Professional Documents
Culture Documents
of Reverse Mortgage
Abstract
Mortgage sector considered a very important sector in todays global economy.
Across the world many countries consider mortgage sector as one of the important
parameter of their economic growth. Importance of this sector increased in last 20
years. The mortgage is a debt, but it provides a sense of ownership to the buyer. A
home buyer or builder can obtain financing (a loan) either to purchase or secure
against the property from a financial institution, such as a bank, either directly or
indirectly through intermediaries. Features of mortgage loans such as the size of the
loan, maturity of the loan, interest rate, method of paying off the loan, and other
characteristics can vary considerably.
In India, Initially people took their loans from small traders, jamidars or tehsildar
and these people charge higher rate of interest on the amount borrowed by
borrower. This was a very big problem in rural area. Nowadays rural people are also
become aware about the different mortgage loan schemes. Government considers
this sector as an important part in their every year union budget. By taking
mortgage loan borrower also get tax benefits so people prefer to take home loan for
investment purpose and to get tax benefits. On the other side, for few borrowers
purchasing a home is necessity and few believe in increasing their wealth or assets.
This paper studies review of mortgage industry in India and status of reverse
mortgage in particular.
Keywords: Mortgage industry, Reverse mortgage, home loan
Ph.D
ameenagar@gmail.com
Scholar,
Pacific
University,Udaipur.
Email:
1. Introduction
Mortgages in India and other developing countries are key motivators for the growth
of the economy as they are the key initiator in the allied industries of steel, cement,
and other materials related with construction besides giving employment to the
masses and the classes. Access to housing finance is a universal problem even in
many countries that are termed developed. Governments around the world have
been addressing this problem for many decades. There are some common features
between developed and developing mortgage markets. Governments
in
both
markets are still faced with almost the same challenges of developing effective
and sustainable mortgage systems in terms of the chronic issues they face and
the limited fiscal resources that constrain the government policy in addressing
these issues for improving access to housing for low- and moderate-income
households.
A significant change in the structure of the mortgage industry is being marked in
the recent years. Presently the banks are gaining market share in direct housing
finance segment. Though the housing finance industry in India is growing for the
past few years still financing through the organized sector continues to account only
for 25% of the total housing investment in India but applying for a mortgage still is
a hassle in India, however, and the mountains of paperwork will test borrower's
patience. Although application requirements differ among banks in India, there are
some regulations all banks have in common. To receive a mortgage in India,
borrower will usually have to open an account with the lending bank. In addition to
the mortgage on a property, banks often demand deposit payments.
While applying the loan borrower has to face multiple verification and processes.
Documents that borrower will need to provide for the application include: proof of
identity (passport, driving license, etc.), proof of address (utility bill, rental
agreement, etc.), proof of regular income (employment contract, bank statement,
balance sheet, etc.), proof of good credit standing, documents about the property
(deed of sale, allotment letter), some photographs of the property and some banks
in India also require that the borrower should have a close relative living in India to
serve as his/her guarantor.
Retail banking is about providing banking services to individuals and joint
individuals as opposed to wholesale banking, which focuses on industry and
institutional clients. The concept of retail banking is not new to the banks. Retail
banking is now being viewed as an attractive market segment, which offers
opportunities for growth with profits. It is only in the recent time, when it has
attracted special attention of the Banks, as a solution to some of their immediate
concerns. The essence of retail banking lies in individual customers.
The Indian mortgage industry has grown at a 16% CAGR over the past five years.
Based on our analysis, the mortgage industry in India is 9-11 years behind other
regional EMs like that in China and Thailand, in terms of penetration in the economy.
Due to various structural drivers, such as young population, reducing family size,
urbanization and rising income levels, we believe the growth rates in this segment
should remain healthy over the longer term.
Across the globe, retail lending has been the most spectacular innovation in the
commercial banking sector in recent years. Retail loans comprise consumer credit
for specific purpose and credit for general use. The surge in credit to the retail
segment across developing as well as developed economies has occurred due to
commercial banks shifting from traditional banking activities to a broad-based
lending portfolio. The growth of retail lending, especially, in emerging economies, is
attributable to the rapid advances in information technology, the evolving
macroeconomic environment owing to financial market reform, and several microlevel demand and supply side factors. Technology induced innovative financial
products have facilitated strengthening of balance sheets and income structures of
banks. Technology has enabled a significant reduction in cost of external finance for
borrowers, while banks have benefited from product innovations, and lower
transaction cost associated with collection, processing and use of information. This,
in its wake, has offered banks better techniques for risk management and pricing of
products. The surge in retail lending, however, has certain limitations. Retail lending
may accentuate indebtedness of households, with implications for sustainability of
private consumption and saving in the medium to longer horizon. Rapid increase in
retail loans may impinge on bank credit for investment activities with implications
for economic growth. Several cross section studies suggest that retail lending may,
however, pose various risks with implications for banks asset quality.
Housing demand still needs to be fulfilled. This is because of the shortage of funds
and inadequacy of financial institutions, coupled with an increase in building
material, labor and land costs. Housing finance in developing countries is a social
good in view of its backward and forward linkages with other sectors of the
economy. Gone are the days, when getting a home loan was a tough task.
Nowadays, obtaining a home loan is a cakewalk, thanks to low interest rates,
income tax benefits, and competition among the Housing Finance Companies
(HFCs). The market is flooded with HFCs, which are competing to attract customers
with a number of offers. Most of the customers are not familiar with the basics of
home loans, and are not sure what the best home loan option is.
2. Types of Mortgage
The mortgage industry of India could break open from its age old image of being
housing mortgage facilitator only. The types of mortgage accepted as collateral
security for facilitating mortgage loans in India include - amusement parks, fitness
centers, restaurants, hotels, motels, hospitals, educational institutions etc.
The following types of rates are prevalent in the Indian mortgage market:
Fixed Mortgage Rate - in this case the rate of interest remains fixed
throughout the loan term. The mortgage rates do not vary according to
market conditions. In other words, the rate of interest is pre-fixed during the
process of borrowing and it generally varies depending on the lending rates
of banks and other factors.
Flexible Mortgage Rate - is one in which the interest rate varies according to
market movements. This type of interest rate is called 'adjusting' or 'floating'
rates. The risk factor is high in this type of interest rates.
Banks have been focusing on floating rate advances within mortgages as it lets
them minimize the interest rate risk on the portfolio.
The housing sector in India for several decades faced a number of set-backs, such
as
an
unorganized
market,
development
disparities,
compartmentalized
development approach and a deterrent rent control system. There was not even a
concerted attempt to understand the housing problem let alone promote it.
The Indian mortgage market in recent years has been witness to intense
competition. A control mechanism is though required for the sustained growth of the
mortgage industry and for the industry to perform and deliver constantly to meet
the future requirements of modern India and meet the international standards of
housing, commercial property, project funding, equity funding etc. to cater to the
needs to the business class as well as the salaried class. Recently, the government
has accepted suggestions for the revamping of land laws, rental laws, and
registration process along with setting up of credit rating organization and modern
mortgage insurance products for the fast-growing mortgage market of India.
Housing in India is a basic human necessity supporting economic activities. It is the
second largest employment generator, next to agriculture. In addition, every rupee
spent on construction, an estimated 75-80 paisa is added to GDP.
Shelter Policy is the first bold step towards addressing the various housing
problems of the country. In many respects, the National Housing and Habitat Policy1998 (NHHP) as adopted by the Indian Parliament are different as compared to the
National Housing Policy of 1987. The NHHP is claimed to have initiated Housing
Revolution leaving aside all the hangovers against ever increasing population. It
emphasized creating a facilitating environment for the growth of housing activity
rather than government taking on the task of building. In order to do so, it laid the
foundation to build public-private partnerships for tackling the housing and
amenities problems. Further, it has rightly pointed out that housing activity has high
employment potential and with linkages in economic activities in the backward and
forward. The NHHP has the following objectives; (a) achieving a surplus in the new
housing supply with shelter options along with housing services for various income
groups including the vulnerable groups: the socially backward, freed bonded
laborers, slum dwellers, disabled, single working women and women headed
household; (b) organizing the housing sector as a prominent potential sector to
generate employment for the skilled and unskilled persons by removing legal
barriers in the supply of housing inputs; (c) ensuring housing as a priority sector on
a par with infrastructure and development of housing services (such as safe water
and sanitation) along with housing units; (d) evolving demand-driven approach for
housing and cost recovery or sharing method in rural areas; and (e) empowering
local government in rural areas and cooperatives to meet the housing needs of all
vulnerable groups through mobilization of resources to increase the stock of housing
and access to basic amenities in rural areas.
HFCs could continue to retain an upper hand given their specialization. Thus, overall
we believe HFCs should continue to remain competitive in the mortgage market.
The National Housing Bank (NHB), wholly owned by RBI, is a principal agency
established in 1988 to direct and regulate, arrange financial assistance and provide
refinance support to the housing finance companies.
The Credit Bureau Report was introduced to the Indian Lending industry in 2000
with the formation of CIBIL - Credit Information Bureau (India) Limited. This has
aided the collection of data on a customers borrowing and payment history. This
has been a boon to the industry.
The NHB and CIBIL have joined hands to set up a Mortgage Registry and a Fraud
Registry. These repositories will have the database of the registered mortgages and
the fraudulent customer details, respectively. Thus helping lending Institutions make
more informed decisions.
The Credit lending process has to be stringent, thorough and vigilant on one hand;
and yet prudent with the aim of growing business and penetrating the market, on
the other. The Indian mortgage lending institutions have the responsibility of
fulfilling the dichotomy of these two objectives.
The principal aim of lending is loan recovery, and 'income generation' through the
sale of mortgage assets is incidental. Financial products like Securitization and
Credit Default Swaps are still in the nascent stage of development.
LICHF is the third-largest player in the Indian mortgage industry, and has grown
faster than the No. 1/No. 2 players in recent years. In addition to the industry
drivers discussed earlier, we believe that strong backing from its parent LIC (whose
distribution network LICHF rides on) could help LICHF sustain healthy growth.
With sizeable fixed rate exposure, LICHF has been at the receiving end of a rising
interest rate cycle over the past few years. The resultant spread/NIM compression
has led to RoE erosion (700 bp over three years). However, with wholesale rate
already easing and overall interest rates likely going down, we believe LICHF should
benefit going forward. We build a 20 bp NIM expansion in each of FY14 and FY15,
leading to a 400 bp ROE expansion and a 28% EPS CAGR over three years.
Recent trends in the Indian mortgage sector show that market is consolidating in
the hands of larger firms. Large HFCs such as HDFC and LICHF are benefitting from
these trends. However, there have been some concerns recently about the renewed
aggression shown by banks in the home loan marketgiven aggressive pricing by
PSU banks such as SBI. On the other hand, shows that the room for banks to turn
more aggressive on pricing is limited (especially since we are now in a base-rate
regime). Moreover, the recent trend of non-bank sources of funding for HFCs (along
with easing of bond yields) should help HFCs improve their competitiveness on cost
of funds versus banks. On non-pricing factors, we believe HFCs could continue to
retain an upper hand given their specialization. Thus, overall we believe HFCs
should continue to remain competitive in the mortgage market.
that is, the structure identification. Besides these data, the real estate estimation
survey must contain the technical description, net area obtained by surveying on
the site, market value estimation methodology and photo-documentation. In stable
economies, the real estate estimation methodology is well known, unlike some
other countries such as Bosnia and Herzegovina where this field is yet to be
regulated.
were carrying higher rates, which were unaffordable ranging from a minimum of
12%to a maximum of 19% in the early 1990s. In fact, it was during this period that
people were reluctant to avail of the housing loans, especially people with limitedfixed-low and moderate income. Then, the period of late nineties was marked with
increasing number of HFIs from all corners and supply of loans for housing with drop
in interest rate. Since interest rate influences the demand for housing loans, there
has been a spurt in housing activities, thanks to the lower interest regime.
Housing loans have been made available to the consumers by a large number of
HFIs in the market in two different schemes of interest, floating and fixed, which
cannot be interchanged even once during the term. Floating rate refers to a facility
in which the consumers would have the benefit of paying interest over their loans
according to the changes that occur from time to time in the market. For example, if
the rate of interest on housing loans is reduced, consumers will pay according to the
reduced rates and vice versa. Whereas, in the case of fixed regime, the interest
rates are fixed for the entire term of housing loans at the time of availing. In other
words, the consumer loan repayment chart will not be altered even if there are any
changes in the market. Though interest is charged on the reduced balance of
principal in both the cases, floating rates are cheaper than the fixed rates in most
cases. The difference ranges anything from 0.25 to 1% in all slabs of loans.
However, there are instances of fixed loans being cheaper than floating rates or no
difference at all. Cost of funds, charge on capital, cost of operations, regulatory
provisioning and margin of profit are some of the important considerations for fixing
interest rates. The Reserve Bank of India being the apex body of the monetary
system fixes interest structure for the loans advanced by commercial banks,
housing financial subsidiaries and cooperative societies. Other private financial
institutions charge interest rate over and above the prevailing interest rate in the
market. It is needless to say that the difference in interest rates across various
institutions is over 1 to 1.5%. Fiscal Incentives are the other positive measures,
which have laid foundation for organizing housing finance market. The commitment
of the government to increase housing stock in the owners segment was exhibited
through a number of concessions from the payments under income and property
taxes.
This market has been largely served by the public housing agencies. The financial
sector has recently opened up to the housing market. The mortgage based loans
are being provided by ICICI Bank in order to acquire real estate for commercial
purposes, as well as working capital.
As per the FICCI survey, incomes of families are rising and the purchasing capacities
along with the loan repaying capacity are going up. Earlier a large number of
borrowers used to be in the late 30s and early 40s. But today greater number of
borrowers is in their mid - 30s.
Housing Finance penetration in developing countries are significantly lower than the
penetration rates in developed countries, and being so it appears to point to a
significant scope for further growth in future. Nevertheless, the challenges
impacting the growth of the sector are relatively high property prices, declining
affordability (as property prices has appreciated at a faster pace than increase in
income levels), and tough operating environment.
India was one of the examples of a critical housing situation in the developing
regions. This was largely due to nonexistence of an effective policy force to guide
housing activities in the country ever since her independence (Mahadeva, 1994,
1997) besides the absence of a developed housing finance system to finance
housing
activities
Mahadeva,1996;
across
Reserve
families
Bank
of
of
India,
different
1978).
incomes
Added
to
(Smets,
these
1997;
is
the
Any senior citizen who has crossed 60 years of age and having his/her own
house is eligible for reverse mortgage.
The loan amount should be based on the valuation done by valuation officer
appointed by the mortgage bank.
schemes so people usually have their regular income from pension, real estate
prices are increasing year by year so the valuation of the property is also increasing
as the the market prices, lack of awareness about the scheme.
are
provided
by
number
of
entities,
including
individual
and
as it is not taxable.
Loan is not required to be serviced i:e there is no payment requirement on a
continuing basis as required in other loans, repayment is due on the
his heirs.
Before resorting to sale of house, preference will be given to the owners or
his heirs to repay the amount along with interest and get the mortgaged
released.
This financial product is meant for people whose property has good value but
is short of cash flow to meet their expenses. They are often called asset rich
but income poor. Reverse Mortgage will give them opportunity to generate
heath care.
This product is useful to senior citizens who are not cared by their children.
By going in for it they can mortgage their property without depending on
others for their financial needs. It can supplement retirement income. By
availing this product senior citizens can continue their own life style without
depending on others. The can plan for pilgrimage etc. by resorting to this
financial product.
It is a non recourse loan under which the bank/HFCs will never come after any
person for repayment of the loan. The lenders can only receive payment of
Serving the BoP markets is not an exercise in serving existing markets better or
more efficiently, neither is it about selling cheap and low quality products. Nor can a
firm do this alone. Multiple players are needed to build the BoP infrastructure create buying power, shape aspirations, improve access and grow healthy markets.
All four elements of the model will demand innovation in technology, business
models and management processes.
One of the more recent upward trends in mortgage debt as a percentage of GDP
came in 1995, when the President Bill Clinton passed a housing bill, which was
infamous for going ridiculous lengths to increase the national homeownership rate.
The bill adequately called The National Homeownership Strategy: Partners in the
American Dream, promoted paper-thin down payments and pushed for ways to get
lenders to give mortgage loans to first-time buyers with shaky financing and
incomes. (Mason (2008))
The concept behind this was that the purchase of a home provided the new owner
with a form of security. For millions of Americans the value of their home would be
their only real security.
For many potential homebuyers, the lack of cash available to accumulate the
required down payment and closing costs is the major impediment to purchasing a
home. Other households do not have sufficient available income to make the
monthly payments on mortgages financed at market interest rates for standard loan
terms. Financing strategies, fueled by the creativity and resources of the private
and
public
sectors,
should
address
both
of
these
financial
barriers
to
homeownership
A major development that took place in the early 1980s which affected the housing
sector was the realization that housing was a basic and a merit good, and a
prominent element of the social security under the welfare framework of the states
responsibility. This realization had subsequently laid the foundation for the greater
emphasis on increasing the stock of housing in the owner-segment in the most
advanced Western European countries (Preimus, 1995; Bouvelhouwer & Van Der
Heijden, 1992; Oscar, 1992) and other developed countries (Wolfe, 1998; Carter,
1997; Mulroy & Ewalt, 1996; Wexler, 1996; Dreier & Atlas, 1995). Housing policies in
these and in a few countries have sought to achieve this far-reaching goal through
stimulating private sector expansion (Linneman & Megbolugbe, 1994; Whitehead,
1993; Kosareva & Struyk, 1993; Megbolugbe & Linneman, 1993) evolving housing
finance systems with mortgage loans, insurance and subsidies and tenure change
strategy of privatizing the public stock to the sitting tenants (Grigsby, 1990; and
Ball, Marten, & Harloe, 1986).
Ezaril (2005) reveals that according to a Fannie Mae Foundation report on predatory
lending, the market has seen exponential growth in lower-income, minority
communities. Guttentag (2007) defines a subprime borrower as one who cannot
qualify for prime financing terms but can qualify for subprime financing terms. The
failure to qualify for prime financing is due primarily to low credit scores. A very low
score will disqualify. A middling score might or might not, depending mainly on the
down payment, the ratio of total expense (including debt payments) to income, and
ability to document income and assets.
The business of subprime mortgages had previously (early 1990s) been a very
small piece of the households owned their own homes and, for most of them,
housing equity will make up nearly all of their non pension assets at retirement
(Venti and Wise, 1991). This is consistent with the American philosophy, where
people were encouraged to become homeowners. Millions of Americans were
encouraged to get on to the property ladder from as early as 1995 when the then
President Bill Clinton passed a housing bill, which is now infamous for going
ridiculous lengths to increase the national homeownership rate. Coy (2008).
5. Conclusion
Like India in all over the world there are many countries who provide mortgage loan
and make their peoples life more easy and comfortable so that they can live in their
dream home easily and also get other benefits. In many foreign countries like US
there are few provisions for senior citizen, they also have another option like
reverse mortgage, in which unlike the regular mortgage lender or financial
institution gives them(Senior Citizen) regular monthly income or lump sum amount
(as per borrowers choice) and although borrower can live in that property as
primary resident but after his/her death the mortgage company has right to sell the
property or borrowers heir has to pay off the whole loan balance (Principle as well
as interest paid on it). India also started this mortgage facility in 2007-2008 union
budget but it is not famous loan type in India.
Mortgage sector also generate employment for many unemployed people in any
country. There are many HFCs are opened and their basic business is mortgage
loan. With the help of these HFCs borrower can take loan easily, these organizations
help them in taking loan (for eg. Required documents, different verifications, tax
benefits, interest rate information, EMI information). These process will help
borrower in understanding the actually mortgage loan life and make it easy for
them to proceed. Sometimes borrower also needs to verify from other sources (for
eg. People who have already taken a loan, other HFCs for comparison of interest
rate and hidden cost information, etc.). While concluding we can say that this sector
helps any country to increase their economic growth as well as people of the
country also get benefited with the same.
References:
381.
Mahadeva, M. (2006) Reforms in housing sector in India: impact on housing
development and housing amenities, Habitat International, vol. 30, pp. 412433.
Zujo, V., Car-Pusic, D., Zileska-Pancovska, V. (2014) Cost and Experience Based
Real Estate Estimation Model, Procedia - Social and Behavioral Sciences, vol.
Affordable
housing:
In
conversation
with
Ramesh
in
Andhra
Pradesh
State,
Innovative
Journal
of
Business
and
Prospects, Southern Economist, vol. 47, no. 9 (1), September, pp. 15-18.
Mahadeva, M. (2004) Development of Housing Finance: Shouldn't Indian
S.
(2008) Housing
Finance: Problems
and
Housing Finance System be Responsive?, Savings and Development, vol. 28, no.
4, pp. 389-414.
Performance Review of Housing Finance Companies and Industry Outlook (2011-
URL:
www.google.com
www.nhb.org.in
www.cibil.com
http://rustybee.com/insights-into-the-retail-lending-policies-of-the-indianmortgage-
industry/
http://rustybee.com/insights-into-the-retail-lending-policies-of-the-indian-
mortgage-industry/
http://www.ukessays.com/dissertation/literature-review/literature-review-on-
american-mortgage-history.php
http://www.huffingtonpost.com/jack-m-guttentag/insanity-in-todaysmortga_b_3429147.html?ir=India
http://profit.ndtv.com/news/your-money/article-how-senior-citizens-canbenefit-from-reverse-mortgage-373027