SlideShare ist ein Scribd-Unternehmen logo
1 von 21
Downloaden Sie, um offline zu lesen
Reverse
Mortgage
By:- Babasab Patil
#
Introduction to Reverse
Mortgage
Until recently, there were two main ways to get cash from your home the
first one is you could sell your home, but then you would have to move and the
second one is you could borrow against your home, but then you would have
to make monthly loan repayments. Now there is a third way of getting money
from your home that does not require you to leave it or to make regular loan
repayments that is “Reverse Mortgage”. A reverse mortgage is a loan against
your home that you do not have to pay back for as long as you live there. With
a reverse mortgage, you can turn the value of your home into cash without
having to move or to repay a loan each month. No matter how this loan is paid
out to you, you typically don‟t have to pay anything back until you die, sell
your home, or permanently move out of your home. Reverse mortgages is a
powerful tool to help eligible homeowners obtain tax-free cash flow
#
History and Origin of reverse
mortgage
The history of reverse mortgage goes back to 1961.In the year 1961 the first
reverse mortgage loan was made by Nelson Haynes of Deering Savings & Loan
(Portland, ME) to Nellie Young, the widow of his high school football coach.In
the year 1963 the first property tax deferral program offered in
Oregon, financed through Public Employees Retirement Fund.In 1970 Survey
research on a "housing annuity plan" was conducted in Los Angeles by Yung-
Ping Chen of UCLA. In 1975 Technical monograph on "Creating New
Financial Instruments for the Aged" authored by Jack M. Guttentag of The
Wharton School.In 1977 First RM loan program, "Equi-Pay", introduced by
Arlo Smith of Broadview Savings & Loan in Independence, OH.In 1978
"Reverse Mortgage Study Project" funded by Wisconsin Bureau on
Aging, directed by Ken Scholen and First statewide deferred payment loan
program offered by WI Dept of Local Affairs and Development, designed by
William Perkins.In 1979 First national "Reverse Mortgage Development
Conference"sponsored by WI Bureau on Aging in Madison
#
The Benefits of a Reverse
Mortgage
 Tax-free funds for as long as you live in your home
 No loan repayment for as long as you live in your home
 No income, medical or credit requirements
 Retain ownership of your home for life this is guaranteed
as long as you maintain your home, and pay insurance and
real estate taxes
 Choose a cash flow plan tailored to your needs
 No restrictions on how you may use the funds
 A tax-advantaged way to pass on part of your estate today
#
Guidelines given by RBI for
Reverse Mortgage:-
 Any house owner over 60 years of age is eligible
for a reverse mortgage.
 The maximum loan is up to 60% of the value of
residential property.
 The maximum period of property mortgage is 15
years with a bank .
 The borrower can opt for a
monthly, quarterly, annual or lump sum payments
at any point, as per his discretion.
#
Costs which are to be incurred while
going for Reverse Mortgage
A. Processing or origination costs: - These are the costs
which covers the bank‟s operating expenses for making
the loan .This cost can be financed as a part of the total
loan.
B. Mortgage Insurance: - This is the insurance charges of
the insurer who guarantees that if the lender that is the
banker goes out of business for any reason, the borrower
would continue to get his or her payments. The insurer
could also guarantee that the borrower will never owe
more than the value of his or her home when the loan is
finally repaid.
#
Conti……..
A. Appraisal fee: - This fee is to be paid to an
appraiser who fixes a value on the borrower‟s
home which is to be mortgaged. An appraiser
must also make sure there are no major structural
defects, such as bad foundation, leaky roof, or
termite damage. If the appraiser uncovers
property defects, you must hire a contractor to
complete the repairs. Once the repairs are
completed, the same appraiser is paid for a
second visit to make sure the repairs have been
completed. The cost of the repair may be
financed within the loan.
#
Conti………..
 The revaluation of the property has to be
undertaken by the Bank once every 5 years.
 The amount received through reverse mortgage is
considered as loan and not income; hence the
same will not attract any tax liability.
 Reverse mortgage rates can be fixed or floating
and hence will vary according to market
conditions depending on the interest rate regime
chosen by the borrower.
#
Risks to Reverse Mortgage
Lenders
There are some risks faced by a Reverse Mortgage
lender. These risks are at the heart of the reluctance of lenders
to get into reverse mortgage 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 a reverse mortgage, at the time of origination. The
uniqueness is because reverse mortgage is a „rising debt‟
instrument. Since reverse mortgage 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. The following are the basic sources
of this risk:-
#
Mortality Risks
This is the risk that a reverse mortgage 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 realised might
decline. However, this risk is usually „diversifiable‟, if the reverse
mortgage lender has a large pool of such borrowers. Possibility of adverse
selection is counterbalanced by the possibility that even borrowers with
poor health may be attracted by Reverse Mortgage‟s credit line or lump
sum options. However, there is no literature on one possible source of
systematic risk. Since reverse mortgage is projected to substantially
improve the monthly income and/ or liquid funds of the reverse mortgage
borrowers, would it not itself result in a systematically higher life
expectancy amongst them than otherwise, now this is a big question.
#
Interest Rate Risks
Said that the typical reverse mortgage borrower is elderly
and is looking for predictable sources of income/
liquidity, reverse mortgage 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 reverse mortgage portfolio. Most
of the reverse mortgage loans accumulate interest on a
floating rate basis to minimize interest rate risks to the
lender, like in SBI the interest rates are revised for every 5
years. 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.
#
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. 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. The more
important point is that some time during the tenure of a
reverse mortgage, an elderly borrower may simply be
physically incapable of maintaining the home as per loan
requirements.
#
Risk Mitigation
• Risk mitigation is the key for the success of any financial
product including reverse mortgage. Some of the risk
mitigation techniques which the providers that is the banker
can apply to reduce the risk on their books are as follow
1. Proper eligibility criterions:-
• The first mitigation of risk can be done at the time of
providing loans. This can be done through proper verification
of the title of the property, age of the borrower; his/her credit
analysis etc. This reduces the risk of default by the borrower
#
Conti………
1. Variable interest rates loan as compared to fixed
interest rate loan:-To avoid interest rate risk, the lender
can go for variable interest rates based on some market
benchmark like MIBOR. This will also reduce the risk of
Pre-payment as the borrower will not have interest
arbitrage on prepayment of the loan
2. Proper analysis of mortality trends:-As the product has
significant longevity risk, the lender can do a detailed
mortality trend analysis on a macro level and also in the
market where it is operating.
#
Conti………
1. Geographical diversification :-The lender can look at
spreading the business across the country by promoting
the product in secondary and tertiary cities also so that the
law of large numbers may work properly and if the
provider has a bad experience in one market; it can be
compensated with good experience in other cities
2. Develop the product for lower age groups:-The lender
can develop home equity conversion mortgages for all
households and not just for elderly. This will significantly
reduce loan to value ratio and that will take care of many
of the risks inherent in the product.
#
Conti………
1. Securitization :-One of the most effective ways of mitigation
risk is securitization It involves many other financial players and
thus it spreads the risk of default/prepayment to many other
participants.
2. Repayment schedule :-In the Repayment schedule, some
default conditions or changes that affect the security of the loan
for the lender that can make reverse mortgages payable should
also be added, like Declaration of bankruptcy, Donation or
abandonment of the house, Condemnation/ Sovereign Takeover
of the property by a government agency, adding a new owner to
the home‟s title, taking out new debt against the home etc.
#
Forces affecting “Reverse
Mortgage”
Any financial product is affected by some forces. The
following are forces that affect this innovative financial
product called “Reverse Mortgage”.
 Borrowers have to bear very high transaction costs.
However, with the latest program we can expect a
declining trend in these costs due to growing
volumes, increased awareness and learning effects.
 There is a definite risk of moral hazard in borrowers being
responsible for home maintenance and in ultimate home
sale. Given the profile of a typical borrower, there are
serious questions on both incentives and ability. It is
impractical to enforce the foreclosure clause
#
Conti…….
 Home equity is an important component of precautionary
savings. If a homeowner has drawn down on his equity
through a reverse mortgage, his ability to meet unforeseen
health care costs or move into alternative housing may be
more limited. Those who become seriously ill but would
like to continue to stay at home may face a severe problem.
If they have to be away from home for long for
convalescence, they may fail to maintain the home and pay
property taxes. Then, as per the conditions of the reverse
mortgage, the lender can foreclose the loan.
 Many elderly households may be simply reluctant to take
on debt, having spent so much of their lifetime saving for
their own house.
#
Conti…….
 Real estate laws are state specific whereas regulations
governing reverse mortgage loans are national in character.
If there is a conflict, state laws will prevail unless pre-
empted by federal law.
 Laws in some states are not clear on the lien priority to be
granted to reverse mortgage over other secured
creditors, in spite of specific provisions in a reverse
mortgage contract.
 What happens if a household declares bankruptcy, having
borrowed through a Reverse mortgage is a big question.
#
Conti…….
 Uncertainty exists on taxation of the borrower. If reverse
mortgage annuities were considered taxable as income of
the borrower, would accrued interest on the loan be a tax-
deductible expense is an issue.
 The tax authorities may if classify an reverse mortgage as a
sale of home rather than a loan, given the high probability
that the entire value may ultimately accrue to the lender. If
so, the borrower may suddenly find that he has lost out on
one-time exemptions on capital gains.
 The lender has to account for accrued interest as
income, without any corresponding cash flow.
#
Thank You

Weitere ähnliche Inhalte

Was ist angesagt?

Mortgage loan origination chap 6 by dr sam ruturi
Mortgage loan origination  chap 6 by dr sam ruturiMortgage loan origination  chap 6 by dr sam ruturi
Mortgage loan origination chap 6 by dr sam ruturisamruturi
 
Reverse Mortgages
Reverse MortgagesReverse Mortgages
Reverse Mortgagesdoshihardik
 
Reverse Mortgage Product Basics 3 24 2010
Reverse Mortgage Product Basics 3 24 2010Reverse Mortgage Product Basics 3 24 2010
Reverse Mortgage Product Basics 3 24 2010fstadler
 
Reverse Mortgage Presentation
Reverse Mortgage PresentationReverse Mortgage Presentation
Reverse Mortgage PresentationKeesha Taylor
 
Reverse Mortgage Truth
Reverse Mortgage Truth Reverse Mortgage Truth
Reverse Mortgage Truth Michael Pinter
 
New home buying seminar riddell and duncan
New home buying seminar riddell and duncanNew home buying seminar riddell and duncan
New home buying seminar riddell and duncanswbcmarketing
 
Reverse Guide 2009
Reverse Guide 2009Reverse Guide 2009
Reverse Guide 2009alfies
 
www Lasvegasmtg Com Reverse Mortgage Myths
www Lasvegasmtg Com   Reverse Mortgage Mythswww Lasvegasmtg Com   Reverse Mortgage Myths
www Lasvegasmtg Com Reverse Mortgage MythsJohn Le Francois
 
Mortgage industry explained-maria arrua
Mortgage industry explained-maria arruaMortgage industry explained-maria arrua
Mortgage industry explained-maria arruaMaria A. Arrua
 
Basics Of Mortgage Loan
Basics Of Mortgage LoanBasics Of Mortgage Loan
Basics Of Mortgage LoanMortgageFit
 
Sacks-Maningas Recovering a Lost Deduction Reprint
Sacks-Maningas Recovering a Lost Deduction ReprintSacks-Maningas Recovering a Lost Deduction Reprint
Sacks-Maningas Recovering a Lost Deduction ReprintNicholas S. Maningas, Sr.
 
Mortgage rates beginner's_guide-maria arrua
Mortgage rates beginner's_guide-maria arruaMortgage rates beginner's_guide-maria arrua
Mortgage rates beginner's_guide-maria arruaMaria A. Arrua
 
Mortgage Market Presentation Pt. 1 & 2
Mortgage Market Presentation Pt. 1 & 2Mortgage Market Presentation Pt. 1 & 2
Mortgage Market Presentation Pt. 1 & 2lerogers
 

Was ist angesagt? (19)

Mortgage loan origination chap 6 by dr sam ruturi
Mortgage loan origination  chap 6 by dr sam ruturiMortgage loan origination  chap 6 by dr sam ruturi
Mortgage loan origination chap 6 by dr sam ruturi
 
Reverse Mortgages
Reverse MortgagesReverse Mortgages
Reverse Mortgages
 
Home loan
Home loanHome loan
Home loan
 
Reverse Mortgage Product Basics 3 24 2010
Reverse Mortgage Product Basics 3 24 2010Reverse Mortgage Product Basics 3 24 2010
Reverse Mortgage Product Basics 3 24 2010
 
Mortgage Basics
Mortgage BasicsMortgage Basics
Mortgage Basics
 
Reverse mortgage
Reverse mortgageReverse mortgage
Reverse mortgage
 
Reverse Mortgage Presentation
Reverse Mortgage PresentationReverse Mortgage Presentation
Reverse Mortgage Presentation
 
Reverse Mortgage Truth
Reverse Mortgage Truth Reverse Mortgage Truth
Reverse Mortgage Truth
 
New home buying seminar riddell and duncan
New home buying seminar riddell and duncanNew home buying seminar riddell and duncan
New home buying seminar riddell and duncan
 
Reverse Mortgage Slide Show
Reverse Mortgage Slide ShowReverse Mortgage Slide Show
Reverse Mortgage Slide Show
 
Reverse Guide 2009
Reverse Guide 2009Reverse Guide 2009
Reverse Guide 2009
 
www Lasvegasmtg Com Reverse Mortgage Myths
www Lasvegasmtg Com   Reverse Mortgage Mythswww Lasvegasmtg Com   Reverse Mortgage Myths
www Lasvegasmtg Com Reverse Mortgage Myths
 
Mortgage industry explained-maria arrua
Mortgage industry explained-maria arruaMortgage industry explained-maria arrua
Mortgage industry explained-maria arrua
 
Mortgage
MortgageMortgage
Mortgage
 
Basics Of Mortgage Loan
Basics Of Mortgage LoanBasics Of Mortgage Loan
Basics Of Mortgage Loan
 
Sacks-Maningas Recovering a Lost Deduction Reprint
Sacks-Maningas Recovering a Lost Deduction ReprintSacks-Maningas Recovering a Lost Deduction Reprint
Sacks-Maningas Recovering a Lost Deduction Reprint
 
Mortgage rates beginner's_guide-maria arrua
Mortgage rates beginner's_guide-maria arruaMortgage rates beginner's_guide-maria arrua
Mortgage rates beginner's_guide-maria arrua
 
Mortgage Market Presentation Pt. 1 & 2
Mortgage Market Presentation Pt. 1 & 2Mortgage Market Presentation Pt. 1 & 2
Mortgage Market Presentation Pt. 1 & 2
 
Reverse Mortgage Purchase
Reverse Mortgage PurchaseReverse Mortgage Purchase
Reverse Mortgage Purchase
 

Ähnlich wie Reverse mortgage Loan By Babasab Patil

Financial Freedom through Reverse Mortgage
Financial Freedom through Reverse MortgageFinancial Freedom through Reverse Mortgage
Financial Freedom through Reverse MortgageProjects Kart
 
9 Mortgage MarketsCHAPTER OBJECTIVESThe specific objectives of.docx
9 Mortgage MarketsCHAPTER OBJECTIVESThe specific objectives of.docx9 Mortgage MarketsCHAPTER OBJECTIVESThe specific objectives of.docx
9 Mortgage MarketsCHAPTER OBJECTIVESThe specific objectives of.docxblondellchancy
 
Mortgage Research Paper
Mortgage Research PaperMortgage Research Paper
Mortgage Research PaperKristin Oliver
 
The Mortgage Subprime Mortgage Lenders
The Mortgage Subprime Mortgage LendersThe Mortgage Subprime Mortgage Lenders
The Mortgage Subprime Mortgage LendersRachel Walters
 
REVERSE MORTGAGES AND RETIREMENT FINANCIAL PLANNING
REVERSE MORTGAGES AND RETIREMENT FINANCIAL PLANNINGREVERSE MORTGAGES AND RETIREMENT FINANCIAL PLANNING
REVERSE MORTGAGES AND RETIREMENT FINANCIAL PLANNINGJose Caba (L.I.O.N.)
 
Your reverse mortgage guide
Your reverse mortgage guideYour reverse mortgage guide
Your reverse mortgage guideMichael Pinter
 
2016 Simple Mortgage Guide
2016 Simple Mortgage Guide2016 Simple Mortgage Guide
2016 Simple Mortgage GuideBrianHenryTO
 
THE NEW- REVERSE MORTGAGE
THE NEW- REVERSE MORTGAGETHE NEW- REVERSE MORTGAGE
THE NEW- REVERSE MORTGAGEBernie Ockrim
 
home process
home process home process
home process 1234sawai
 
Fixed Rate Mortgage Loans
Fixed Rate Mortgage LoansFixed Rate Mortgage Loans
Fixed Rate Mortgage LoansKaren Nelson
 
Personal loans
Personal loansPersonal loans
Personal loansDharmik
 
A Specialty Mortgage
A Specialty MortgageA Specialty Mortgage
A Specialty Mortgagebbyluvsboo
 
Reverse mortgage presentation_7_11
Reverse mortgage presentation_7_11Reverse mortgage presentation_7_11
Reverse mortgage presentation_7_11James Stout
 

Ähnlich wie Reverse mortgage Loan By Babasab Patil (20)

Financial Freedom through Reverse Mortgage
Financial Freedom through Reverse MortgageFinancial Freedom through Reverse Mortgage
Financial Freedom through Reverse Mortgage
 
9 Mortgage MarketsCHAPTER OBJECTIVESThe specific objectives of.docx
9 Mortgage MarketsCHAPTER OBJECTIVESThe specific objectives of.docx9 Mortgage MarketsCHAPTER OBJECTIVESThe specific objectives of.docx
9 Mortgage MarketsCHAPTER OBJECTIVESThe specific objectives of.docx
 
Mortgage Research Paper
Mortgage Research PaperMortgage Research Paper
Mortgage Research Paper
 
The Mortgage Subprime Mortgage Lenders
The Mortgage Subprime Mortgage LendersThe Mortgage Subprime Mortgage Lenders
The Mortgage Subprime Mortgage Lenders
 
REVERSE MORTGAGES AND RETIREMENT FINANCIAL PLANNING
REVERSE MORTGAGES AND RETIREMENT FINANCIAL PLANNINGREVERSE MORTGAGES AND RETIREMENT FINANCIAL PLANNING
REVERSE MORTGAGES AND RETIREMENT FINANCIAL PLANNING
 
Your reverse mortgage guide
Your reverse mortgage guideYour reverse mortgage guide
Your reverse mortgage guide
 
2016 Simple Mortgage Guide
2016 Simple Mortgage Guide2016 Simple Mortgage Guide
2016 Simple Mortgage Guide
 
THE NEW- REVERSE MORTGAGE
THE NEW- REVERSE MORTGAGETHE NEW- REVERSE MORTGAGE
THE NEW- REVERSE MORTGAGE
 
Bridge loan
Bridge loanBridge loan
Bridge loan
 
Homeloans
HomeloansHomeloans
Homeloans
 
Homeloans
HomeloansHomeloans
Homeloans
 
home process
home process home process
home process
 
Fixed Rate Mortgage Loans
Fixed Rate Mortgage LoansFixed Rate Mortgage Loans
Fixed Rate Mortgage Loans
 
Personal loans
Personal loansPersonal loans
Personal loans
 
A Specialty Mortgage
A Specialty MortgageA Specialty Mortgage
A Specialty Mortgage
 
Reverse mortgage presentation_7_11
Reverse mortgage presentation_7_11Reverse mortgage presentation_7_11
Reverse mortgage presentation_7_11
 
Chapter (7)
Chapter (7)Chapter (7)
Chapter (7)
 
New reverse presentation
New reverse presentation New reverse presentation
New reverse presentation
 
Loans (2)
Loans (2)Loans (2)
Loans (2)
 
Mortgage fact sheet email
Mortgage   fact sheet emailMortgage   fact sheet email
Mortgage fact sheet email
 

Mehr von Babasab Patil

Segmentation module 4 mba 1st sem by babasab patil (karrisatte)
Segmentation module 4  mba 1st sem by babasab patil (karrisatte)Segmentation module 4  mba 1st sem by babasab patil (karrisatte)
Segmentation module 4 mba 1st sem by babasab patil (karrisatte)Babasab Patil
 
Marketing management module 1 core concepts of marketing mba 1st sem by baba...
Marketing management module 1 core concepts of marketing  mba 1st sem by baba...Marketing management module 1 core concepts of marketing  mba 1st sem by baba...
Marketing management module 1 core concepts of marketing mba 1st sem by baba...Babasab Patil
 
Marketing management module 2 marketing environment mba 1st sem by babasab pa...
Marketing management module 2 marketing environment mba 1st sem by babasab pa...Marketing management module 2 marketing environment mba 1st sem by babasab pa...
Marketing management module 2 marketing environment mba 1st sem by babasab pa...Babasab Patil
 
Marketing management module 4 measuring andforecasting demand mba 1st sem by...
Marketing management module 4  measuring andforecasting demand mba 1st sem by...Marketing management module 4  measuring andforecasting demand mba 1st sem by...
Marketing management module 4 measuring andforecasting demand mba 1st sem by...Babasab Patil
 
Measuring and forecasting demand module 4 mba 1st sem by babasab patil (karri...
Measuring and forecasting demand module 4 mba 1st sem by babasab patil (karri...Measuring and forecasting demand module 4 mba 1st sem by babasab patil (karri...
Measuring and forecasting demand module 4 mba 1st sem by babasab patil (karri...Babasab Patil
 
Notes managerial communication 3 business correspondence and report writing ...
Notes managerial communication  3 business correspondence and report writing ...Notes managerial communication  3 business correspondence and report writing ...
Notes managerial communication 3 business correspondence and report writing ...Babasab Patil
 
Notes managerial communication mod 2 basic communication skills mba 1st sem ...
Notes managerial communication mod 2  basic communication skills mba 1st sem ...Notes managerial communication mod 2  basic communication skills mba 1st sem ...
Notes managerial communication mod 2 basic communication skills mba 1st sem ...Babasab Patil
 
Notes managerial communication mod 4 the job application process mba 1st sem ...
Notes managerial communication mod 4 the job application process mba 1st sem ...Notes managerial communication mod 4 the job application process mba 1st sem ...
Notes managerial communication mod 4 the job application process mba 1st sem ...Babasab Patil
 
Notes managerial communication mod 5 interviews mba 1st sem by babasab patil...
Notes managerial communication mod 5 interviews  mba 1st sem by babasab patil...Notes managerial communication mod 5 interviews  mba 1st sem by babasab patil...
Notes managerial communication mod 5 interviews mba 1st sem by babasab patil...Babasab Patil
 
Notes managerial communication part 1 mba 1st sem by babasab patil (karrisatte)
Notes managerial communication part 1  mba 1st sem by babasab patil (karrisatte)Notes managerial communication part 1  mba 1st sem by babasab patil (karrisatte)
Notes managerial communication part 1 mba 1st sem by babasab patil (karrisatte)Babasab Patil
 
Principles of marketing mba 1st sem by babasab patil (karrisatte)
Principles of marketing mba 1st sem by babasab patil (karrisatte)Principles of marketing mba 1st sem by babasab patil (karrisatte)
Principles of marketing mba 1st sem by babasab patil (karrisatte)Babasab Patil
 
Segmentation module 4 mba 1st sem by babasab patil (karrisatte)
Segmentation module 4  mba 1st sem by babasab patil (karrisatte)Segmentation module 4  mba 1st sem by babasab patil (karrisatte)
Segmentation module 4 mba 1st sem by babasab patil (karrisatte)Babasab Patil
 
Marketing management module 1 important questions of marketing mba 1st sem...
Marketing management module 1  important questions of marketing   mba 1st sem...Marketing management module 1  important questions of marketing   mba 1st sem...
Marketing management module 1 important questions of marketing mba 1st sem...Babasab Patil
 
Discovery shuttle processing NASA before launching the rocket by babasab ...
Discovery shuttle processing  NASA   before  launching the rocket by babasab ...Discovery shuttle processing  NASA   before  launching the rocket by babasab ...
Discovery shuttle processing NASA before launching the rocket by babasab ...Babasab Patil
 
Corporate lessons from__iim__calcutta by babasab patil
Corporate lessons from__iim__calcutta by babasab patil Corporate lessons from__iim__calcutta by babasab patil
Corporate lessons from__iim__calcutta by babasab patil Babasab Patil
 
Communication problems between men and women by babasab patil
Communication problems between men and women by babasab patil Communication problems between men and women by babasab patil
Communication problems between men and women by babasab patil Babasab Patil
 
Brasil waterfall byy babasab patil
Brasil waterfall  byy babasab patil Brasil waterfall  byy babasab patil
Brasil waterfall byy babasab patil Babasab Patil
 
Best aviation photography_ever__bar_none by babasab patil
Best aviation photography_ever__bar_none by babasab patil Best aviation photography_ever__bar_none by babasab patil
Best aviation photography_ever__bar_none by babasab patil Babasab Patil
 
Attitude stone cutter
Attitude stone cutterAttitude stone cutter
Attitude stone cutterBabasab Patil
 
Attitude stone cutter
Attitude stone cutterAttitude stone cutter
Attitude stone cutterBabasab Patil
 

Mehr von Babasab Patil (20)

Segmentation module 4 mba 1st sem by babasab patil (karrisatte)
Segmentation module 4  mba 1st sem by babasab patil (karrisatte)Segmentation module 4  mba 1st sem by babasab patil (karrisatte)
Segmentation module 4 mba 1st sem by babasab patil (karrisatte)
 
Marketing management module 1 core concepts of marketing mba 1st sem by baba...
Marketing management module 1 core concepts of marketing  mba 1st sem by baba...Marketing management module 1 core concepts of marketing  mba 1st sem by baba...
Marketing management module 1 core concepts of marketing mba 1st sem by baba...
 
Marketing management module 2 marketing environment mba 1st sem by babasab pa...
Marketing management module 2 marketing environment mba 1st sem by babasab pa...Marketing management module 2 marketing environment mba 1st sem by babasab pa...
Marketing management module 2 marketing environment mba 1st sem by babasab pa...
 
Marketing management module 4 measuring andforecasting demand mba 1st sem by...
Marketing management module 4  measuring andforecasting demand mba 1st sem by...Marketing management module 4  measuring andforecasting demand mba 1st sem by...
Marketing management module 4 measuring andforecasting demand mba 1st sem by...
 
Measuring and forecasting demand module 4 mba 1st sem by babasab patil (karri...
Measuring and forecasting demand module 4 mba 1st sem by babasab patil (karri...Measuring and forecasting demand module 4 mba 1st sem by babasab patil (karri...
Measuring and forecasting demand module 4 mba 1st sem by babasab patil (karri...
 
Notes managerial communication 3 business correspondence and report writing ...
Notes managerial communication  3 business correspondence and report writing ...Notes managerial communication  3 business correspondence and report writing ...
Notes managerial communication 3 business correspondence and report writing ...
 
Notes managerial communication mod 2 basic communication skills mba 1st sem ...
Notes managerial communication mod 2  basic communication skills mba 1st sem ...Notes managerial communication mod 2  basic communication skills mba 1st sem ...
Notes managerial communication mod 2 basic communication skills mba 1st sem ...
 
Notes managerial communication mod 4 the job application process mba 1st sem ...
Notes managerial communication mod 4 the job application process mba 1st sem ...Notes managerial communication mod 4 the job application process mba 1st sem ...
Notes managerial communication mod 4 the job application process mba 1st sem ...
 
Notes managerial communication mod 5 interviews mba 1st sem by babasab patil...
Notes managerial communication mod 5 interviews  mba 1st sem by babasab patil...Notes managerial communication mod 5 interviews  mba 1st sem by babasab patil...
Notes managerial communication mod 5 interviews mba 1st sem by babasab patil...
 
Notes managerial communication part 1 mba 1st sem by babasab patil (karrisatte)
Notes managerial communication part 1  mba 1st sem by babasab patil (karrisatte)Notes managerial communication part 1  mba 1st sem by babasab patil (karrisatte)
Notes managerial communication part 1 mba 1st sem by babasab patil (karrisatte)
 
Principles of marketing mba 1st sem by babasab patil (karrisatte)
Principles of marketing mba 1st sem by babasab patil (karrisatte)Principles of marketing mba 1st sem by babasab patil (karrisatte)
Principles of marketing mba 1st sem by babasab patil (karrisatte)
 
Segmentation module 4 mba 1st sem by babasab patil (karrisatte)
Segmentation module 4  mba 1st sem by babasab patil (karrisatte)Segmentation module 4  mba 1st sem by babasab patil (karrisatte)
Segmentation module 4 mba 1st sem by babasab patil (karrisatte)
 
Marketing management module 1 important questions of marketing mba 1st sem...
Marketing management module 1  important questions of marketing   mba 1st sem...Marketing management module 1  important questions of marketing   mba 1st sem...
Marketing management module 1 important questions of marketing mba 1st sem...
 
Discovery shuttle processing NASA before launching the rocket by babasab ...
Discovery shuttle processing  NASA   before  launching the rocket by babasab ...Discovery shuttle processing  NASA   before  launching the rocket by babasab ...
Discovery shuttle processing NASA before launching the rocket by babasab ...
 
Corporate lessons from__iim__calcutta by babasab patil
Corporate lessons from__iim__calcutta by babasab patil Corporate lessons from__iim__calcutta by babasab patil
Corporate lessons from__iim__calcutta by babasab patil
 
Communication problems between men and women by babasab patil
Communication problems between men and women by babasab patil Communication problems between men and women by babasab patil
Communication problems between men and women by babasab patil
 
Brasil waterfall byy babasab patil
Brasil waterfall  byy babasab patil Brasil waterfall  byy babasab patil
Brasil waterfall byy babasab patil
 
Best aviation photography_ever__bar_none by babasab patil
Best aviation photography_ever__bar_none by babasab patil Best aviation photography_ever__bar_none by babasab patil
Best aviation photography_ever__bar_none by babasab patil
 
Attitude stone cutter
Attitude stone cutterAttitude stone cutter
Attitude stone cutter
 
Attitude stone cutter
Attitude stone cutterAttitude stone cutter
Attitude stone cutter
 

Kürzlich hochgeladen

Solution manual for Intermediate Accounting, 11th Edition by David Spiceland...
Solution manual for  Intermediate Accounting, 11th Edition by David Spiceland...Solution manual for  Intermediate Accounting, 11th Edition by David Spiceland...
Solution manual for Intermediate Accounting, 11th Edition by David Spiceland...mwangimwangi222
 
Stock Market Brief Deck for March 19 2024.pdf
Stock Market Brief Deck for March 19 2024.pdfStock Market Brief Deck for March 19 2024.pdf
Stock Market Brief Deck for March 19 2024.pdfMichael Silva
 
Stock Market Brief Deck for March 26.pdf
Stock Market Brief Deck for March 26.pdfStock Market Brief Deck for March 26.pdf
Stock Market Brief Deck for March 26.pdfMichael Silva
 
LIC PRIVATISATION its a bane or boon.pptx
LIC PRIVATISATION its a bane or boon.pptxLIC PRIVATISATION its a bane or boon.pptx
LIC PRIVATISATION its a bane or boon.pptxsonamyadav7097
 
What Key Factors Should Risk Officers Consider When Using Generative AI
What Key Factors Should Risk Officers Consider When Using Generative AIWhat Key Factors Should Risk Officers Consider When Using Generative AI
What Key Factors Should Risk Officers Consider When Using Generative AI360factors
 
Introduction to Entrepreneurship and Characteristics of an Entrepreneur
Introduction to Entrepreneurship and Characteristics of an EntrepreneurIntroduction to Entrepreneurship and Characteristics of an Entrepreneur
Introduction to Entrepreneurship and Characteristics of an Entrepreneurabcisahunter
 
India Economic Survey Complete for the year of 2022 to 2023
India Economic Survey Complete for the year of 2022 to 2023India Economic Survey Complete for the year of 2022 to 2023
India Economic Survey Complete for the year of 2022 to 2023SkillCircle
 
Stock Market Brief Deck for 3/22/2024.pdf
Stock Market Brief Deck for 3/22/2024.pdfStock Market Brief Deck for 3/22/2024.pdf
Stock Market Brief Deck for 3/22/2024.pdfMichael Silva
 
Hungarys economy made by Robert Miklos
Hungarys economy   made by Robert MiklosHungarys economy   made by Robert Miklos
Hungarys economy made by Robert Miklosbeduinpower135
 
Slideshare - ONS Economic Forum Slidepack - 18 March 2024.pptx
Slideshare - ONS Economic Forum Slidepack - 18 March 2024.pptxSlideshare - ONS Economic Forum Slidepack - 18 March 2024.pptx
Slideshare - ONS Economic Forum Slidepack - 18 March 2024.pptxOffice for National Statistics
 
MARKET FAILURE SITUATION IN THE ECONOMY.
MARKET FAILURE SITUATION IN THE ECONOMY.MARKET FAILURE SITUATION IN THE ECONOMY.
MARKET FAILURE SITUATION IN THE ECONOMY.Arifa Saeed
 
Taipei, A Hidden Jewel in East Asia - PR Strategy for Tourism
Taipei, A Hidden Jewel in East Asia - PR Strategy for TourismTaipei, A Hidden Jewel in East Asia - PR Strategy for Tourism
Taipei, A Hidden Jewel in East Asia - PR Strategy for TourismBrian Lin
 
ACCOUNTING FOR BUSINESS.II BRANCH ACCOUNTS NOTES
ACCOUNTING FOR BUSINESS.II BRANCH ACCOUNTS NOTESACCOUNTING FOR BUSINESS.II BRANCH ACCOUNTS NOTES
ACCOUNTING FOR BUSINESS.II BRANCH ACCOUNTS NOTESKumarJayaraman3
 
20240314 Calibre March 2024 Investor Presentation (FINAL).pdf
20240314 Calibre March 2024 Investor Presentation (FINAL).pdf20240314 Calibre March 2024 Investor Presentation (FINAL).pdf
20240314 Calibre March 2024 Investor Presentation (FINAL).pdfAdnet Communications
 
Contracts with Interdependent Preferences
Contracts with Interdependent PreferencesContracts with Interdependent Preferences
Contracts with Interdependent PreferencesGRAPE
 
Sarlat Advisory - Corporate Brochure - 2024
Sarlat Advisory - Corporate Brochure - 2024Sarlat Advisory - Corporate Brochure - 2024
Sarlat Advisory - Corporate Brochure - 2024Guillaume Ⓥ Sarlat
 
Lundin Gold March 2024 Corporate Presentation - PDAC v1.pdf
Lundin Gold March 2024 Corporate Presentation - PDAC v1.pdfLundin Gold March 2024 Corporate Presentation - PDAC v1.pdf
Lundin Gold March 2024 Corporate Presentation - PDAC v1.pdfAdnet Communications
 
Mphasis - Schwab Newsletter PDF - Sample 8707
Mphasis - Schwab Newsletter PDF - Sample 8707Mphasis - Schwab Newsletter PDF - Sample 8707
Mphasis - Schwab Newsletter PDF - Sample 8707harshan90
 

Kürzlich hochgeladen (20)

Solution manual for Intermediate Accounting, 11th Edition by David Spiceland...
Solution manual for  Intermediate Accounting, 11th Edition by David Spiceland...Solution manual for  Intermediate Accounting, 11th Edition by David Spiceland...
Solution manual for Intermediate Accounting, 11th Edition by David Spiceland...
 
Stock Market Brief Deck for March 19 2024.pdf
Stock Market Brief Deck for March 19 2024.pdfStock Market Brief Deck for March 19 2024.pdf
Stock Market Brief Deck for March 19 2024.pdf
 
Stock Market Brief Deck for March 26.pdf
Stock Market Brief Deck for March 26.pdfStock Market Brief Deck for March 26.pdf
Stock Market Brief Deck for March 26.pdf
 
LIC PRIVATISATION its a bane or boon.pptx
LIC PRIVATISATION its a bane or boon.pptxLIC PRIVATISATION its a bane or boon.pptx
LIC PRIVATISATION its a bane or boon.pptx
 
What Key Factors Should Risk Officers Consider When Using Generative AI
What Key Factors Should Risk Officers Consider When Using Generative AIWhat Key Factors Should Risk Officers Consider When Using Generative AI
What Key Factors Should Risk Officers Consider When Using Generative AI
 
Introduction to Entrepreneurship and Characteristics of an Entrepreneur
Introduction to Entrepreneurship and Characteristics of an EntrepreneurIntroduction to Entrepreneurship and Characteristics of an Entrepreneur
Introduction to Entrepreneurship and Characteristics of an Entrepreneur
 
India Economic Survey Complete for the year of 2022 to 2023
India Economic Survey Complete for the year of 2022 to 2023India Economic Survey Complete for the year of 2022 to 2023
India Economic Survey Complete for the year of 2022 to 2023
 
Stock Market Brief Deck for 3/22/2024.pdf
Stock Market Brief Deck for 3/22/2024.pdfStock Market Brief Deck for 3/22/2024.pdf
Stock Market Brief Deck for 3/22/2024.pdf
 
Hungarys economy made by Robert Miklos
Hungarys economy   made by Robert MiklosHungarys economy   made by Robert Miklos
Hungarys economy made by Robert Miklos
 
Slideshare - ONS Economic Forum Slidepack - 18 March 2024.pptx
Slideshare - ONS Economic Forum Slidepack - 18 March 2024.pptxSlideshare - ONS Economic Forum Slidepack - 18 March 2024.pptx
Slideshare - ONS Economic Forum Slidepack - 18 March 2024.pptx
 
MARKET FAILURE SITUATION IN THE ECONOMY.
MARKET FAILURE SITUATION IN THE ECONOMY.MARKET FAILURE SITUATION IN THE ECONOMY.
MARKET FAILURE SITUATION IN THE ECONOMY.
 
Taipei, A Hidden Jewel in East Asia - PR Strategy for Tourism
Taipei, A Hidden Jewel in East Asia - PR Strategy for TourismTaipei, A Hidden Jewel in East Asia - PR Strategy for Tourism
Taipei, A Hidden Jewel in East Asia - PR Strategy for Tourism
 
ACCOUNTING FOR BUSINESS.II BRANCH ACCOUNTS NOTES
ACCOUNTING FOR BUSINESS.II BRANCH ACCOUNTS NOTESACCOUNTING FOR BUSINESS.II BRANCH ACCOUNTS NOTES
ACCOUNTING FOR BUSINESS.II BRANCH ACCOUNTS NOTES
 
20240314 Calibre March 2024 Investor Presentation (FINAL).pdf
20240314 Calibre March 2024 Investor Presentation (FINAL).pdf20240314 Calibre March 2024 Investor Presentation (FINAL).pdf
20240314 Calibre March 2024 Investor Presentation (FINAL).pdf
 
Contracts with Interdependent Preferences
Contracts with Interdependent PreferencesContracts with Interdependent Preferences
Contracts with Interdependent Preferences
 
Sarlat Advisory - Corporate Brochure - 2024
Sarlat Advisory - Corporate Brochure - 2024Sarlat Advisory - Corporate Brochure - 2024
Sarlat Advisory - Corporate Brochure - 2024
 
Lundin Gold March 2024 Corporate Presentation - PDAC v1.pdf
Lundin Gold March 2024 Corporate Presentation - PDAC v1.pdfLundin Gold March 2024 Corporate Presentation - PDAC v1.pdf
Lundin Gold March 2024 Corporate Presentation - PDAC v1.pdf
 
Mphasis - Schwab Newsletter PDF - Sample 8707
Mphasis - Schwab Newsletter PDF - Sample 8707Mphasis - Schwab Newsletter PDF - Sample 8707
Mphasis - Schwab Newsletter PDF - Sample 8707
 
Effects & Policies Of Bank Consolidation
Effects & Policies Of Bank ConsolidationEffects & Policies Of Bank Consolidation
Effects & Policies Of Bank Consolidation
 
New Monthly Enterprises Survey. Issue 21. (01.2024) Ukrainian Business in War...
New Monthly Enterprises Survey. Issue 21. (01.2024) Ukrainian Business in War...New Monthly Enterprises Survey. Issue 21. (01.2024) Ukrainian Business in War...
New Monthly Enterprises Survey. Issue 21. (01.2024) Ukrainian Business in War...
 

Reverse mortgage Loan By Babasab Patil

  • 2. # Introduction to Reverse Mortgage Until recently, there were two main ways to get cash from your home the first one is you could sell your home, but then you would have to move and the second one is you could borrow against your home, but then you would have to make monthly loan repayments. Now there is a third way of getting money from your home that does not require you to leave it or to make regular loan repayments that is “Reverse Mortgage”. A reverse mortgage is a loan against your home that you do not have to pay back for as long as you live there. With a reverse mortgage, you can turn the value of your home into cash without having to move or to repay a loan each month. No matter how this loan is paid out to you, you typically don‟t have to pay anything back until you die, sell your home, or permanently move out of your home. Reverse mortgages is a powerful tool to help eligible homeowners obtain tax-free cash flow
  • 3. # History and Origin of reverse mortgage The history of reverse mortgage goes back to 1961.In the year 1961 the first reverse mortgage loan was made by Nelson Haynes of Deering Savings & Loan (Portland, ME) to Nellie Young, the widow of his high school football coach.In the year 1963 the first property tax deferral program offered in Oregon, financed through Public Employees Retirement Fund.In 1970 Survey research on a "housing annuity plan" was conducted in Los Angeles by Yung- Ping Chen of UCLA. In 1975 Technical monograph on "Creating New Financial Instruments for the Aged" authored by Jack M. Guttentag of The Wharton School.In 1977 First RM loan program, "Equi-Pay", introduced by Arlo Smith of Broadview Savings & Loan in Independence, OH.In 1978 "Reverse Mortgage Study Project" funded by Wisconsin Bureau on Aging, directed by Ken Scholen and First statewide deferred payment loan program offered by WI Dept of Local Affairs and Development, designed by William Perkins.In 1979 First national "Reverse Mortgage Development Conference"sponsored by WI Bureau on Aging in Madison
  • 4. # The Benefits of a Reverse Mortgage  Tax-free funds for as long as you live in your home  No loan repayment for as long as you live in your home  No income, medical or credit requirements  Retain ownership of your home for life this is guaranteed as long as you maintain your home, and pay insurance and real estate taxes  Choose a cash flow plan tailored to your needs  No restrictions on how you may use the funds  A tax-advantaged way to pass on part of your estate today
  • 5. # Guidelines given by RBI for Reverse Mortgage:-  Any house owner over 60 years of age is eligible for a reverse mortgage.  The maximum loan is up to 60% of the value of residential property.  The maximum period of property mortgage is 15 years with a bank .  The borrower can opt for a monthly, quarterly, annual or lump sum payments at any point, as per his discretion.
  • 6. # Costs which are to be incurred while going for Reverse Mortgage A. Processing or origination costs: - These are the costs which covers the bank‟s operating expenses for making the loan .This cost can be financed as a part of the total loan. B. Mortgage Insurance: - This is the insurance charges of the insurer who guarantees that if the lender that is the banker goes out of business for any reason, the borrower would continue to get his or her payments. The insurer could also guarantee that the borrower will never owe more than the value of his or her home when the loan is finally repaid.
  • 7. # Conti…….. A. Appraisal fee: - This fee is to be paid to an appraiser who fixes a value on the borrower‟s home which is to be mortgaged. An appraiser must also make sure there are no major structural defects, such as bad foundation, leaky roof, or termite damage. If the appraiser uncovers property defects, you must hire a contractor to complete the repairs. Once the repairs are completed, the same appraiser is paid for a second visit to make sure the repairs have been completed. The cost of the repair may be financed within the loan.
  • 8. # Conti………..  The revaluation of the property has to be undertaken by the Bank once every 5 years.  The amount received through reverse mortgage is considered as loan and not income; hence the same will not attract any tax liability.  Reverse mortgage rates can be fixed or floating and hence will vary according to market conditions depending on the interest rate regime chosen by the borrower.
  • 9. # Risks to Reverse Mortgage Lenders There are some risks faced by a Reverse Mortgage lender. These risks are at the heart of the reluctance of lenders to get into reverse mortgage 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 a reverse mortgage, at the time of origination. The uniqueness is because reverse mortgage is a „rising debt‟ instrument. Since reverse mortgage 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. The following are the basic sources of this risk:-
  • 10. # Mortality Risks This is the risk that a reverse mortgage 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 realised might decline. However, this risk is usually „diversifiable‟, if the reverse mortgage lender has a large pool of such borrowers. Possibility of adverse selection is counterbalanced by the possibility that even borrowers with poor health may be attracted by Reverse Mortgage‟s credit line or lump sum options. However, there is no literature on one possible source of systematic risk. Since reverse mortgage is projected to substantially improve the monthly income and/ or liquid funds of the reverse mortgage borrowers, would it not itself result in a systematically higher life expectancy amongst them than otherwise, now this is a big question.
  • 11. # Interest Rate Risks Said that the typical reverse mortgage borrower is elderly and is looking for predictable sources of income/ liquidity, reverse mortgage 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 reverse mortgage portfolio. Most of the reverse mortgage loans accumulate interest on a floating rate basis to minimize interest rate risks to the lender, like in SBI the interest rates are revised for every 5 years. 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.
  • 12. # 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. 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. The more important point is that some time during the tenure of a reverse mortgage, an elderly borrower may simply be physically incapable of maintaining the home as per loan requirements.
  • 13. # Risk Mitigation • Risk mitigation is the key for the success of any financial product including reverse mortgage. Some of the risk mitigation techniques which the providers that is the banker can apply to reduce the risk on their books are as follow 1. Proper eligibility criterions:- • The first mitigation of risk can be done at the time of providing loans. This can be done through proper verification of the title of the property, age of the borrower; his/her credit analysis etc. This reduces the risk of default by the borrower
  • 14. # Conti……… 1. Variable interest rates loan as compared to fixed interest rate loan:-To avoid interest rate risk, the lender can go for variable interest rates based on some market benchmark like MIBOR. This will also reduce the risk of Pre-payment as the borrower will not have interest arbitrage on prepayment of the loan 2. Proper analysis of mortality trends:-As the product has significant longevity risk, the lender can do a detailed mortality trend analysis on a macro level and also in the market where it is operating.
  • 15. # Conti……… 1. Geographical diversification :-The lender can look at spreading the business across the country by promoting the product in secondary and tertiary cities also so that the law of large numbers may work properly and if the provider has a bad experience in one market; it can be compensated with good experience in other cities 2. Develop the product for lower age groups:-The lender can develop home equity conversion mortgages for all households and not just for elderly. This will significantly reduce loan to value ratio and that will take care of many of the risks inherent in the product.
  • 16. # Conti……… 1. Securitization :-One of the most effective ways of mitigation risk is securitization It involves many other financial players and thus it spreads the risk of default/prepayment to many other participants. 2. Repayment schedule :-In the Repayment schedule, some default conditions or changes that affect the security of the loan for the lender that can make reverse mortgages payable should also be added, like Declaration of bankruptcy, Donation or abandonment of the house, Condemnation/ Sovereign Takeover of the property by a government agency, adding a new owner to the home‟s title, taking out new debt against the home etc.
  • 17. # Forces affecting “Reverse Mortgage” Any financial product is affected by some forces. The following are forces that affect this innovative financial product called “Reverse Mortgage”.  Borrowers have to bear very high transaction costs. However, with the latest program we can expect a declining trend in these costs due to growing volumes, increased awareness and learning effects.  There is a definite risk of moral hazard in borrowers being responsible for home maintenance and in ultimate home sale. Given the profile of a typical borrower, there are serious questions on both incentives and ability. It is impractical to enforce the foreclosure clause
  • 18. # Conti…….  Home equity is an important component of precautionary savings. If a homeowner has drawn down on his equity through a reverse mortgage, his ability to meet unforeseen health care costs or move into alternative housing may be more limited. Those who become seriously ill but would like to continue to stay at home may face a severe problem. If they have to be away from home for long for convalescence, they may fail to maintain the home and pay property taxes. Then, as per the conditions of the reverse mortgage, the lender can foreclose the loan.  Many elderly households may be simply reluctant to take on debt, having spent so much of their lifetime saving for their own house.
  • 19. # Conti…….  Real estate laws are state specific whereas regulations governing reverse mortgage loans are national in character. If there is a conflict, state laws will prevail unless pre- empted by federal law.  Laws in some states are not clear on the lien priority to be granted to reverse mortgage over other secured creditors, in spite of specific provisions in a reverse mortgage contract.  What happens if a household declares bankruptcy, having borrowed through a Reverse mortgage is a big question.
  • 20. # Conti…….  Uncertainty exists on taxation of the borrower. If reverse mortgage annuities were considered taxable as income of the borrower, would accrued interest on the loan be a tax- deductible expense is an issue.  The tax authorities may if classify an reverse mortgage as a sale of home rather than a loan, given the high probability that the entire value may ultimately accrue to the lender. If so, the borrower may suddenly find that he has lost out on one-time exemptions on capital gains.  The lender has to account for accrued interest as income, without any corresponding cash flow.