most likely left the workforce and may be cash poor and (b) their home which
is most likely their largest single asset. Due to increased longevity rates, India is
experiencing a demographic shift with an aging of the population. For many older
Indian households their largest single asset is their primary place of residence, This
group consists primarily of retirees aged 60 years and over who have permanently
left the full-time workforce with limited means of earning additional household
income, but who also have a lack of prior financial planning assistance and often
no access to superannuation funds .At the same time there has been an increase in
essential living expenses such as medical, food, transport. These changes were
generally not anticipated by many retired person. In the US the number of reverse
mortgages continues to double each year. For many individuals the timing of
reverse mortgages may be as ideal, as residential property prices are increasing.
Also when returns from other investments fall, then a reverse mortgage has the
potential to make up the shortfall.

LITERATURE REVIEW

Dr. G.Srinivasan- Reverse Mortgage can serve as a boon to retirees, as it does not
conflict with the psychology of elderly Indian population. It can serve as a major as
well as supplementary source of income for retirees at the crucial phase of their
life. But much though is to be bestowed on the designing of this product, for better
appeal among senior citizens.
Ashish Daptardar and Dr. Chandan Dasgupta- India is experiencing a
demographic shift with an aging of the population due to increased longevity rates.
They focused on a rapidly expanding area that affects a growing section of society
and examines factors influencing reverse mortgages, both in supply and demand.
So far this area has been somewhat overlooked in terms of understanding the
financial needs of older Indian and importantly to what extent reverse mortgages
adequately addresses their needs. We would like to investigate how reverse
mortgages are perceived and currently accepted.
Dr.R Venkataraman, and Prof. Archana Mishra (2013) - they provide in-depth
information of the reverse mortgage scheme and banks offering it. This will enable
us to understand the importance of RMS for the Indian society and it will also
make us to understand that why this golden plan has still not got popularity in
India.
Asst.Prof. Suresha B and Dr. Gajendra Naidu (2012) - They particularly
focused on joint family system and old age health care. During the last one decade
there has been significant demographic change in India's population due to
globalization and improved medical facility and lifestyle. The fall of joint family
system and rise in nuclear family system has brought new dimension to the care
and welfare of Elderly.
Michelangeli (2008) in his paper defined that: A reverse mortgage is a financial
instrument that allows a homeowner to secure liquid fund against the equity in a
house. This type of home equity loan allows homeowners to convert some of the
equity in their home to cash. The loan does not have to be repaid as long as the

borrower lives in the house. The borrower does not require satisfying credit or
income requirement and they can receive the proceeds (cash) in different ways.
Chou, Chow & Chi (2006): Reverse mortgage is a loan against property owned by
the debtor and the loan becomes repayable when the borrowers die or leaves their
residence permanently. The borrower may receive cash in a number of different
ways or a combination of them.
Chans (2002): Reverse mortgage scheme are financial schemes, which enable a
homeowner to draw down some of the equity in the property. The amount drawn
down is repaid when homeowner dies or moves out of the property. Repayment
can be deferred till the death or exit of the plan-holder or surviving spouse.
Kumar, Purnananda Mallela, Divakaruni,RajasekharKanagala, & Sri
Venkata, Madhukar: The paper identifies a few potential target segments to
enhance marketability of these products in India and suggests a survey be
conducted to assess the potential in these segments in different geographies like
Metros, Urban and Semi-urban areas and the survey results can be used to design
new Reverse Mortgage products for better marketability.

REVERSE MORTGAGE

Reverse mortgages are loans that allow seniors to take equity out of their homes to
help pay for living expenses or other costs. As the equity in their home decreases,
the amount of the loan increases. Unlike a traditional mortgage, seniors do not
make monthly payments. The loan becomes due when the borrower dies, moves
out of the house, or fails to maintain the property and pay homeowners insurance
and property taxes. This type of loan is almost always insured by the Federal
Housing Administration.
Unlike a traditional mortgage, seniors do not make monthly payments. The loan
becomes due when the borrower dies, moves out of the house, or fails to maintain
the property and pay homeowners insurance and property taxes. If borrowers are
not able to meet these requirements the loan becomes delinquent and the home can
eventually go into foreclosure.
The concept of reverse mortgage was introduced in India in early 1990s, but the
growth of reverse mortgages has increased over the past decade. Reverse
mortgages have been actively promoted in India by few Nationalized banks and
LIC of India. In certain overseas markets the reverse mortgage product has been
accepted due various reasons. The reverse mortgage allows an older person to
retain ownership and access some of the previously inaccessible capital without
selling, but mortgaging their property.
Senior Citizens usually do not have a regular income and if they exhaust their
savings, then it gets difficult to meet living expenses without having to sell their
house. A reverse mortgage allows a senior citizen who owns a house to avail of a
monthly stream of income against mortgage of the house. The senior citizen
remains the owner and occupies the house throughout his or her lifetime, without
repayment or servicing of the loan. This system allows Senior Citizens to convert
their homes into cash without having to sell their property. The monthly amount
paid by the reverse mortgage company can be used to meet medical expenses, pay
utility bills and so on. The borrower does not need to repay the loan as long as
he/she continues to live in the house.

This scheme is becoming popular in recent years in India. But as per the RBI
report it is not well accepted in India due to the family system that we follow.
Recent reports seem to indicate that less than 150 people have taken advantage of
the facility since its inception, and it is, therefore, likely to be considered a failure.
This is unfortunate because the facility simply has not been adequately explained.
It was also unattractively packaged. The Indian banking industry must not
complicate the scheme as it has done.

Feature of Reverse Mortgage

1. Minimum Age Limit: Typically the borrowers should be more than 60
years of age. Lenders fix this age limit duly considering the guidelines in the
social security system and other welfare measures offered by the
government and also the, retirement age of the working class.
2. Loan Amount: Maximum Loan Amount to borrowers depends on the house
value, borrowers age, cost of the loan and the payment plan selected by the
borrower. Typically, the loan amount or the Principal Limit is the maximum
lump-sum payment a borrower can receive or the net present value of
monthly payments or Line of Credit. The loan amount is restricted to
percentage of the property value. In Roll up type of Reverse Mortgages
offered in UK, higher amounts are granted in return for a higher interest
loan. In some other cases, when the borrower get fewer amounts initially,
further amounts will be made available depending on the property value.
However, there are some restrictions which limit the time at which the
borrower can apply for further advance. (Formulas to calculate loan amount
are given in Appendix A)
3. Loan Interest: Loan interest charged on the debt of the borrower can be
fixed or adjustable. For Fixed Rate Reverse Mortgages, the loan interest
would remain same until it is repaid. In case of adjustable rates, the rates are
adjusted at defined time periods based on some reference rate like T-Bill
rate. Interest rate caps for the period as well as for life time are typically
specified for these adjustable rates. In some cases as in Fixed Repayment
Mortgage in UK, there is no explicit interest rate, but borrower agrees that
when the house is sold, he will be pay the lender a higher sum than the

4.

5.

6.

7.

8.

amount borrowed. The higher amount will depend on the age and life
expectancy. However, when borrower dies, the lender may charge interest on
this higher sum from the date borrower die until the mortgage is actually
repaid.
Payment Options: Once the loan amount is determined, it will be disbursed
according to the payment option chosen. The borrower will have the typical
options like receiving a lump sum amount or a series of monthly payments
or access line-of-credit.
Repayment: No repayment is required on Reverse Mortgages as long as the
borrower lives in the house as a principal residence. The full loan balance
becomes due and payable when the borrower sells the house or permanently
moves away or when the borrower dies. When the loan is payable due to
death of the borrower, borrowers heirs can repay the outstanding loan and
take title to the property or lender can sell the property and pay off the loan.
If the property value is more than the outstanding loan balance, the
difference is paid to the heirs.
Loan Costs: Loan costs typically include an origination fee, appraisal fee,
mortgage insurance fee, and other closing costs. There are usually caps on
these upfront costs, which may be financed as part of the Reverse Mortgage.
Mandatory Occupation: The borrower must occupy the property. The
borrowers income and credit worthiness are not of concern because
payments are made from the lender to the borrower.
House ownership: Typically, lender does not own the house. The borrowers
retain the title to the house and are responsible for taxes, insurance and
upkeep. In the Home reversions schemes sold in UK, the lenders buy a share
of the borrower property, so that there is transfer in the ownership to the
lender.

Eligibility for Reverse Mortgage Loan: Borrower Requirements:

62 years of age or older

Own the property outright, or almost entirely

Occupy the property as a principal residence

Not be delinquent on federal debt

Have financial resources to continue to make timely payment of

ongoing property taxes, insurance and Homeowner Association fees, etc.

Participate in a housing counseling session (typically by phone)

Property Requirements:

Meet all FHA property standards and flood requirements

Single family home, or 2-4 unit home with one unit occupied by
owner.

HUD approved condominium project.

Manufactured home that meets FHA requirements.

Financial Requirements

Income, assets, monthly living expenses, and credit history will be

verified.

Timely payment of real estate taxes, hazard and flood insurance

premiums will be verified.
Guidelines of RBI for Reverse Mortgage:1) Any house owner over 60 years of age is eligible for a reverse mortgage.
2) The maximum loan is up to 60 per cent of the value of the residential property.
3) The maximum period of property mortgage is 15 years with a bank or HFC
(housing finance company).
4) The borrower can opt for a monthly, quarterly, annual or lump sum payments at
any point, as per his discretion.
5) The revaluation of the property has to be undertaken by the bank or HFC once
every 5 years.

6) The amount received through reverse mortgage is considered as loan and not
income; hence the same will not attract any tax liability
Types of Reverse Mortgage

1. Term: Borrower receives monthly payments for a set period of time. The
loan is repaid with interest at the end of the set term unless he moves out or
dies during the term.
2. Split Term: Borrower receives monthly payments for a set term. The
payments will stop at the end of the set term. Expiration of the term is not a
contingency to repay the loan as in the case of Term Reverse Mortgages. The
loan has to be repaid when the homeowner dies or moves or sells the home.
3. Tenure: Borrower receives monthly payments as long as he lives in the
house. Loan has to be repaid on death of borrower or on his move-out.
4. Line of Credit: Line-of-credit reverse mortgage offers borrowers access to a
source of money they can use whenever and however they choose. The
principal limit is approved based on the borrowers home value, age,
origination fee, and percentage of shared appreciation the lender is entitled
to. The entire line of credit may be advanced at closing.
5. Hybrid Term/Tenure: Hybrid term/tenure reverse mortgage combines the
features of term or tenure plan and line-of credit plan. It allows the borrower
to set aside part of the principal limit at origination to establish a line of
credit. The borrower receives the rest of the principal limit in the form of
equal monthly payments as long as the term does not expire or the borrower
lives in the home.
6. Lifetime: Borrower receives monthly payments as long as he is alive even if
he is NOT staying in the mortgaged house. The contingency to repay occurs
on the death of the borrower. An annuity attached to this reverse mortgage
enables income to be provided for life.

7. Roll Up: A lifetime Reverse Mortgage offered in UK, with an added feature
of lending additional cash advance to the borrower in return for higher loan
interest rate.
Other types of Reverse Mortgage Products are:
Home Reversion / Sale and Lease Back- The homeowner sells the house
but keeps the right to live in the house till the time it is his prime residence.
The amount could be used for home improvement, any other health need etc.
Interest-only Mortgage- The borrower takes lump sum and pays only
interest during his lifetime. The principal is recovered through the sale of the
home.
Mortgage Annuity/ Home Income- The loan is used to purchase an annuity
for the homeowner. The advantage is that even if the homeowner moves out
of the home, the annuity will continue till his death.
Shared Appreciation Mortgage- This provides loans at a below market
interest rate. In return, the lender gets a pre-agreed share in any appreciation
in the property value over the accumulated value of the loan.

Importance of Reverse Mortgage in India

The society in India has under-gone huge changes in last 4-5 decades. Nuclear
family has replaced the joint family system. The system of family supporting the
older people has gone. As mentioned earlier the public pension system has not
been able to provide an alternate support to old people. This condition leaves the
older people in jeopardy.
They face following issues: Outliving their retirement income
Depending on their children to help pay expenses
Getting sick and having no way to pay the expenses
Not being able to guarantee an income for their spouse after they are gone
Being able to live as long as they like in their own home.
Looking at the current situation, the needs for a product which can help these
people to solve some of these problems is always a welcome step. Reverse
mortgage or equity release products tries to answer all these problems. Every
Indian, irrespective of its income level tries to build a home for himself during his
working life. Reverse mortgage will give him/her an opportunity to generate
income from that very home. As the ownership remains with the borrower, he can
transfer the home to his successors also if the later agrees to pay the loan amount.
Such a product relieves the pressure on government also to provide old age
security and thus government also needs to support such initiative.

Risk Factor involved in RML

Any financial product involves some risk and reverse mortgage is no exception.
The lender faces many type of risk for this product. Some of these risks are:1. Longevity Risk- The lender has to provide the payment upfront either lump
sum or installments as the case may be but gets his money back only when the
borrowers dies or move into another residence. As we are aware that the life
expectancy of people is increasing, the risk of late recovery of loans is a big
risk for the lenders.
The risk is aggravated by the fact that with the payments from reverse
mortgage, the lifestyle of the borrower gets better which may become one of
the contributors in the improvement of longevity.
2. Interest Rate Risk- The payments to the borrower in case of a reverse
mortgage is fixed, either for a term or lifetime but the cash flows for the lender
may not be fixed and are dependent on the interest rate market. Thus the lender
runs the risk that the interest rates in the market may move in the opposite
direction of that the lender anticipated.
3. Market Risk (Property Value Risk) -The lender in a reverse mortgage can
claim back his loan only from the property on which the loan has been granted.
He does not have recourse to any other asset of the borrower. If the sales
proceeds of the home are not sufficient, the lender cannot clam the balance
from the heirs of the borrower. This gives rise to the risk of adverse movement
in property market which affects the profitability of the product. Early
Redemption Risk- Some of the reverse mortgages loans may give the borrower
an option of repays the loan at any point of time. This leads to another risk for
the lender of early redemption as the borrower will pay back the loan when it is
most beneficial to him which in most cases does not coincide with the interests
of the lender. In case the lender has securitized the loan, which in most of the
cases it is, the risk becomes higher as the lender cannot closer its position in
this case.
BENEFITS OF REVERSE MORTGAGE

1) The inflows of funds are tax-free till the borrower lives in the same house
property.
2) Repayment of the loan is not required till borrower resides in that house.
3) For procurement of loan income proof, medical checkups& credit eligibility
formalities are not required as the house property in this case is available as
collateral securities.
4) In case of TML the amount should be used only for the construction, repairs or
maintenance of the same house on which the loan is taken but in here the loan
amount can be used for the medical purpose also. It is basically to generate income
for the borrower.
5) The loan amount can be taken lump-sum or in various installments (monthly,
quarterly, half yearly or annually) & the installments amount also can be decided
by the borrower based on their needs.
6) The valuation of property revised in every 4-5 years.
7) The person of higher age will be eligible to get higher annuity.

List of Banks Offering Reverse Mortgage Service:-

1. Axis Bank
2. PNB
3. HSBC
4. State Bank of India
5. Bank of Baroda
6. CITI Bank
7. Barclays
8. Canara Bank
9. HDFC
10. ABN AMRO
11. ICICI
12. IDBI
13. Union Bank of India
14. Oriental Bank of Commerce
15.Bank of India

Factors Affecting Reverse Mortgage

1. High transaction cost: The borrowers have to bear a very high transaction
cost. However as compare to the initial days now its having a declining
trend because of the increasing awareness.
2. Risk of moral hazard: There is always a great risk of moral hazard in
borrower who is being responsible for home maintenance & ultimately for
sale of the house property.
3. Unable to fulfill unexpected needs: Investment in house property is an
important component of precautionary savings. If a house owner has already
taken a RML then the ability to meet unexpected health care cost or move in
to alternative house may be difficult. Especially for those who become
seriously ill but they want to continue their stay in the same house will have
to face many problems because there the maintenance of the house will be
the biggest problem.
4. Emotional attachment: Many elderly people may not be willing to take
loan against their home because somewhere they feel that the property which
they made after adding all their savings which they earned with great
difficulty should not go to anyone else possession.
5. Uncertainty of taxation: this is also a major concern where people have a
confusion that if the amount of loan installments which is received by the
borrower is taken as his income then will he be getting any exception on the
interest amount what he is paying towards the loan amount.
6. Loss on exemption from capital gain: since the total cash inflow of reverse
mortgage is taken as tax free amount that is the reason the sale will not get
benefit of capital gain as that will be considered as loan recovered not sale of
house property.

S.W.O.T Analysis

Strengths:
1. It provides a regular income to senior citizens as per their choice.
2. The loan is provided without any income proof.
3. On the regular income any type of tax is not payable.
4. The property is valued by the bank maximum at an interval of 5 years.
5. The borrower can continue staying in the house till the last breath.

Weakness:
1. This loan product has a maximum tenure of only 15 years.
2. Basis of property valuation is not clear.
3. Requirement of clear title to property in the name of the borrower.
4. Three days period to cancel loan is too less.
5. Various fees to be added to borrowers liability, which can be quite
substantial.

Opportunities:
1. Its a substitute of social security for senior citizens.
2. Increase in nuclear families increases need of more cash inflow during old
age to lead a pleasant life.
3. Number of eligible borrowers may increase in future because Indians always
prefer to invest either in gold or in house property.

Threats:
1. Property valuations are ambiguous.
2. There is a non-recourse guarantee.
3. Rate of interest is at the discretion of lender. Any increase in the rate, if
floating, will increase the burden of the borrower.
4. Lender has discretion to raise loan amount on revaluation. However, if it
does not do so, borrower doesn't get loan according to proper value of
property.
5. Lender has right to foreclose loan by forcing sale of property if borrower
doesn't pay for insurance, property taxes or maintain & repair house. Can
lead to further harassment.
6. The norms need to be fine-tuned & made watertight so that these borrowers
are not harassed or short-changed in their old age.

CHALLENGES AHEAD OF REVERSE MORTGAGE

The finance minister's budget proposals in 2011 included the introduction of the
reverse mortgage facility for senior citizens in India. Recent reports that time seem
to indicate that less than 150 people have taken advantage of the facility since its

inception, and it is, therefore, likely to be considered a failure. This is unfortunate

because the facility simply has not been adequately explained. It was also
unattractively packaged. The reverse mortgage facility allows senior citizens to
unlock the value of their most valuable asset, their home, by mortgaging it and
enjoying the use of the money in their lifetime while continuing to live in it until
their deaths. It is a well-entrenched idea in many developed countries in the West
where its terms are such that only home-owners above a given age (typically 60-65
years) may apply.
The Indian banking industry must not complicate the scheme as it has done. The
industry's offer caps the available loan amount at Rs 50 lakh, instead of providing
for an equitable percentage of the property's value, and limits the loan period to
tenure of 15 years. Which 60-year-old couple would wish to put themselves in a
position to have to redeem the principal plus interest amount when they are 75 or
more, at which age they are unlikely to have the stamina to sell out and move to a
new home, which would inevitably be their only option? Inadequate clarity and
inappropriate terms have led the reverse mortgage loan facility in India to have
limited takers. It is possible that most Indians will not sell the family home, and
would prefer passing it on to the next generation, even if they have to live in
relative penury during their waning years because of the small income. However,
many Indian traditions and values have changed in the last 15 years. This is like
many other things. For example, we hated debt and dreaded living on borrowed
funds. The Diners Club credit card was introduced in India in the 1960s. It never
ever took off. But today's new generation has upturned that. More credit cards are
issued in India per month than in most countries in the world, and cards have
changed the way life is lived. The increasing GNP and the surge of the
manufacturing and service sectors owe much to the great surge in consumer
purchasing, including of expensive aspiration goods and real estate.