Reverse mortgage at sbi mba finance project report

REVERSE MORTGAGE AT SBI BELGAUM

CHAPTER- 1

EXECUTIVE SUMMARY

BABASAB PATIL MBA FINANCE PROJECT Page 1


EXECUTIVE SUMMARY

The title of the project is “REVERSE MORTGAGE”. Project was carried out at
SBI main branch, station road Belgaum. The main objective behind the study was to
understand the concept of Reverse Mortgage and its feasibility study.

Objectives of the study:

• To study the organizational structure.
• To study the theoretical aspects of Reverse Mortgage.
• Reverse Mortgage practices in SBI.
• Feasibility Study.

Statement of the problem:

Study has been taken in order to know the feasibility of Reverse Mortgage in SBI
main branch, Belgaum.

Research Methodology:

 Sampling method: - Deliberate Convenience Sampling. For selecting the sample
for my survey two important criteria were considered one is that the age of the
respondents should more than 62 and the other criteria is that respondent should
own a house with its title.

 Sample size :- 30



 Data collection method
• Primary data
− Questionnaire
− Personal interview
− Observations

• Secondary data
− Records of SBI
− Journals
− Websites

 Scope of study
• Belgaum city

 Tools used for analysis
• SPSS
• Graphs and Charts

Limitations of study:

The limitation of the study is lack of information being provided by the
staff of the bank because of the privacy policy of the bank. As for the survey deliberate
convenience sampling is used, in which the respondents are selected on the basis of
certain criteria the sample size is less and this is another limitation of my study.



Findings:
• An attractive option to the elderly to finance their consumption needs on their
own.
• The loan is given without any income, medical or credit requirements criteria.
• Encourage more people in the working population to increase the proportion of
their savings invested in housing.
• Reverse mortgage lender in the Indian market must proceed with caution.
• The actual size of the reverse mortgage markets is nowhere near its estimated
potential.
• Out of 30 respondents only 40% had some basic knowledge about Reverse
Mortgage.
• 7 people were willing to go for Reverse Mortgage out of 30 respondents.



Suggestions;

• Educate people about reverse mortgage: - As by the survey I have found out that
only 40% of the respondents have some basic idea about reverse mortgage, so by
this it can be said that people are not educated about reverse mortgage. So I would
suggest the bank to educate the people about reverse mortgage through
advertisements, conducting workshops and lectures on reverse mortgage etc.
• Take responsibility for the expenses incurred by the borrower on property
valuation etc: - As it is necessary that the person going for reverse mortgage
should make valuation of his property first, these valuation expenses are incurred
by the applicant himself. During my survey some respondents said that, as they
are aged it is very difficult for them arrange money for property valuation and for
this reason they think going for reverse mortgage is not attractive. So I would
suggest bank to take responsibility of the expenses incurred by the borrower on
property by including it in the total value so that many people go for it.
• Proper eligibility criterions: - In some cases there is a risk of default by the
borrower; this risk can be avoided at the time of providing loans. So in order to
avoid the risk I would suggest the bank to do 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
• Geographical diversification.:- The bank 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 bank has a bad experience
in one market; it can be compensated with good experience in other cities



CHAPTER- 2

INTRODUCTION TO BANKING
SECTOR IN INDIA



Introduction to Banking Sector in India

Banking in India originated in the first decade of 18th century with The General Bank
of India coming into existence in 1786. This was followed by Bank of Hindustan. Both
these banks are now defunct. The oldest bank in existence in India is the State Bank of
India being established as "The Bank of Bengal" in Calcutta in June 1806. A couple of
decades later, foreign banks like Credit Lyonnais started their Calcutta operations in the
1850s. At that point of time, Calcutta was the most active trading port, mainly due to the
trade of the British Empire, and due to which banking activity took roots there and
prospered. The first fully Indian owned bank was the Allahabad Bank, which was
established in 1865.

By the 1900s, the market expanded with the establishment of banks such as Punjab
National Bank, in 1895 in Lahore and Bank of India, in 1906, in Mumbai - both of which
were founded under private ownership. The Reserve Bank of India formally took on the
responsibility of regulating the Indian banking sector from 1935. After India's
independence in 1947, the Reserve Bank was nationalized and given broader powers.

 History of Banks

At the end of late-18th century, there were hardly any banks in India in the modern
sense of the term. At the time of the American Civil War, a void was created as the
supply of cotton to Lancashire stopped from the Americas. Some banks were opened at
that time which functioned as entities to finance industry, including speculative trades in
cotton. With large exposure to speculative ventures, most of the banks opened in India
during that period could not survive and failed. The depositors lost money and lost
interest in keeping deposits with banks. Subsequently, banking in India remained the
exclusive domain of Europeans for next several decades until the beginning of the 20th
century.



The Bank of Bengal, which later became the State Bank of India.At the beginning of
the 20th century, Indian economy was passing through a relative period of stability.
Around five decades have elapsed since the India's First war of Independence, and the
social, industrial and other infrastructure have developed. Atthat time there were very
small banks operated by Indians, and most of them were owned and operated by
particular communities. The banking in India was controlled and dominated by the
presidency banks, namely, the Bank of Bombay, the Bank of Bengal, and the Bank of
Madras - which later on merged to form the Imperial Bank of India, and Imperial Bank of
India, upon India's independence, was renamed the State Bank of India. There were also
some exchange banks, as also a number of Indian joint stock banks. All these banks
operated in different segments of the economy. The presidency banks were like the
central banks and discharged most of the functions of central banks. They were
established under charters from the British East India Company. The exchange banks,
mostly owned by the Europeans, concentrated on financing of foreign trade. Indian joint
stock banks were generally under capitalized and lacked the experience and maturity to
compete with the presidency banks, and the exchange banks. There was potential for
many new banks as the economy was growing. Lord Curzon had observed then in the
context of Indian banking: "In respect of banking it seems we are behind the times. We
are like some old fashioned sailing ship, divided by solid wooden bulkheads into separate
and cumbersome compartments."
Under these circumstances, many Indians came forward to set up banks, and
many banks were set up at that time, a number of which have survived to the present such
as Bank of India and Corporation Bank, Indian Bank, Bank of Baroda, and Canara Bank.

During the Wars
The period during the First World War (1914-1918) through the end of the
Second World War (1939-1945), and two years thereafter until the independence of India
were challenging for the Indian banking. The years of the First World War were



turbulent, and it took toll of many banks which simply collapsed despite the Indian
economy gaining indirect boost due to war-related economic activities. At least 94 banks
in India failed during the years 1913 to 1918.

Post-independence
The partition of India in 1947 had adversely impacted the economies of Punjab and
West Bengal, and banking activities had remained paralyzed for months. India's
independence marked the end of a regime of the Laissez-faire for the Indian banking. The
Government of India initiated measures to play an active role in the economic life of the
nation, and the Industrial Policy Resolution adopted by the government in 1948
envisaged a mixed economy. This resulted into greater involvement of the state in
different segments of the economy including banking and finance. The major steps to
regulate banking included:

• In 1948, the Reserve Bank of India, India's central banking authority, was
nationalized, and it became an institution owned by the Government of India.
• In 1949, the Banking Regulation Act was enacted which empowered the Reserve
Bank of India (RBI) "to regulate, control, and inspect the banks in India."
• The Banking Regulation Act also provided that no new bank or branch of an
existing bank may be opened without a licence from the RBI, and no two banks
could have common directors.

However, despite these provisions, control and regulations, banks in India except the
State Bank of India, continued to be owned and operated by private persons. This
changed with the nationalization of major banks in India on 19th July, 1969.

 Development of Banking Sector

Nationalisation
By the 1960s, the Indian banking industry has become an important tool to
facilitate the development of the Indian economy. At the same time, it has emerged as a



large employer, and a debate has ensued about the possibility to nationalize the banking
industry. Indira Gandhi, the-then Prime Minister of India expressed the intention of the
GOI in the annual conference of the All India Congress Meeting in a paper entitled
"Stray thoughts on Bank Nationalisation." The paper was received with positive
enthusiasm.
Thereafter, her move was swift and sudden, and the GOI issued an ordinance and
nationalised the 14 largest commercial banks with effect from the midnight of July 19,
1969. Jayaprakash Narayan, a national leader of India, described the step as a
"masterstroke of political sagacity." Within two weeks of the issue of the ordinance, the
Parliament passed the Banking Companies (Acquition and Transfer of Undertaking) Bill,
and it received the presidential approval on 9th August, 1969.
A second dose of nationalisation of 6 more commercial banks followed in 1980. The
stated reason for the nationalisation was to give the government more control of credit
delivery. With the second dose of nationalisation, the GOI controlled around 91% of the
banking business of India.
After this, until the 1990s, the nationalised banks grew at a pace of around 4%,
closer to the average growth rate of the Indian economy.

Liberalisation
In the early 1990s the then Narasimha Rao government embarked on a policy of
liberalisation and gave licences to a small number of private banks, which came to be
known as New Generation tech-savvy banks, which included banks such as UTI
Bank(now re-named as Axis Bank) (the first of such new generation banks to be set up),
ICICI Bank and HDFC Bank. This move, along with the rapid growth in the economy of
India, kickstarted the banking sector in India, which has seen rapid

growth with strong contribution from all the three sectors of banks, namely, government
banks, private banks and foreign banks.
The next stage for the Indian banking has been setup with the proposed relaxation
in the norms for Foreign Direct Investment, where all Foreign Investors in banks may be



given voting rights which could exceed the present cap of 10%,at present it has gone up
to 49% with some restrictions.
The new policy shook the Banking sector in India completely. Bankers, till this
time, were used to the 4-6-4 method (Borrow at 4%;Lend at 6%;Go home at 4) of
functioning. The new wave ushered in a modern outlook and tech-savvy methods of
working for traditional banks.All this led to the retail boom in India. People not just
demanded more from their banks but also received more.

 Current situation

Currently (2007), banking in India is generally fairly mature in terms of supply,
product range and reach-even though reach in rural India still remains a challenge for the
private sector and foreign banks. In terms of quality of assets and capital adequacy,
Indian banks are considered to have clean, strong and transparent balance sheets relative
to other banks in comparable economies in its region. The Reserve Bank of India is an
autonomous body, with minimal pressure from the government. The stated policy of the
Bank on the Indian Rupee is to manage volatility but without any fixed exchange rate-and
this has mostly been true.

With the growth in the Indian economy expected to be strong for quite some time-
especially in its services sector-the demand for banking services, especially retail
banking, mortgages and investment services are expected to be strong. One may also
expect M&As, takeovers, and asset sales.In March 2006, the Reserve Bank of India
allowed Warburg Pincus to increase its stake in Kotak Mahindra Bank (a private sector
bank) to 10%. This is the first time an investor has been allowed to hold more than 5% in
a private sector bank since the RBI announced norms in 2005

that any stake exceeding 5% in the private sector banks would need to be vetted by them.
Currently, India has 88 scheduled commercial banks (SCBs) - 28 public sector
banks (that is with the Government of India holding a stake), 29 private banks (these do
not have government stake; they may be publicly listed and traded on stock exchanges)



and 31 foreign banks. They have a combined network of over 53,000 branches and
17,000 ATMs. According to a report by ICRA Limited, a rating agency, the public sector
banks hold over 75 percent of total assets of the banking industry, with the private and
foreign banks holding 18.2% and 6.5% respectively.



CHAPTER- 3

INTRODUCTION STATE BANK OF
INDIA



Introduction State Bank of India

• Evolution of SBI

The origin of the State Bank of India goes back to the first decade of the nineteenth
century with the establishment of the Bank of Calcutta in Calcutta on 2 June 1806. Three
years later the bank received its charter and was re-designed as the Bank of Bengal (2
January 1809). A unique institution, it was the first joint-stock bank of British India
sponsored by the Government of Bengal. The Bank of Bombay (15 April 1840) and the
Bank of Madras (1 July 1843) followed the Bank of Bengal. These three banks remained
at the apex of modern banking in India till their amalgamation as the Imperial Bank of
India on 27 January 1921.

Primarily Anglo-Indian creations, the three presidency banks came into existence
either as a result of the compulsions of imperial finance or by the felt needs of local
European commerce and were not imposed from outside in an arbitrary manner to
modernize India's economy. Their evolution was, however, shaped by ideas culled from
similar developments in Europe and England, and was influenced by changes occurring
in the structure of both the local trading environment and those in the relations of the
Indian economy to the economy of Europe and the global economic framework.

• Establishment

The establishment of the Bank of Bengal marked the advent of limited liability, joint-
stock banking in India. So was the associated innovation in banking, viz. the decision to
allow the Bank of Bengal to issue notes, which would be accepted for payment of public
revenues within a restricted geographical area. This right of note issue was very valuable
not only for the Bank of Bengal but also its two siblings, the Banks of Bombay and
Madras. It meant an accretion to the capital of the banks, a capital on which the
proprietors did not have to pay any interest. The concept of



deposit banking was also an innovation because the practice of accepting money for
safekeeping (and in some cases, even investment on behalf of the clients) by the
indigenous bankers had not spread as a general habit in most parts of India. But, for a
long time, and especially upto the time that the three presidency banks had a right of note
issue, bank notes and government balances made up the bulk of the investible resources
of the banks.

The three banks were governed by royal charters, which were revised from time to
time. Each charter provided for a share capital, four-fifth of which were privately
subscribed and the rest owned by the provincial government. The members of the board
of directors, which managed the affairs of each bank, were mostly proprietary directors
representing the large European managing agency houses in India. The rest were
government nominees, invariably civil servants, one of whom was elected as the
president of the board.

• Business

The business of the banks was initially confined to discounting of bills of exchange or
other negotiable private securities, keeping cash accounts and receiving deposits and
issuing and circulating cash notes. Loans were restricted to Rs.one lakh and the period of
accommodation confined to three months only. The The business of the banks was
initially confined to discounting of bills of exchange or other negotiable private
securities, keeping cash accounts and receiving deposits and issuing and circulating cash
notes. Loans were restricted to Rs.one lakh and the period of accommodation confined to
three months only. The security for such loans was public securities, commonly called
Company's Paper, bullion, treasure, plate, jewels, or goods 'not of a perishable nature' and
no interest could be charged beyond a rate of twelve per cent. Loans against goods like
opium, indigo, salt woollens, cotton, cotton piece goods, mule twist and silk goods were
also granted but such finance by way of cash credits gained momentum only from the
third decade of the



nineteenth century. All commodities, including tea, sugar and jute, which began to be
financed later, were either pledged or hypothecated to the bank.

Demand promissory notes were signed by the borrower in favour of the guarantor,
which was in turn endorsed to the bank. Lending against shares of the banks or on the
mortgage of houses, land or other real property was, however, forbidden.Indians were the
principal borrowers against deposit of Company's paper, while the business of discounts
on private as well as salary bills was almost the exclusive monopoly of individuals
Europeans and their partnership firms. But the main function of the three banks, as far as
the government was concerned, was to help the latter raise loans from time to time and
also provide a degree of stability to the prices of government securities.

• Major change in the conditions

A major change in the conditions of operation of the Banks of Bengal, Bombay and
Madras occurred after 1860. With the passing of the Paper Currency Act of 1861, the
right of note issue of the presidency banks was abolished and the Government of India
assumed from 1 March 1862 the sole power of issuing paper currency within British
India. The task of management and circulation of the new currency notes was conferred
on the presidency banks and the Government undertook to transfer the Treasury balances
to the banks at places where the banks would open branches. None of the three banks had
till then any branches (except the sole attempt and that too a short-lived one by the Bank
of Bengal at Mirzapore in 1839) although the charters had given them such authority. But
as soon as the three presidency bands were assured of the free use of government
Treasury balances at places where they would open branches, they embarked on branch
expansion at a rapid pace. By 1876, the branches, agencies and sub agencies of the three
presidency banks covered most of the major parts and many of the inland trade centers in
India.



While the Bank of Bengal had eighteen branches including its head office, seasonal
branches and sub agencies, the Banks of Bombay and Madras had fifteen each.

• Presidency Banks Act
The presidency Banks Act, which came into operation on 1 May 1876, brought the
three presidency banks under a common statute with similar restrictions on business. The
proprietary connection of the Government was, however, terminated, though the banks
continued to hold charge of the public debt offices in the three presidency towns, and the
custody of a part of the government balances. The Act also stipulated the creation of
Reserve Treasuries at Calcutta, Bombay and Madras into which sums above the specified
minimum balances promised to the presidency banks at only their head offices were to be
lodged. The Government could lend to the presidency banks from such Reserve
Treasuries but the latter could look upon them more as a favour than as a right.
The decision of the Government to keep the surplus balances in Reserve
Treasuries outside the normal control of the presidency banks and the connected decision
not to guarantee minimum government balances at new places where branches were to be
opened effectively checked the growth of new branches after 1876. The pace of
expansion witnessed in the previous decade fell sharply although, in the case of the Bank
of Madras, it continued on a modest scale as the profits of that bank were mainly derived
from trade dispersed among a number of port towns and inland centers of the
presidency.India witnessed rapid commercialization in the last quarter of the nineteenth
century as its railway network expanded to cover all the major regions of the country.
New irrigation networks in Madras, Punjab and Sind accelerated the process of
conversion of subsistence crops into cash crops, a portion of which found its way into the
foreign markets. Tea and coffee plantations transformed large areas of the eastern Terais,
the hills of Assam and the Nilgiris into regions of estate agriculture par excellence. All
these resulted in the expansion of

India's international trade more than six-fold. The three presidency banks were both
beneficiaries and promoters of this commercialization process as they became involved in



the financing of practically every trading, manufacturing and mining activity in the sub-
continent. While the Banks of Bengal and Bombay were engaged in the financing of
large modern manufacturing industries, the Bank of Madras went into the financing of
large modern manufacturing industries, the Bank of Madras went into the financing of
small-scale industries in a way which had no parallel elsewhere. But the three banks were
rigorously excluded from any business involving foreign exchange. Not only was such
business considered risky for these banks, which held government deposits, it was also
feared that these banks enjoying government patronage would offer unfair competition to
the exchange banks which had by then arrived in India. This exclusion continued till the
creation of the Reserve Bank of India in 1935.

• Presidency Banks of Bengal

The presidency Banks of Bengal, Bombay and Madras with their 70 branches were
merged in 1921 to form the Imperial Bank of India. The triad had been transformed into a
monolith and a giant among Indian commercial banks had emerged. The new bank took
on the triple role of a commercial bank, a banker's bank and a banker to the
government.But this creation was preceded by years of deliberations on the need for a
'State Bank of India'. What eventually emerged was a 'half-way house' combining the
functions of a commercial bank and a quasi-central bank.The establishment of the
Reserve Bank of India as the central bank of the country in 1935 ended the quasi-central
banking role of the Imperial Bank. The latter ceased to be bankers to the Government of
India and instead became agent of the Reserve Bank for the transaction of government
business at centers at which the central bank was not established. But it continued to
maintain currency chests and small coin depots and operate the remittance facilities
scheme for other banks and the public on terms stipulated by the Reserve Bank. It also
acted as a bankers' bank by holding their

surplus cash and granting them advances against authorized securities. The management
of the bank clearing houses also continued with it at many places where the Reserve
Bank did not have offices. The bank was also the biggest tendered at the Treasury bill



auctions conducted by the Reserve Bank on behalf of the Government. The establishment
of the Reserve Bank simultaneously saw important amendments being made to the
constitution of the Imperial Bank converting it into a purely commercial bank. The earlier
restrictions on its business were removed and the bank was permitted to undertake
foreign exchange business and executor and trustee business for the first time.

• Imperial Bank

The Imperial Bank during the three and a half decades of its existence recorded an
impressive growth in terms of offices, reserves, deposits, investments and advances, the
increases in some cases amounting to more than six-fold. The financial status and
security inherited from its forerunners no doubt provided a firm and durable platform.
But the lofty traditions of banking which the Imperial Bank consistently maintained and
the high standard of integrity it observed in its operations inspired confidence in its
depositors that no other bank in India could perhaps then equal. All these enabled the
Imperial Bank to acquire a pre-eminent position in the Indian banking industry and also
secure a vital place in the country's economic life.When India attained freedom, the
Imperial Bank had a capital base (including reserves) of Rs.11.85 crores, deposits and
advances of Rs.275.14 crores and Rs.72.94 crores respectively and a network of 172
branches and more than 200 sub offices extending all over the country

• First Five Year Plan

In 1951, when the First Five Year Plan was launched, the development of rural India was
given the highest priority. The commercial banks of the country including the Imperial
Bank of India had till then confined their operations to the urban sector and were not



equipped to respond to the emergent needs of economic regeneration of the rural areas. In
order, therefore, to serve the economy in general and the rural sector in particular, the All
India Rural Credit Survey Committee recommended the creation of a state-partnered and
state-sponsored bank by taking over the Imperial Bank of India, and integrating with it,
the former state-owned or state-associate banks. An act was accordingly passed in
Parliament in May 1955 and the State Bank of India was constituted on 1 July 1955.
More than a quarter of the resources of the Indian banking system thus passed under the
direct control of the State. Later, the State Bank of India (Subsidiary Banks) Act was
passed in 1959, enabling the State Bank of India to take over eight former State-
associated banks as its subsidiaries (later named Associates).The State Bank of India was
thus born with a new sense of social purpose aided by the 480 offices comprising
branches, sub offices and three Local Head Offices inherited from the Imperial Bank. The
concept of banking as mere repositories of the community's savings and lenders to
creditworthy parties was soon to give way to the concept of purposeful banking sub
serving the growing and diversified financial needs of planned economic development.
The State Bank of India was destined to act as the pacesetter in this respect and lead the
Indian banking system into the exciting field of national development.



Organization structure of the SBI main branch, Belgaum

ASSISTANT GENERAL MANAGER

CHIEF MANAGER MANAGER CHIEF
MANAGER (A & A) (DBD) MANAGER (CA)

DOMESTIC
DEPUTY
MANAGER (FO)

NRI & TIME DEPUTY
DEPOSIT MANAGER (FO)

DEPARTMENT DEPUTY
MANAGER MANAGER DEP. MANAGER
(CASH) (SYSTEM) (GENERAL A/C)

DEPUTY DEPUTY DEP.
MANAGER MANAGER MANAGER
(CASH) (INTERBANK) (GOVT A/C)



CHAPTER- 4

REVERSE MORTGAGE



Reverse Mortgage
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. Reverse mortgages enable eligible
homeowners to access the money they have built up as equity in their homes. They are
primarily designed to strengthen seniors’ personal and financial independence by
providing funds without a monthly payment burden during their lifetime in the home. The
major eligibility requirements are that the person must be at least 62 years of age and
should own a home. Reverse mortgage is emerging as a significant financial security tool
for senior homeowners because of the broad range of needs these unique loans can
satisfy.
Senior homeowners of all income levels have taken out reverse mortgages for
many different reasons. For some, reverse mortgages provide the extra money that let
them stay securely in their homes throughout retirement. For others, reverse mortgages
provide a means to live more comfortably and pursue their dreams. Its a special type of
mortgage which allows the senior homeowner to access their equity which they have
built up in the form of the home and use the money according to their wish, all this while
letting owner stay in his home. It’s called a reverse mortgage because the flow of
payments is reversed from a traditional mortgage.



The lender makes payments to the owner, or arranges a line of credit that is
available for the owners use. This differs from a traditional mortgage used to purchase or
refinance a home in which you must make monthly mortgage payments to the bank.

To qualify for most loans, the lender checks the applicant’s income to see how
much he can afford to pay back each month. But with a reverse mortgage, he doesn’t
have to make monthly repayments. So the owner or the applicant doesn’t need a
minimum amount of income to qualify for a reverse mortgage. He could have no income,
and still be able to get a reverse mortgage. With most home loans, if a person fails to
make his monthly repayments, he could lose his home. But with a reverse mortgage, he
doesn’t have any monthly repayments to make. So he can’t lose his home by failing to
make them. Reverse mortgages typically require no repayment for as long as the owner
or co-owner live in the home. So reverse mortgage differ from other home loans in these
important ways, the first one is the applicant don’t need an income to qualify for a
reverse mortgage and the second one is he don’t have to make monthly repayments on a
reverse mortgage.

Reverse mortgages have a different purpose than forward mortgages do. With a
forward mortgage, you use your income to repay debt, and this builds up equity in your
home. But with a reverse mortgage, you are taking the equity out in cash. So with a
reverse mortgage your debt increases and your home equity decreases. It’s just the
opposite, or reverse of traditional mortgage. During a reverse mortgage, the lender sends
you cash, and you make no repayments. So the amount you owe (your debt) gets larger as
you get more cash and more interest is added to your loan balance. As your debt grows,
your equity shrinks, unless your home’s value is growing at a high rate. When a reverse
mortgage becomes due and payable, you may owe a lot of money and your equity may be
very small. If you have the loan for a long time, or if your home’s value decreases, there
may not be any equity left at the end of the loan. In short, a reverse mortgage is a “rising
debt, falling equity” type of



deal. But that is exactly what informed reverse mortgage borrowers want to “spend
down” their home equity while they live in their homes, without having to make monthly
loan repayments.



 Difference between traditional mortgage and reverse mortgage

Item Mortgage Reverse Mortgage

Purpose of loan to purchase a home to generate income

Before closing borrower has no equity in borrower has a lot of
the home equity in the home
At closing borrower owes a lot, and borrower owes very little,
has little equity and has lot of equity
During the loan, makes monthly payments receives payments
borrower... to the lender from the lender

loan balance goes down loan balance rises

equity grows equity declines
At end of loan, owes nothing owes substantial
borrower... amount
has substantial equity
has much less,
little, or no equity
Type of Falling Debt- Rising Rising Debt- Falling
Transaction Equity Equity



 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, WI on May
21-22.San Francisco Development Fund's "Reverse Annuity Mortgage(RAM)" program
funded by Federal Home Loan ank Board, foundations, and WI Bureau on Aging;
directed by Don Ralya .

In 1980 Unlocking Home Equity for the Elderly, edited by Ken Scholen and Yung-
Ping Chen, published by Ballinger (Cambridge, MA) .Two-year "Home Equity
Conversion Project" funded by U.S.Administration on Aging, directed by Ken Scholen
FHA reverse mortgage insurance proposal by Ken Scholenendorsed by housing pre-
conference to 1981 White House Conference on Aging.In 1981 National Center for
Home Equity Conversion (NCHEC) incorporated as independent, non-profit organization
in Madison, WI; directed by Ken Scholen U. S. House Select Committee on Aging hears
first Cong- ressional testimony on reverse mortgages, by Ken Scholen White House
Conference on Aging endorses proposal for FHA RM insurance, recommending that "the
FHA should develop an insurance program for reverse mortgage loans" Newsweek,
Time, U.S. News, Good Morning America



provide first national media exposure for reverse mortgages San Francisco RAM program
closes first loans.In 1982 "National Potential for Home Equity onversion" authored by
Bruce Jacobs (University of Rochester) San Francisco RAM program expands to new
sites in California, directed by Bronwyn Belling.U. S. Administration on Aging funds
NCHEC research on federal issues - including FHA RM insurance U. S. Senate Special
Committee on Aging stages first hearing on reverse mortgages; staffed by John Rother;
testimony by Ken Scholen, Jack Guttentag, Maurice Weinrobe, James Firman U. S.
Senate Special Committee on Aging issues report citing need for reverse mortgage
insurance Garn-St. Germain Depository Institutions Act clears regulatory path for
reverse mortgages; first federal statutory recognition of reverse mortgages.

In 1983 Federal Council on Aging supports proposal for FHA reverse mortgage
insurance. FHA reverse mortgage insurance demonstration program proposed by U.S.
Department of Housing and Urban Develop- ment (HUD) in housing bill "RMs:
Problems and Prospects for a Secondary Market and an Examination of Mortgage
Guaranty Insurance", authored by Maurice Weinrobe (Clark University) "National
Development Conference" sponsored by NCHEC with HUD support in Washington, DC;
greetings sent by President Reagan and Representative Claude Pepper U.S.
Administration on Aging funds NCHEC information and training project "Home Equity
Financing of Long-Term Care for the Elderly" byBruce Jacobs (University of Rochester)
and William Weissert (Urban Institute)FHA insurance proposal by Sen John Heinz
adopted by Senate;House-Senate conference committee mandates HUD study. In 1984
First open-ended, risk-pooling reverse mortgage offered by American Homestead in New
Jersey SF RAM program and NCHEC provide training and technical assistance to new
reverse mortgage programs in AZ, MA, NY, WI Prudential-Bache announces marketing
agreement with American Homestead Social Security Administration releases policy
memo on treatment of income from HEC plans.



In 1985 HUD sponsors conference on home equity conversion.U. S. Senate & House
Aging Committees sponsor joint briefing session for Congressional taffers, moderated by
Ken Scholen Line-of-credit development project initiated by United Seniors Health
Cooperative (DC), directed by Bronwyn Belling First "split-term" RM offered by CT
Housing Finance Agency, designed by Stuart Jennings and Arnold Pritchard . In 1986
"Home Equity Information Center" established by AARP, directed by Katrinka Smith
Sloan American Homestead expands into CT, OH, and PA California Home Equity
Conversion Coalition established by RAM program counselors MA Elderly Equity
Program funded by Commonwealth of Massachusetts, directed by Len Raymond HUD
releases study opposing a federal reverse mortgage insurance demonstration AARP
releases analysis by Ken Scholen critiquing HUD study; AARP urges enactment of
federal RM insurance demo.

In 1987 NCHEC completes studies on home equity financing of long-term care
for Minnesota and Connecticut U.S. House Ways and Means Committee hears testimony
on HEC and long-term care by James Firman United Seniors) and Ken Scholen
(NCHEC) Congress passes FHA reverse mortgage insurance proposal American
Homestead expands into DE, MD, and VA "Home-Made Money: A Consumer Guide to
HEC" published by AARP, authored by Ken Scholen .In 1988 National survey of
members' reverse mortgage needs and preferences by AARP FHA reverse mortgage
insurance legislation signed by President Reagan on 2/5/88; Judith V. May named to
develop program HUD announces HECM development team including Edward
Szymanoski, Jr, Patrick Quinton, Donald Alexander, and Mary Kay Roma "Innovation in
Hone Equity Conversion" conference sponsored by AARP; attracts 200 participants from
25 states New plan announced by Capital Holding Corporation (Louisville, KY); 10th
largest investor-owned insurance company in America; "Home Income Security Plan"
first offered in KY, MD, and VA First line-of-credit reverse mortgage developed by VA
Housing Development Authority American Homestead expands into CA Providential
Home Income Plan



(San Francisco) offers shared-appreciation plan throughout CA HUD releases proposed
regulations for FHA reverse mortgage insurance program Fannie Mae announces
intention to purchase reverse mortgages insured by FHA U. S. Administration on Aging
announces cooperative agreement with HUD to sponsor training of reverse
mortgage counselors.

In 1989"A Financial Guide to Reverse Mortgages" by Ken Scholen for NCHEC
introduces total loan cost rate method for analyzing costs HUD selects 50 lenders by
lottery to make first FHA-insured reverse mortgages. Software for determining reverse
mortgage loan advances developed by FHA and made available to the public Wendover
Funding (NC) announces program for servicing FHA-insured reverse mortgages HUD
releases "Home Equity Conversion Mortgage" (HECM) Fourteen 2-day HECM
counselor training sessions conducted by Bronwyn Belling (AARP) and Ken Scholen
(NCHEC) for FHA Capital Holding expands into CA and FL FNMA announces policies
for purchasing FHA-insured (HECM) reverse mortgages First FHA-insured HECM made
to Marjorie Mason of Fairway, KS by the James B Nutter Co National Center for Home
Equity Conversion (NCHEC) moves from Madison, WI to Marshall, MN .In 1990 AARP
releases FHA Counselor Training and Reference Manual, by Bronwyn Belling and Ken
Scholen American Homestead and Providential suspend lending as recession and falling
appreciation expectations dry up debt sources for new loansFourteen more 2-day
counselor training sessions conducted by Bronwyn Belling (AARP) and Ken Scholen
(NCHEC) for HUD "Reverse Angle" newsletter published for FHA counselors by AARP
Home Equity Information Center Congress increases FHA insurance authority to 25,000
loans by 9/31/95; requires disclosure of total loan cost & development of equity reserve
option AARP publishes "Model State Law on Reverse Mortgages" HUD publishes "FHA
Home Equity Conversion Insurance Demonstration: A Model to Calculate Borrower
Payments and Insurance Risk," by Edward Szymanoski Jr.



In 1991 Los Angeles County Employees Retirement Association sponsors
information seminar on reverse mortgages as a potential fund investment and member
benefit AARP publishes 3rd edition of "Home-Made Money" by Ken Scholen;
distribution tops 250,000 New consumer guide developed by Federal Trade Commission
in partnership with NCHEC and AARP HUD publishes new regulations making reverse
mortgage insurance available to all FHA lenders Interim report on FHA program by
Judith V. May Retirement Income On The House: Cashing In On Your Home With A
"Reverse" Mortgage, First lifetime reverse mortgage programs proposed by Peter
Mazonas of Homefirst (San Francisco) and Robert Bachman of Home Equity Partners
(Irvine, CA) FNMA expands funding for expanded HECM program; develops
comprehensive "Instruction Package" Wendover Funding announces correspondent
program and "starter kit" for lenders First multi-state HECM lending programs developed
by International Mortgage (DE, DC, MD, PA, VA, WV), Directors Mortgage (AZ, CA,
NV), and ARCS Mortgage (CA, HI, NY, OR, WA).

In 1992 Capital Holding Corporation airs 60-second and 120-second prime-time
network television ads in CA and FL for its "Homearnings" plan Initial public stock
offering by Providential Home Income Plan attracts strong investor interest AARP
publishes 79-page discussion paper on reverse mortgage counseling by Ken Scholen
AARP releases videotape for counselor training written and narrated by Ken Scholen U.
S. Securities & Exchange Commission issues directive prohibiting interest accrual in
reverse mortgage accounting U. S. Securities & Exchange Commission rescinds previous
directive; issues directive on effective yield method for reverse mortgage accounting
AARP sponsors community coalition-building seminars in support of HECM
development in OH, WI, IA, NY, NJ, PA, IL Retirement Income On The House: Cashing
In On Your Home With A "Reverse" Mortgage named best book of 1992 on financial
services for the elderly by the National Association of State Units on Aging (NASUA)
HECM preliminary evaluation released by HUD.



In 1993 Transamerica announces reverse mortgage product including deferred
annuity from MetLife Fannie Mae convenes roundtable on developing a conventional
reverse mortgage Capital Holding discontinues "Homearnings" plan NCHEC prepares
report on taxation of reverse mortgage transactions for AARP Home Equity Partners
(Irvine, CA) & Union Labor Life announce new "Freedom" plan including optional
immediate annuity from MetLife Wendover convenes 2-day conference of HECM
originators AARP sponsors community seminars in support of HECM program
development in CA, LA, MI, & MS Fannie Mae initiates series of information sessions
for financial planners and elderlaw attorneys Andrus Gerontology Center (USC)
convenes national telecon- ference on reverse mortgages National Center for Home
Equity Conversion (NCHEC) moves from Marshall, MN to Apple Valley, MN At year's
end, the HECM program is all states except AK, SD, & TX); Unity Mortgage offers it in
25 states; Senior Income in 14 states; Directors Mortgage in 14 states; Amerifirst
Mortgage in 9 states; ARCS Mortgage in 6 states; & International Mortgage in 4 states.
In the year 1994 Household Senior Services offers "Ever Yours" creditline reverse
mortgage in FL, GA, IL, KY, MD, MI, OH, and VA Congress enacts "total loan cost
rate" disclosure requirement for all reverse mortgages; Federal Reserve publishes
proposed regulations NCHEC prepares report on "Reversing Foreclosures" for AARP
New York rescinds mortgage tax on reverse mortgages U. S. Court of Appeals barrier to
RM lending in Texas; Rep. Gonzales legislates statutory override of court decision CA
Public Employees Retirement System (CALPERS) initiates study of reverse mortgage
investment Transamerica introduces creditline plan and expands into NY, NJ, PA, and
CT At year's end, Unity Mortgage is offering the HECM in 42 states and Director's
Mortgage has merged with Norwest Mortgage .

In 1995 HUD releases "Evaluation of the Home Equity Conversion Mortgage
Insurance Demonstration" HUD releases first major revision of HECM handbook.HUD
approves direct endorsement processing of HECM loans NCHEC publishes Your New
Retirement Nest Egg: A Consumer Guide to the New Reverse



Mortgages by Ken Scholen.AARP publishes 5th edition of "Home-Made Money" by Ken
Scholen; distribution tops 400,000 HECM program lapses at end of federal fiscal year
AARP sponsors national conference on reverse mortgages in MD on 11/14-15 Fannie
Mae announces "HomeKeeper" plan; media coverage includes front-page, above-the-fold
article in USA Today FHA Commissioner’s Award resented by Nicolas Retsinas to Ken
Scholen for his work on reverse mortgages .

In 1996 HECM program re-authorized on January 26, 1996 Fannie Mae begins
lender training for "Home Keeper" NCHEC issues Second Edition of Your New
Retirement Nest Egg: A Consumer Guide to the New Reverse Mortgages by Ken
Scholen, Hartford Life tests annuity complement to HECM and Fannie Mae reverse
mortgages HUD initiates counselor training via satellite TV.

In 1997 AARP releases consumer videotapes written by Ken Scholen featuring
Scholen and Bronwyn Belling AARP sponsors HUD counselor training via satellite TV
featuring Belling and Scholen Referral fee scams denounced by AARP, HUD, Fannie
Mae Household Senior Services discontinues "Forever Yours" plan AARP announces
counselor support fund capitalized by HUD and Fannie Mae NCHEC initiates "preferred"
lender and counselor program and releases "Reverse Mortgage Counselor" software Ibis
Software (SF) releases "Reverse Mortgage Originator" Texas approves referendum to
permit RMs, but technical errors make impact uncertain, problematic AARP sponsors
national reverse mortgage leadership roundtable and conference National Reverse
Mortgage Lenders Association (NRMLA) organized by Jeffrey Taylor with Peter Bell as
staff .

In 1998 NCHEC circulates discussion papers on "Strengthening Cost Disclosures on
Reverse Mortgages" by Ken Scholen AARP releases "HECM Training-in-a-Box"
including videotapes, workbook, HECM handbook, and counseling manual Fannie Mae
conducts market research to identify reverse mortgage market segments NCHEC
publishes "Reverse Mortgages for Beginners: A Consumer Guide to Every
Homeowner’s Retirement Nest Egg”.NCHEC establishes



website.Transamerica HomeFirst (SF) discontinues originating its proprietary
"HouseMoney" loans and servicing new HECM and HomeKeeper loans Federal Reserve
clarifies inclusion of annuities in TALC disclosures .

In 1999 Neighborhood Reinvestment Corporation (NRC) provides HECM training in
cooperation with AARP Texas approves reverse mortgage lending in statewide
referendum but prohibits creditline choices preferred by most consumers Fannie Mae
announce new consumer protections in 5/22 lender letter NRMLA and AARP support
absolute limit on origination fees, refinancing reforms, and research on a single national
203b limit AARP initiates test of HECM counseling by telephone and develops reverse
mortgage counselor exam in cooperation with HUD, Fannie Mae, and NRMLA.In 2000
First national reverse mortgage counseling exam is taken by 425 counselors in 43
statesNRC provides 2-day HECM training in Atlanta, Minneapolis, Oakland, Tampa,
New Orleans, and San Antonio AARP completes "Model Specifications for Comparing
Reverse Mortgages;" Financial Freedom and Fannie Mae agree to develop new software
implementing the specifications Congress approves absolute limit on origination fees,
refinancing reforms, and research on a single national 203b limit Fannie Mae
discontinues "equity share" pricing option AARP Foundation selects 30 HECM
counselors to participate in HUD-supported pilot "telecounseling" project Financial
Freedom becomes largest reverse mortgage originator via merger with Unity
Mortgage.In 2001 AARP releases new 68-page consumer guide, creates new reverse
mortgage portal announces new tollfree consumer infoline and availability of HECM
counseling by telephone Fannie Mae announces it will waive the equity share fee on all
loans in its Home Keeper portfolio Financial Freedom releases counseling software
meeting AARP model specifications. In 2007 HECM program re-authorized (Reverse
Mortgage)



 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

 The following are the 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.
• 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.



Reverse mortgage in the US

Reverse mortgage was introduced in the US in the late 1980s. Since then, the
number of people pledging their property for reverse mortgage has been on the rise. Take
a look at the numbers.In 1990, there were just 157 people who had opted for this product.
In 2006, 59,781 people opted for reverse mortgage. The concept in India is similar to the
one in the US.To be eligible for reverse mortgage, you should be at least 62 years old and
own a property."In a reverse mortgage, you borrow money using your home as collateral
but there aren't any payments. The interest that is charged is added to the balance owed.
That means you owe more each month. When you die or when the house is sold, the debt
gets paid off," says Jeffrey D. Voudrie, CFP, CEPP, president, Legacy Planning Group
Inc.Once you pledge your property for reverse mortgage, you will receive funds as long
as you live in that property. There are three main sources that home owners can tap in the
US. One of these is the federally insured Home Equity Conversion Mortgage,
administered by the Department of Housing and Urban Development.The majority of
people opting for reverse mortgage go for HECM as it offers the best interest rates and
loan amount. However, if they opt for government-insured reverse mortgages, then they
will also have to pay a fee for Federal Housing Administration insurance that will protect
against the value of the home going below the loan amount.There are also single-purpose
reverse mortgages, offered by state or local government agencies for a specific reason
and, lastly, proprietary reverse mortgages offered by banks, mortgage companies and
other private lenders.People planning a property reverse mortgage have to undergo a free
mortgage counselling from an independent government-approved "housing agency".
Reverse mortgages offered by other financial institutions also require individuals to
undergo similar counselling. "Seniors like this product because it allows them to stay in
their homes and they are not required to make monthly payments," says Voudrie.
However, a concern among most elders is the rising interest rates, which increases the
cost of the loan.



 Costs which are to be incurred while going for Reverse Mortgage
• 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.

• 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.

• 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.

• Other fees which include credit report fee for verifying whether any
tax liabilities are there, title search fee, document preparation fee for
loan documents, mortgage recording fee, survey fee, etc.



 Risks to RM 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.

 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. In this three risks may be
pointed out they are.
• RM can be considered as a package loan with a ‘crossover’ put option to the
borrower to sell his house at the accumulated value of the reverse mortgage loan
at the time of repayment which is uncertain. If this option can be valued, it can be
suitably priced and sold in the market. However, unlike in the case of traditional
mortgages, markets for resale, securitization and derivatives based on reverse
mortgages are non-existent or non-competitive. Small market size and
predominance of government backed reverse mortgage insurance may dissuade
potential entrants. This impedes the flow of funds to finance reverse mortgage
loans.



• For the lender, both the interest and any shared appreciation component added to
the loan balance are taxable as current income even though there is no cash inflow
• Reverse mortgage loans found takers amongst lenders only after the availability
of default insurance. Even then, in most of the reverse mortgage loans, interest
accumulates at a floating rate linked to one-year treasury rates. A fixed interest
rate reverse mortgage carries an interest rate risk are higher than a conventional
coupon bond or regular mortgage. It could be especially high at origination and
continues to be higher throughout. The small initial investment under an reverse
mortgage is very deceptive. Reverse mortgage creates very large off-balance sheet
liabilities, if market rates rise above the rate assumed under reverse mortgage.

 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. Though the reverse mortgage 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.

 Liquidity Risks:-
In Reverse mortgage loans where the borrower draws down on his loan through a credit
line, there is a risk of sudden withdrawals.



 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

• 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

• 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

• 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.

• 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

• 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.



• 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.

• 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”.
1. 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.
2. 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. Negative publicity, potential litigation and likely
judgments make it so.
3. 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.
4. Many elderly households may be simply reluctant to take on debt, having spent
so much of their lifetime saving for their own house.
5. 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.
6. 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.
7. What happens if a household declares bankruptcy, having borrowed through a
Reverse mortgage is a big question.
8. 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.
9. 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.
10. The lender has to account for accrued interest as income, without any
corresponding cash flow.

 Indian Market Potential

 India-specific Characteristics of Relevance to RM
• There are no universal old age social security related benefits. Only about 10% of
the active working populations are covered by formal schemes. This would
substantially enlarge the potential target market for RM.
• A much lower proportion of urban households, and by implication, less scope for
reverse mortgage.



• A much larger proportion of elders co-living with their family members of
subsequent generations and hence less scope for reverse mortgage.
• A possibly stronger hand over motive, reducing the scope for reverse mortgage.
• A possibly higher real rate of appreciation of real estate and housing prices,
making reverse mortgage more attractive to the lender.
• Widespread under valuation of real estate properties to accommodate transactions
involving unaccounted money and evasion of taxes on property and real estate
transactions
• Complexity, variety and location specific variations in types of home ownerships
like Benami holdings that is Irrevocable power of attorney, Leasehold, freehold,
Land use conversion regulations, Floor space regulations, rent, tenancy controls,
Disposal of ancestral property.
• Absence of competitive suppliers for immediate life annuity products. This, in
turn, is a consequence of Lack of data on old age mortality rates, Lack of long-
term treasury securities for managing interest rate risks of annuity providers.
• India specific legal and taxation issues like License/ Permission required under
insurance/ banking regulation for offering reverse mortgage ,Income tax treatment
for reverse mortgage lender and borrower, Capital gains on property, Reporting
and provisioning by the lender as per banking/ insurance regulation, Status of RM
loan in case of insolvency.

 Old Age Population
Though the Indian population is still comparatively ‘young’, India is also
‘ageing’. According to some demographic survey conducted for India indicated the
following outcomes.
• The number of elderly (>60 yrs) will increase to 113 million by 2016, 179
million by 2026, and 218 million by 2030. Their share in the total population is
projected to be 8.9 % by 2016 and 13.3% by 2026. The dependency ratio

is projected to rise from 15% as of now to about 40% in the next four decades



• The percentage of >60 in the population of Tamil Nadu and Kerala will reach
about 15% by 2020 itself.

• Life expectancy at age 60, which is around 17 yrs now, will increase to around 20
by 2020

 Sources of Income Support for the Elderly in India
As of 1994, the estimated percentage among the elderly, dependent on various sources of
income was as follows:

Source Men Women All elderly
Pensions/Rent 9-10% 5% 7-8%
Work 65% 15% 40%
Transfers 30% 72% 52%
Of which, from 22% 58% 40%
Children

In addition, as per a survey of the National Sample Survey Organization (NSSO) in 1994,
less than 4% of the elderly lived alone. A 1995-96 National Sample Survey of the elderly
reported that about 5% of them lived alone, another 10% lived with their spouses only
and another 5% lived with relatives/ non-relatives, other than their own children. In other
words, co-residence with children and other relatives is predominant.
However, the following aspects are worrisome:
• The extent and adequacy of support, especially for widows

• Vulnerability of such support to shocks to family income

• As incomes and life expectancy rose in the now developed countries,
simultaneously there was a decline in co-residence rates and intergenerational
support. It may happen in India too



• Strains due to demographic trends seem inevitable: fewer children must support
parents for longer periods of time. In a recent survey covering 30 cities, 70% of
the respondents did not expect their children to take care of them after retirement.

• Job related migration of youth within the country and emigration.

 Potential Market Segments
Now let us see specification of the potential target segment for Reverse Mortgage.
• Age Group
Above 58 years, assuming 58 is the typical retirement age. Older the individual, more
attractive will be reverse mortgage. Additional considerations will include the minimum
age specified for preferential treatment as ‘senior citizens’ in matters such as income tax
or the recently introduced Varishta Bima Yojana.

• High House Equity
The current monthly annuity payout by LIC under its immediate annuity product Jeevan
Akshay is 844 Rs for a single premium payment of Rs 1 lakh, for a person aged 65. The
annuity will be lower in case of joint life or annuity certain options. If we were to use a
minimum of Rs 5000 as the monthly annuity that makes reverse mortgage a worthwhile
activity, we need an RM loan of around Rs 6 lakhs. Assuming a loan to home value ratio
of 60%, this implies a current market value of Rs. 10 lakhs.

• Low Current Incomes Relative to Desired Standard of Living
Amongst such households, we are looking for those whose current levels of income are
insufficient to afford their desired standard of living. The salary replacement rates
suggested in the literature, for maintaining the same standard of living after retirement as
before, is around 60%. This implies a pre-retirement take home salary or income (after-
tax) of around Rs 9000-10000 a month. A potential reverse mortgage borrower would be



one who had such a pre-retirement income but no substantial pension benefits. Therefore,
he would be employed in the private sector or self-employed.

• Long Tenure at Current Home
Reverse Mortgage is attractive to a borrower especially when he values continued stay in
his current residence and plans to do so for a long term into the future. This is likely
when he has already stayed in his current home for a relatively longer period- say a
minimum of 10 years. Additional indicators for such a desire could be a person currently
resident in one’s home town/ state.

• Lack of Other Supports
If such an individual is living alone, as in the case of a widower or widow, reverse
mortgage can make a substantial contribution to his/ her standard of living. Alternatively,
the next generation may be living far away, either in India or abroad.

• No Significant Bequeath Motive
It can be said that there is a basic conflict between taking an reverse mortgage loan and a
desire to bequeath property to one’s heirs. If an elderly homeowner has no children, this
question may not arise. Otherwise, we need to look for attributes indicating a weak
bequeath motive. For example, in the Indian context, it could mean ‘no sons’. Or it could
be that the entire next generation of the family has migrated to

another metro or abroad with no intention of coming back. They may be much better off
than the older generation and may not value bequests, if any.

• Independence and Quality of Life
A potential reverse mortgage borrower must be an elderly person who values his
financial independence. He must be interested in maintaining his desired quality of life
rather than curtailing consumption for lack of current cash income. This implies he must



be mentally prepared to consider borrowing in old age, let alone through innovative
financial products like reverse mortgage. This implies certain minimum education and
exposure to financial savings/ assets/ markets.

 Considerations in Product Design
Now let’s see what are the aspects which need to be focused for a product design likely to
be attractive from the perspective of a potential reverse mortgage customer and a lender.

 Customer Perspective:-

• Empathetic counseling from professionally competent and independent
counselors- NGOs like Help Age, Dignity Foundation, Indian Association of
Retired Persons (IARP) etc., may be interested in providing such services
• Ratio of reverse mortgage Loan limit to current market value of property: This
will be a function of borrower’s age, projected long term interest rates and
property appreciation rates.
• Flexibility in drawdown: The line of credit with interest credit for unutilised
portion is the most popular choice in the U.S context. The same might be true in
India too. Cash may be withdrawn as and when needed, especially large amounts
to meet medical and other emergencies, in contrast to a

regular monthly amount. However this is vulnerable to myopic withdrawals or
under pressure from relatives.
• Minimum possible reverse mortgage closure costs.
• Clarity in borrower’s responsibility for property maintenance and paying
property taxes, insurance etc. Strong legal protection against foreclosure and/ or
forcible eviction based on fine print may be desirable. Alternatively, the
reverse mortgage lender should be willing to take over such a responsibility
against deduction from reverse mortgage loan limit/ annuity.



• Clarity in tax treatment of reverse mortgage receipts, accrued interest, capital
gains etc.
• Option to refinance in case interest rates decline substantially
• Protection against lender defaults- though not very critical.

 Lender Perspective:-
The major concern is with respect to the risks of longevity, interest rates and property
appreciation rates. There is no simple way to explore these except through financial
modelling. Some alternatives for limiting risks in the learning phase can be suggested as
below.

• Purchasing a life annuity through an insurance tie-up so that a part of the
mortality risk is transferred to the insurer with the necessary core competence.
Their expertise may also be used to decide on the lump sum reverse mortgage
loan.
• Based on the U.S experience so far, it seems better for the lender to assume
responsibility for property maintenance/ taxes against deduction from reverse
mortgage loan limits/ annuity payments.
• Though insurance against default risk is unlikely in India, an reverse mortgage
lender has to charge an equivalent additional interest spread of 2-2.5%, if not
more, as a default risk premium

• It seems worthwhile to explore and lobby for concessional refinance for reverse
mortgage loans from agencies like the National Housing Bank and for lower
reverse mortgage related transaction taxes.
• Given the requirement of property market related expertise at the micro-level, it
might be worthwhile to focus on only one or two cities in the initial phase.
• There might be a need for tie-ups with agencies for various services- property
valuation, title search, property maintenance and so on.



 Myths about Reverse Mortgages
The following are some of the myths about reverse mortgage in the minds of the
people which need to be clearly addressed in order to make this product more
attractive and popular.
• The lender will own the home
The applicant and his family will continues to retain ownership of the home.
The Lender does not take control of the title. The lender's interest is limited to
the outstanding loan balance.

• Reverse Mortgage lenders just want to sell your house
The lenders are in the business of helping to keep owners home and meet
whatever financial needs he may have in order to help him to maintain
financial independence. Reverse Mortgage borrowers may remain in the home
for as long as they wish. However, should they decide to sell the home for any
reason, the loan would then become due and payable.

• Owner’s heirs will be saddled with the loan
The Reverse Mortgage is a non-recourse loan. This means that the lender can
only derive repayment of the loan from the proceeds of the sale of the
property.

• Owner need a certain level of income, good credit, or good health to
qualify
A Reverse Mortgage has no income, credit, or health requirements.

• Owner has to make monthly payments on his Reverse Mortgage
There are never any monthly payments. Payment of taxes, insurance and
general upkeep of the home are the only responsibilities of the homeowner.



• Home must be debt free to qualify for a Reverse Mortgage
Owner may have a mortgage or other debt on his home. The mortgage or debt
however, must be paid off first with the proceeds of the reverse mortgage.

• Only the "cash poor" or desperate senior citizens can benefit from the
Reverse Mortgage
Even though some seniors may have a greater need than others for the cash or
monthly income, the Reverse Mortgage can also be an excellent financial or
estate planning tool.

 SWOT analysis on reverse mortgage loans
Under this scheme, any senior citizen owning unencumbered residential property
in India can mortgage such property for a loan, to tide over expenses in their
twilight years. Here's a SWOT analysis of the same.
Strengths
• The senior citizens are entitled to regular cash flows at their choice - monthly,
quarterly, half yearly and annually.
• The loan is given without any income criteria at an age where normal loans are
not available.

• No loan servicing or repayment required during the lifetime of borrower and
spouse.
• If the borrower dies during the period, the spouse will continue to get the loan
amount for 15 years.
• Tax treatment of a RML will be as loan, not income, so no tax will be payable on
the regular cash flows
• The borrower and their spouse can continue to stay in the house till both die.
• Heirs of the borrower will be entitled to get the surplus of sale value of the
property.



• Borrower/heir can get mortgage released by paying loan with interest without
having to sell property at any time.
• Reassessment of property value will be done periodically say once every 5 years.

Weaknesses
• This loan product has a maximum tenure of only 15 years. If the borrower
outlives this period, the regular cash flows will stop.
• Basis of property valuation is not clear.
• Requirement of clear title to property in the name of the borrower to get the loan.
• Various fees to be added to borrower’s liability, which can be quite substantial.

Opportunities
• Partial substitute for a social security scheme for senior citizens.
• Increasing number of nuclear families.
• Medical expenses and cost of living going up, increasing the need for additional
income in old age.

• Most Indians have strong preference for own home. Therefore many eligible
citizens may opt for the scheme.

Threats
• Property valuations are ambiguous.
• There is a non-recourse guarantee, which means that loan plus interest should
never exceed realizable value of property. In case of fall in property value or loan
with interest exceeding assessed property value, banks may resort to strong-arm
tactics to force the borrowers to move out, if they live too long after the loan
period is over.



• Rate of interest is at the discretion of lender. Any increase in the rate, if floating,
will increase the burden of the borrower.
• 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.
• Lender has right to foreclose loan by forcing sale of property if borrower doesn't
pay for insurance, property taxes or maintain and repair house.

 The following factors are considered while determining the
amount of loan.
• Age of the borrower and any co-applicant.
• The current value of the property and expected property appreciation rate.
• The current interest rate and interest rate volatility (interest rate risk).
• Closure and servicing costs.
• Specific features chosen like fixed or floating interest.
• Whether the payment is taken as lump sum, or monthly payments or quarterly
payment. Lump sum provides the cash immediately, but the interest fees are the
highest.
• The location of the property and whether the maximum loan amount is subject to
the maximum loan limits.



 Steps to followed for getting a Reverse mortgage

The following are the important steps which are to be followed by every person who is
going for reverse mortgage.

1. EDUCATION

The applicant must first educate himself about the reverse mortgage by visiting
this website; this will the beginning of reverse home mortgage learning process.
Many banks nowadays send their representatives to the home of the applicants to
explain the benefits of a reverse home mortgage to the homeowner and family or
friends. Any doubts regarding reverse mortgage may be cleared at that time. If the
homeowner has already had HUD counseling OR is ready to proceed with the
process, an application is to be completed. Government has developed some
websites like HUD or AARP which can be visited for details of reverse mortgage.

2. HUD COUNSELING

Counseling by a HUD approved counselor is required. This can be taken as a first
step or after the application has been completed. HUD counseling can be done via
the telephone or at a fixed location. The HUD counselor will sign and date a HUD
Counseling Certificate at the conclusion of the meeting. The borrower(s) then sign
and date the HUD counseling certificate and give it to their Loan Officer to start
the loan process.

3. APPLICATION

The loan officer takes the application before or after HUD counseling. The loan
officer carefully explains the Reverse home mortgage program features and
benefits. Some of the forms are Good Faith Estimate, Tax & Insurance



Disclosure, Loan application, Privacy Policy Disclosure. The loan officer will collect
copies of Drivers License or other form of Picture ID, Social Security Card or
Medicare Card, Most recent Property tax statement, Homeowners Fire Insurance
Policy, Most recent mortgage statement.

4. PROCESSING THE LOAN

When both the application and HUD counseling have been completed, you are
ready to start processing the loan. The next step is to order a HUD appraisal and a
termite inspection. If either report reveals things that require fixing, according to
HUD guidelines the borrower can fix these within six months after the close of
escrow. If there are repairs required, a separate “Repair Set Aside” account is
created. Fire insurance is required. In some cases the current policy may be less
than the lender requires and therefore it is necessary to increase the insurance
policy to the current value.

5. CLOSING

When the loan documents are ready to be signed, the loan officer will schedule a
convenient time to come to the home of the applicant in some case with a notary
to go over the documents and sign and date the loan papers. If you choose to have
monthly payment, the funds are wired to your account on the first day of every
month. If you choose a credit line, the funds are wired within five business days
of receiving the request in writing.

6. AFTER CLOSING

You must continue to pay property taxes and insurance. You must also maintain
your home in good repair. Any repairs that are required must be done within six
months of the close date. Proof of required repairs must be sent to the Lender.

 Termination of Reverse Mortgage Contract:-


The following are the cases where in the reverse mortgage contract may be terminated
that is terminating the contract of giving regular payouts to the borrower by the bank
before the tenure gets over:-

• The borrower has not stayed in the mortgaged property for a continuous period of
one year.
• The borrower fails to pay property taxes, home insurance or maintain and repair
the residential property.
• The residential mortgaged property is donated or abandoned by the borrower.
• The borrower makes changes in the residential property that affect the security of
the loan for the lender. For example, renting out a part or the entire 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.
• The government, under legal provisions, seeks to acquire the residential property
for public use.
• The government condemns the residential property.



Reverse Mortgage in SBI

The State Bank of India (SBI) has started offering reverse mortgage products for senior
citizen on October 12, 2007. Joint loans will be given if the spouse is alive and is over 58
years of age. The loan is be 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. In
an press report The Chief General Manager for Personal Banking (SBI), Mr. Sangeet
Shukla 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 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.
Reverse mortgage is very popular product in many countries. The scheme offers old
persons with less income to offer their house as mortgage security. The old person will
get a loan from the bank and the bank will keep on paying them for a fixed period. After
the time of loan is over, the bank may either, acquire the property and give the remainder
to the customer’ heirs or they can pay back and keep the property. The scheme is very
good for some people looking for additional money to support their needs at old age.


Reverse mortgage at sbi mba finance project report

Reverse mortgage at sbi mba finance project report

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