KARNATAK LAW SOCIETY’S

INSTITUTE OF MANAGEMENT EDUCATION AND RESEARCH, BELGAUM.

(Affiliated to Karnatak University, Dharwad & Recognized by AICTE, New Delhi)

(2006-2008)

This is to certify that Ms. Deepa G. Uppar has

satisfactorily

Completed her

Major concurrent project IN

BELGAUM

Entitled

“REVERSE MORTGAGE”

In partial fulfillment of the requirement for the

award of Master’s Degree in Business Administration

Awarded by Karnatak University, Dharwad for the

year 2007-2008.

Institute Guide Director

Prof. J.G.Naik Dr.Poornima M .Charantimath.

KARNATAK LAW SOCIETY’S

INSTITUTE OF MANAGEMENT EDUCATION AND RESEARCH, BELGAUM.

(Affiliated to Karnatak University, Dharwad & Recognized by AICTE, New Delhi)

(2006-2008)

A PROJECT REPORT

ON

“REVERSE MORTGAGE”

FOR

Submitted To:

KARNATAK UNIVERSITY DHARWAD FOR PARTIAL

FULFILLMENT OF MASTER OF BUSINESS ADMINISTRATION

Submitted By:

DEEPA G. UPPAR

Reg No: MBA06003016

MBA IV semester

UNDER THE GUIDANCE OF

Institute Guide Organisation Guide

Prof. J.G.Naik Mr. M.V.S. Gupta

ACKNOWLEDGEMENT

This project has been a unique experience for me, where I could learn practically

the working of an organization and interact with all the professionals and customers

there.

It is my privilege to extend words of thanks to the people who have helped and

encouraged me in completing this study successfully.

My special thanks to Mr.M.V.S. Gupta, Asst General Manager, SBI Main

branch, Belgaum under whose guidance this project was completed. I remain obliged to

him for taking off time from his busy schedule to guide me in this project.

I would also like to thank our Director, Dr P M Charantimath for her whole

hearted support.

I am extremely thankful to my project guidance Prof. J.G.Naik, for his constant

and timely support and supervision during my concurrent project.

I owe a debt of gratitude to my Parents, the silent guides in my Life without their

never-ending support nothing would have been possible.

I also dedicate my sincere thanks to all Teaching & Non Teaching Staff Members

for their help.

Last but not the least I thank my friends and each & every one who directly or

indirectly helped me in making my project successful.

DEEPA.G. UPPAR

INDEX

Sl.No Particulars Page No

1 Executive summary

1

2 Introduction to Banking Sector 6

3 Introduction to SBI13

4 Reverse Mortgage 22

5 Feasibility study67

6 Findings and Suggestions 75

7 Bibliography 78

8 Annexure 80

DECLARATION BY THE STUDENT

I Ms.Deepa G. Uppar, hereby declare that the project entitled “REVERSE

MORTGAGE” at SBI Main Branch, Belgaum. has been submitted to Karnatak

University Dharwad, under the guidance of Prof. J.G.Naik As per the requirement of

the curriculum of Masters of Business Administration course of Karnatak University

Dharwad.

This project report is submitted to the Institute of Management Education and

Research, Belgaum and also to SBI Main branch, Belgaum.

PLACE: BELGAUM Deepa G. Uppar

DATE:

CHAPTER- 1

EXECUTIVE SUMMARY

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 (A & A)

MANAGER (DBD)

CHIEF MANAGER (CA)

DOMESTIC

NRI & TIME DEPOSIT

DEPUTY MANAGER (FO)

DEPUTY MANAGER (FO)

DEPARTMENT MANAGER (CASH)

DEPUTY MANAGER (CASH)

DEPUTY MANAGER (SYSTEM)

DEPUTY MANAGER (INTERBANK)

DEP. MANAGER (GENERAL A/C)

DEP. MANAGER (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

the home

borrower has a lot of

equity in the home

At closing borrower owes a lot, and

has little equity

borrower owes very little,

and has lot of equity

During the loan,

borrower...

makes monthly payments

to the lender

loan balance goes down

equity grows

receives payments

from the lender

loan balance rises

equity declines

At end of loan,

borrower...

owes nothing

has substantial equity

owes substantial

amount

has much less,

little, or no equity

Type of

Transaction

Falling Debt- Rising

Equity

Rising Debt- Falling

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 treat- ment 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 round- table 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

Of which, from

Children

30%

22%

72%

58%

52%

40%

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 in SBI, main branch Belgaum:-

As reverse mortgage is offered by all the branches of SBI from October 12 2007,

SBI main branch in Belgaum also started providing the facility of Reverse Mortgage. Due

to lack of knowledge about reverse mortgage in Belgaum there are no any customers for

this product in SBI main branch Belgaum. Recently one customer is willing to take

reverse mortgage from SBI main branch. This deal has not yet been finalized, it is in

process.

The bank pays installments monthly, quarterly and even lump sum. The loan

amount is paid in installment for 10 years or for 15 years as per the requirement and wish

of the borrower.

The following is the table showing the installments on monthly, quarterly basis

for the period of 10 tears and 15 years for a loan amount of Rs 100000 at a interest rate of

10.75%.

Loan Tenor10 years 15 years

Monthly instalments(Rs.)

468 225

Quarterly instalments(Rs.)

1,423 687

Lump sum payment(Rs.)

36,022 21,619

In SBI main branch recently one customer showed willingness to take up reverse

mortgage. As due to the privacy policy of the bank hence forth the name of the customer

will be taken as Mr. A. Mr. A is of 64 ages and owns a house with its title. After the e

valuation of the house, the value of the house is estimated to be Rs 10, 00,000. As per the

SBI guidelines only the loan is given on 90% of the property value so in this case Mr. A

can take a loan of Rs 9,00,000 (that is 90% of 10,00,000). MR .A wants to get the

installment on monthly bases for a period of 15 years. So his monthly installment for the

period of 15 years for the loan amount is Rs 2,025.

Guidelines for “Reverse Mortgage” in SBI

Objective of the scheme

To provide a source of additional income for senior citizens of India who own self-

acquired and self-occupied house property in India.

Eligibility

No. of borrowers: - Single or jointly with spouse in case of a living spouse.

Age of first borrower :- Above 60 years

No. of surviving spouses on date of sanction of loan :- Should not be more than

one. Borrowers will have to give an undertaking that they will not remarry during

the currency of the loan. If the borrowers choose to remarry, the loan will be

foreclosed.

Age of spouse :- Above 58 years

Residence :-

a. Borrower should be staying at self-acquired and self owned

house / flat against which loan is being raised, as his

permanent primary residence.

b. Mobile/Telephone/Credit Card bills/Certificate from the

Housing Society where the borrower is staying /Affidavit made

before the Executive Magistrate may be accepted as proof of

residence.

c. Borrowers will be required to inform the Bank when they cease

to use this residence as their permanent residence.

Title of the Property :-

a. Borrowers should have a clear and transferable title in their

names

b. Title verification and search report for a period of 30 years will

be required to be obtained from the Bank’s empanelled advocate

at borrowers’ cost.

Title of the property and number of borrowers.- In case if the title in single name

and loan number of borrowers. availed jointly with spouse. Title holder should

make a Will in favour of the other spouse. The Will should confirm that this is the

last Will and that it supersedes all earlier wills, if any. The borrower to undertake

that no fresh Will shall be made during the currency of the loan

Encumbrances: - The property should be free from any encumbrances. However

in case of property purchased by availing Home Loan from SBI and mortgaged to

SBI, it will be considered for RML, subject to closure of the Home Loan account

out of the proceeds of RML

Residual Life of property: - Should be at least 20 years in case of single borrower

and 25 years in case of spouse being below 60 years of age. Certificate from

empanelled engineer/ architect will be required to be obtained for this purpose, in

addition to valuation of property.

Security

The Reverse Mortgage Loan shall be secured by way of equitable mortgage of

residential property.

Tenor

Age of the younger of the borrowers between 58 and upto 68 years: 15 years

Age of the younger of the borrowers above 68 years: 10 years

OR till death of the borrower(s),

Whichever is earlier

Disbursement

By credit to an SB account in the joint names of the borrowers operated by E or S.

Periodicity of availing loan

Monthly payment.

Quarterly payment

Lump sum payment

Quantum of loan

The loan amount would be 90% of the value of property. Loan amount would include

interest till maturity. The maximum loan amount is kept at Rs. 1 Crore and minimum

Rs.3 lacs

Purpose of Loan

Supplementing income, any personal expenses, house repairs, etc. Loan amount should

not be used for speculative, trading and business purposes.

Repayment/Settlement

The loan shall become due and payable only when the last surviving borrower

dies or opts to sell the home, or permanently moves out of the home for to an

institution or to relatives. Typically, a “permanent move” may generally mean

that neither the borrower nor any other co-borrower has lived in the house

continuously for one year or do not intend to live continuously. Bank may obtain

such documentary evidence as may be deemed appropriate for the purpose.

Settlement of loan along with accumulated interest is to be met by the proceeds

received out of sale of residential property or prepayment by borrowers and his

next of kin.

The borrower(s) or his/her/their legal heirs/estate shall be provided with the first

right to settle the loan along with accumulated interest, without sale of property.

A reasonable amount of time, say up to 6 months, may be provided when RML

repayment is triggered, for house to be sold.

The balance surplus (if any), remaining after settlement of the loan with accrued

interest and expenses, shall be passed on to the borrower or the estate of the

borrower/legal heirs.

Borrowers will be required to submit annual life certificates in the month of

November every year. This certificate will also include clauses regarding marital

status, and permanent residence of the borrowers, in addition to the balance

confirmation as on 31st October of that year.

List of legal heirs will be obtained at the time of sanction of loan. With a view to

avoiding disputes at the time of settlement of loan amount by legal heirs, specific

instructions about inheritance of the property and payment of balance amount, if

any, of the sale proceeds after settling the Bank’s dues , will be required to be part

of the borrowers’ Will.

Foreclosure

The loan shall be liable for foreclosure due to occurrence of the following events of

default.

If the borrower(s) has/have not stayed in the property for a continuous period of

one year

If the borrower(s) fail(s) to pay property taxes or maintain and repair the

residential property or fail(s) to keep the home insured, the Bank reserves the

right to insist on repayment of loan by bringing the residential property to sale and

utilizing the sale proceeds to meet the outstanding balance of principal and

interest.

If borrower(s) declare himself/ herself/themselves bankrupt.

If the residential property so mortgaged to the Bank is donated or abandoned by

the borrower(s).

If the borrower(s) effect changes in the residential property that affect the security

of the loan for the lender.For example: renting out part or all of the house by

creating a tenancy right; 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 of taking out new debt against the residential property

or alienating the interest by way of a gift or will.

Due to perpetration of fraud or misrepresentation by the borrower(s).

If the Government under statutory provisions, seeks to acquire the residential

property for public use.

If the Government condemns the residential property (for example, for health or

safety reasons).

Any other event such as re-marriage of the borrower(s) etc. which shall have an

adverse impact on the loan settlement prospects.

Borrowers do not accept the revised terms on revaluation of property and interest

reset at the end of every 5 years from sanction.

Any violation of the terms and conditions of RML.

Pre-payment of loan

The borrower(s) will have option to prepay the loan at any time during the loan

tenor.

There will be no prepayment penalty.

Valuation/Revaluation of property and option for the Bank to adjust payments.

After the initial valuation to determine the loan amount, subsequent revaluations

will be done at intervals of 5 years.

The Bank shall have the option to revise the periodic/lump-sum amount every 5

years along with revaluation. In the scenario of fall in property prices, the Bank

may decide to revise the amount at any time earlier than 5 years. At every stage

of revision, it should be ensured that the Loan to Value ratio does not exceed

90% at maturity.

If the Borrower does not accept the revised terms, no further payments will be

effected by the Bank.Interest at the rate agreed before the review will continue to

accrue on the outstanding amount of the loan. The accumulated principal and

interest shall become due and payable as mentioned in clauses 9 and 10.

Interest Rate

10.75% p.a. (Fixed) subject to reset every 5 years.

Processing fee

0.50% of the loan amount, minimum Rs. 500 and maximum of Rs. 10,000

Right of Rescission

As a customer-friendly gesture and in keeping with international best practices, after the

documents have been executed and loan transaction finalized, borrowers will have right

of rescission up to seven days to cancel the transaction. If the loan amount has been

disbursed, the entire loan amount will need to be repaid by the borrower within this

period. However, interest for the period may be waived. Processing fee shall not be

refunded in such cases.

Insurance and maintenance of house property

The house property will be insured by the borrower at his cost against fire,

earthquake and other calamities.

The borrower shall ensure to pay all taxes, charges etc.

Bank reserves the right to pay insurance premium, taxes, charges etc. by reducing

the loan amount to that extent.

The borrower shall maintain the property in good condition

Operational issues

Type of facility: - Non-renewable Overdraft without ledger folio charges. No

cheque book/debit card will be linked to this account.

Availability of product :- All branches

CHAPTER- 5

FEASIBILITY STUDY

Feasibility study

Feasibility study is the likelihood study. It is the way to determine if a business idea is

capable of being achieved. The results which we get out of this study are used to make a

decision whether to proceed with the project or no. I took out the feasibility study to see

the likelihood of Reverse Mortgage offered by SBI.I limited my study only to SBI main

Branch, Belgaum.In order to do the feasibility study of reverse mortgage for SBI main

branch I contacted and surveyed 30 respondents. I prepared a questionnaire in which I

asked the respondents details about their house, whether they get any pension, whether

they are in need of any financial assistance, their knowledge about reverse mortgage and

whether they are willing to go for reverse mortgage or no.

So by this feasibility study we can come to know how many people are need

financial assistance, how many people have some knowledge and how many people are

willing to go for reverse mortgage.

Market Value

Market Value

8 26.7 26.7 26.7

17 56.7 56.7 83.3

5 16.7 16.7 100.0

30 100.0 100.0

Rs200000-500000

Rs500000-1000000

Above Rs1000000

Total

ValidFrequency Percent Valid Percent

CumulativePercent

Market Value

Above Rs1000000

Rs500000-1000000

Rs200000-500000

Interpretation:

In the sample size of 30 people, 8 people had house whose market value was between Rs

200000 to Rs 500000, 17 people had house whose market value was between Rs 500000

to Rs 100000 and 5 people had house whose market value was above Rs 1000000.

Pension

Pension

22 73.3 73.3 73.3

8 26.7 26.7 100.0

30 100.0 100.0

Yes

No

Total

ValidFrequency Percent Valid Percent

CumulativePercent

Pension

No

Yes

Interpretation:

In the sample size of 30 respondents 22 people said they get pension and remaining 8

people said they did not get any kind of pension. So by seeing the above chart we can

make a inference that in the sample size of 30 respondents maximum people get pension.

Financial Assistance

Financial Assistance

22 73.3 73.3 73.3

8 26.7 26.7 100.0

30 100.0 100.0

Yes

No

Total

ValidFrequency Percent Valid Percent

CumulativePercent

Financial Assistance

No

Yes

Interpretation:

Financial assistance refers to whether the respondent is in need of money for his daily

needs. Here out of 30 respondents 73.3% of the people needed financial assistance for

their expenses and remaining 26.7% people did not need any kind of financial assistance

for their daily expenses.

Knowledge about Reverse Mortgage

Knowledge about Reverse Mortgage

12 40.0 40.0 40.0

18 60.0 60.0 100.0

30 100.0 100.0

Yes

No

Total

ValidFrequency Percent Valid Percent

CumulativePercent

Knowledge about Reverse Mortgage

No

Yes

Interpretation:

Here knowledge about Reverse Mortgage refers to how many people are aware about the

concept of Reverse Mortgage. So according to my survey of 30 respondents only 40%

that is 12 respondents had a basic idea about Reverse Mortgage and the remaining 60%

that is 18 people did not had any kind of knowledge about reverse Mortgage. So by this

we can say that many people don’t have a basic idea about Reverse Mortgage and the

bank need to focus on spreading the concept of reverse mortgage.

Willingness for Reverse Mortgage

Willingness for Reverse Mortgage

7 23.3 23.3 23.3

23 76.7 76.7 100.0

30 100.0 100.0

Yes

No

Total

ValidFrequency Percent Valid Percent

CumulativePercent

Willingness for Reverse Mortgage

No

Yes

Interpretation:

As before we saw that only 40% of the respondents had some basic knowledge about

reverse mortgage and after providing the knowledge about reverse mortgage only 7

respondents were willing to go for reverse mortgage. From the above chart we can say

that maximum people feel it is not worthwhile to go for reverse mortgage.

Conclusion:-

For the purpose of feasibility study I conducted a survey of 30 respondents. These 30

respondents were selected on the basis of certain criteria .The first criteria for

selecting the respondents was the age of the respondents should be more than 60 and

the second one is that he should own a house with its title. After conducting the

survey of 30 peoples, 73.3% of the respondents needed some kind of financial

assistance, 40% of the respondents had some basic knowledge about reverse

mortgage, but after giving the details about reverse mortgage to all the 30 people only

7 people were willing to go for reverse mortgage. By the outcomes this study it can

be said that this was not the right time for introducing the concept of reverse

mortgage by SBI.I have also found out that even if the people need some financial

assistance they are not willing to go for reverse mortgage the reasons may be that the

house is only important assets, the elder people would like to transfer their house to

their legal heirs. As we can see in India joint families are more the elder people don’t

like to sell their house they would like to live in the same house and would like to

transfer the house to their legal heirs. So it can be concluded that introdusing reverse

mortgage at this time was not feasible but it may work very well in future.

CHAPTER- 6

FINDINGS AND SUGGESTIONS

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- 7

BIBLIOGRAPHY

Bibliography:-

1. Websites

www.sbi.co.in

www.google.co.in (Google search engine).

www.wikipedia.com

2. Books

Market Research - Tull and Hawkins

3. Journals, articles and Registers of the bank.

The journal of Banking studies

CHAPTER- 7

ANNEXURE

QUESTIONNAIRE

1. Do you own a house with its clear title?

Yes [ ] No [ ]

2. Where it is situated?

------------------------------------------------

3. What is the market value of the house?

Below 200000 [ ]

200001 – 500000 [ ]

500001 – 1000000 [ ]

More than 1000000 [ ]

4. Is the house used for residence?

Yes [ ] No [ ]

5. Do you get any pension?

Yes [ ] No [ ]

6. Do you need any financial assistance?

Yes [ ] No [ ]

7. Do you know about Reverse Mortgage?

Yes [ ] No [ ]

8. If no, do you need details about Reverse mortgage?

Yes [ ] No [ ]

9. Are you willing to go for reverse mortgage?

Yes [ ] No [ ]

----------Thank You ---------