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Reverse mortgage at sbi mba finance project report


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Reverse mortgage at sbi mba finance project report BEC DOMS BAGALKOT MBA

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Reverse mortgage at sbi mba finance project report

  2. 2. REVERSE MORTGAGE AT SBI BELGAUMEXECUTIVE SUMMARY The title of the project is “REVERSE MORTGAGE”. Project was carried out atSBI main branch, station road Belgaum. The main objective behind the study was tounderstand 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 SBImain 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 :- 30BABASAB PATIL MBA FINANCE PROJECT Page 2
  3. 3. REVERSE MORTGAGE AT SBI BELGAUM  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 ChartsLimitations of study: The limitation of the study is lack of information being provided by thestaff of the bank because of the privacy policy of the bank. As for the survey deliberateconvenience sampling is used, in which the respondents are selected on the basis ofcertain criteria the sample size is less and this is another limitation of my study.BABASAB PATIL MBA FINANCE PROJECT Page 3
  4. 4. REVERSE MORTGAGE AT SBI BELGAUMFindings: • 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.BABASAB PATIL MBA FINANCE PROJECT Page 4
  5. 5. REVERSE MORTGAGE AT SBI BELGAUMSuggestions; • 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 citiesBABASAB PATIL MBA FINANCE PROJECT Page 5
  7. 7. REVERSE MORTGAGE AT SBI BELGAUMIntroduction to Banking Sector in India Banking in India originated in the first decade of 18th century with The General Bankof India coming into existence in 1786. This was followed by Bank of Hindustan. Boththese banks are now defunct. The oldest bank in existence in India is the State Bank ofIndia being established as "The Bank of Bengal" in Calcutta in June 1806. A couple ofdecades later, foreign banks like Credit Lyonnais started their Calcutta operations in the1850s. At that point of time, Calcutta was the most active trading port, mainly due to thetrade of the British Empire, and due to which banking activity took roots there andprospered. The first fully Indian owned bank was the Allahabad Bank, which wasestablished in 1865. By the 1900s, the market expanded with the establishment of banks such as PunjabNational Bank, in 1895 in Lahore and Bank of India, in 1906, in Mumbai - both of whichwere founded under private ownership. The Reserve Bank of India formally took on theresponsibility of regulating the Indian banking sector from 1935. After Indiasindependence 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 modernsense of the term. At the time of the American Civil War, a void was created as thesupply of cotton to Lancashire stopped from the Americas. Some banks were opened atthat time which functioned as entities to finance industry, including speculative trades incotton. With large exposure to speculative ventures, most of the banks opened in Indiaduring that period could not survive and failed. The depositors lost money and lostinterest in keeping deposits with banks. Subsequently, banking in India remained theexclusive domain of Europeans for next several decades until the beginning of the 20thcentury.BABASAB PATIL MBA FINANCE PROJECT Page 7
  8. 8. REVERSE MORTGAGE AT SBI BELGAUM The Bank of Bengal, which later became the State Bank of India.At the beginning ofthe 20th century, Indian economy was passing through a relative period of stability.Around five decades have elapsed since the Indias First war of Independence, and thesocial, industrial and other infrastructure have developed. Atthat time there were verysmall banks operated by Indians, and most of them were owned and operated byparticular communities. The banking in India was controlled and dominated by thepresidency banks, namely, the Bank of Bombay, the Bank of Bengal, and the Bank ofMadras - which later on merged to form the Imperial Bank of India, and Imperial Bank ofIndia, upon Indias independence, was renamed the State Bank of India. There were alsosome exchange banks, as also a number of Indian joint stock banks. All these banksoperated in different segments of the economy. The presidency banks were like thecentral banks and discharged most of the functions of central banks. They wereestablished under charters from the British East India Company. The exchange banks,mostly owned by the Europeans, concentrated on financing of foreign trade. Indian jointstock banks were generally under capitalized and lacked the experience and maturity tocompete with the presidency banks, and the exchange banks. There was potential formany new banks as the economy was growing. Lord Curzon had observed then in thecontext of Indian banking: "In respect of banking it seems we are behind the times. Weare like some old fashioned sailing ship, divided by solid wooden bulkheads into separateand cumbersome compartments." Under these circumstances, many Indians came forward to set up banks, andmany banks were set up at that time, a number of which have survived to the present suchas 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 theSecond World War (1939-1945), and two years thereafter until the independence of Indiawere challenging for the Indian banking. The years of the First World War wereBABASAB PATIL MBA FINANCE PROJECT Page 8
  9. 9. REVERSE MORTGAGE AT SBI BELGAUMturbulent, and it took toll of many banks which simply collapsed despite the Indianeconomy gaining indirect boost due to war-related economic activities. At least 94 banksin India failed during the years 1913 to 1918.Post-independence The partition of India in 1947 had adversely impacted the economies of Punjab andWest Bengal, and banking activities had remained paralyzed for months. Indiasindependence marked the end of a regime of the Laissez-faire for the Indian banking. TheGovernment of India initiated measures to play an active role in the economic life of thenation, and the Industrial Policy Resolution adopted by the government in 1948envisaged a mixed economy. This resulted into greater involvement of the state indifferent segments of the economy including banking and finance. The major steps toregulate banking included: • In 1948, the Reserve Bank of India, Indias 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 theState Bank of India, continued to be owned and operated by private persons. Thischanged with the nationalization of major banks in India on 19th July, 1969.  Development of Banking SectorNationalisation By the 1960s, the Indian banking industry has become an important tool tofacilitate the development of the Indian economy. At the same time, it has emerged as aBABASAB PATIL MBA FINANCE PROJECT Page 9
  10. 10. REVERSE MORTGAGE AT SBI BELGAUMlarge employer, and a debate has ensued about the possibility to nationalize the bankingindustry. Indira Gandhi, the-then Prime Minister of India expressed the intention of theGOI in the annual conference of the All India Congress Meeting in a paper entitled"Stray thoughts on Bank Nationalisation." The paper was received with positiveenthusiasm. Thereafter, her move was swift and sudden, and the GOI issued an ordinance andnationalised 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, theParliament 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. Thestated reason for the nationalisation was to give the government more control of creditdelivery. With the second dose of nationalisation, the GOI controlled around 91% of thebanking 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 ofliberalisation and gave licences to a small number of private banks, which came to beknown as New Generation tech-savvy banks, which included banks such as UTIBank(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 ofIndia, kickstarted the banking sector in India, which has seen rapidgrowth with strong contribution from all the three sectors of banks, namely, governmentbanks, private banks and foreign banks. The next stage for the Indian banking has been setup with the proposed relaxationin the norms for Foreign Direct Investment, where all Foreign Investors in banks may beBABASAB PATIL MBA FINANCE PROJECT Page 10
  11. 11. REVERSE MORTGAGE AT SBI BELGAUMgiven voting rights which could exceed the present cap of 10%,at present it has gone upto 49% with some restrictions. The new policy shook the Banking sector in India completely. Bankers, till thistime, were used to the 4-6-4 method (Borrow at 4%;Lend at 6%;Go home at 4) offunctioning. The new wave ushered in a modern outlook and tech-savvy methods ofworking for traditional banks.All this led to the retail boom in India. People not justdemanded 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 theprivate 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 relativeto other banks in comparable economies in its region. The Reserve Bank of India is anautonomous body, with minimal pressure from the government. The stated policy of theBank on the Indian Rupee is to manage volatility but without any fixed exchange rate-andthis 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 retailbanking, mortgages and investment services are expected to be strong. One may alsoexpect M&As, takeovers, and asset sales.In March 2006, the Reserve Bank of Indiaallowed Warburg Pincus to increase its stake in Kotak Mahindra Bank (a private sectorbank) to 10%. This is the first time an investor has been allowed to hold more than 5% ina private sector bank since the RBI announced norms in 2005that 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 sectorbanks (that is with the Government of India holding a stake), 29 private banks (these donot have government stake; they may be publicly listed and traded on stock exchanges)BABASAB PATIL MBA FINANCE PROJECT Page 11
  12. 12. REVERSE MORTGAGE AT SBI BELGAUMand 31 foreign banks. They have a combined network of over 53,000 branches and17,000 ATMs. According to a report by ICRA Limited, a rating agency, the public sectorbanks hold over 75 percent of total assets of the banking industry, with the private andforeign banks holding 18.2% and 6.5% respectively.BABASAB PATIL MBA FINANCE PROJECT Page 12
  14. 14. REVERSE MORTGAGE AT SBI BELGAUMIntroduction State Bank of India • Evolution of SBI The origin of the State Bank of India goes back to the first decade of the nineteenthcentury with the establishment of the Bank of Calcutta in Calcutta on 2 June 1806. Threeyears later the bank received its charter and was re-designed as the Bank of Bengal (2January 1809). A unique institution, it was the first joint-stock bank of British Indiasponsored by the Government of Bengal. The Bank of Bombay (15 April 1840) and theBank of Madras (1 July 1843) followed the Bank of Bengal. These three banks remainedat the apex of modern banking in India till their amalgamation as the Imperial Bank ofIndia on 27 January 1921. Primarily Anglo-Indian creations, the three presidency banks came into existenceeither as a result of the compulsions of imperial finance or by the felt needs of localEuropean commerce and were not imposed from outside in an arbitrary manner tomodernize Indias economy. Their evolution was, however, shaped by ideas culled fromsimilar developments in Europe and England, and was influenced by changes occurringin the structure of both the local trading environment and those in the relations of theIndian 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 toallow the Bank of Bengal to issue notes, which would be accepted for payment of publicrevenues within a restricted geographical area. This right of note issue was very valuablenot only for the Bank of Bengal but also its two siblings, the Banks of Bombay andMadras. It meant an accretion to the capital of the banks, a capital on which theproprietors did not have to pay any interest. The concept ofBABASAB PATIL MBA FINANCE PROJECT Page 14
  15. 15. REVERSE MORTGAGE AT SBI BELGAUMdeposit banking was also an innovation because the practice of accepting money forsafekeeping (and in some cases, even investment on behalf of the clients) by theindigenous bankers had not spread as a general habit in most parts of India. But, for along time, and especially upto the time that the three presidency banks had a right of noteissue, bank notes and government balances made up the bulk of the investible resourcesof the banks. The three banks were governed by royal charters, which were revised from time totime. Each charter provided for a share capital, four-fifth of which were privatelysubscribed and the rest owned by the provincial government. The members of the boardof directors, which managed the affairs of each bank, were mostly proprietary directorsrepresenting the large European managing agency houses in India. The rest weregovernment nominees, invariably civil servants, one of whom was elected as thepresident of the board. • Business The business of the banks was initially confined to discounting of bills of exchange orother negotiable private securities, keeping cash accounts and receiving deposits andissuing and circulating cash notes. Loans were restricted to lakh and the period ofaccommodation confined to three months only. The The business of the banks wasinitially confined to discounting of bills of exchange or other negotiable privatesecurities, keeping cash accounts and receiving deposits and issuing and circulating cashnotes. Loans were restricted to lakh and the period of accommodation confined tothree months only. The security for such loans was public securities, commonly calledCompanys Paper, bullion, treasure, plate, jewels, or goods not of a perishable nature andno interest could be charged beyond a rate of twelve per cent. Loans against goods likeopium, indigo, salt woollens, cotton, cotton piece goods, mule twist and silk goods werealso granted but such finance by way of cash credits gained momentum only from thethird decade of theBABASAB PATIL MBA FINANCE PROJECT Page 15
  16. 16. REVERSE MORTGAGE AT SBI BELGAUMnineteenth century. All commodities, including tea, sugar and jute, which began to befinanced 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 themortgage of houses, land or other real property was, however, forbidden.Indians were theprincipal borrowers against deposit of Companys paper, while the business of discountson private as well as salary bills was almost the exclusive monopoly of individualsEuropeans and their partnership firms. But the main function of the three banks, as far asthe government was concerned, was to help the latter raise loans from time to time andalso 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 andMadras occurred after 1860. With the passing of the Paper Currency Act of 1861, theright of note issue of the presidency banks was abolished and the Government of Indiaassumed from 1 March 1862 the sole power of issuing paper currency within BritishIndia. The task of management and circulation of the new currency notes was conferredon the presidency banks and the Government undertook to transfer the Treasury balancesto the banks at places where the banks would open branches. None of the three banks hadtill then any branches (except the sole attempt and that too a short-lived one by the Bankof Bengal at Mirzapore in 1839) although the charters had given them such authority. Butas soon as the three presidency bands were assured of the free use of governmentTreasury balances at places where they would open branches, they embarked on branchexpansion at a rapid pace. By 1876, the branches, agencies and sub agencies of the threepresidency banks covered most of the major parts and many of the inland trade centers inIndia.BABASAB PATIL MBA FINANCE PROJECT Page 16
  17. 17. REVERSE MORTGAGE AT SBI BELGAUMWhile the Bank of Bengal had eighteen branches including its head office, seasonalbranches 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 thethree presidency banks under a common statute with similar restrictions on business. Theproprietary connection of the Government was, however, terminated, though the bankscontinued to hold charge of the public debt offices in the three presidency towns, and thecustody of a part of the government balances. The Act also stipulated the creation ofReserve Treasuries at Calcutta, Bombay and Madras into which sums above the specifiedminimum balances promised to the presidency banks at only their head offices were to belodged. The Government could lend to the presidency banks from such ReserveTreasuries 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 ReserveTreasuries outside the normal control of the presidency banks and the connected decisionnot to guarantee minimum government balances at new places where branches were to beopened effectively checked the growth of new branches after 1876. The pace ofexpansion witnessed in the previous decade fell sharply although, in the case of the Bankof Madras, it continued on a modest scale as the profits of that bank were mainly derivedfrom trade dispersed among a number of port towns and inland centers of thepresidency.India witnessed rapid commercialization in the last quarter of the nineteenthcentury 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 ofconversion of subsistence crops into cash crops, a portion of which found its way into theforeign 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. Allthese resulted in the expansion ofIndias international trade more than six-fold. The three presidency banks were bothbeneficiaries and promoters of this commercialization process as they became involved inBABASAB PATIL MBA FINANCE PROJECT Page 17
  18. 18. REVERSE MORTGAGE AT SBI BELGAUMthe 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 oflarge modern manufacturing industries, the Bank of Madras went into the financing oflarge modern manufacturing industries, the Bank of Madras went into the financing ofsmall-scale industries in a way which had no parallel elsewhere. But the three banks wererigorously excluded from any business involving foreign exchange. Not only was suchbusiness considered risky for these banks, which held government deposits, it was alsofeared that these banks enjoying government patronage would offer unfair competition tothe exchange banks which had by then arrived in India. This exclusion continued till thecreation of the Reserve Bank of India in 1935. • Presidency Banks of BengalThe presidency Banks of Bengal, Bombay and Madras with their 70 branches weremerged in 1921 to form the Imperial Bank of India. The triad had been transformed into amonolith and a giant among Indian commercial banks had emerged. The new bank tookon the triple role of a commercial bank, a bankers bank and a banker to thegovernment.But this creation was preceded by years of deliberations on the need for aState Bank of India. What eventually emerged was a half-way house combining thefunctions of a commercial bank and a quasi-central bank.The establishment of theReserve Bank of India as the central bank of the country in 1935 ended the quasi-centralbanking role of the Imperial Bank. The latter ceased to be bankers to the Government ofIndia and instead became agent of the Reserve Bank for the transaction of governmentbusiness at centers at which the central bank was not established. But it continued tomaintain currency chests and small coin depots and operate the remittance facilitiesscheme for other banks and the public on terms stipulated by the Reserve Bank. It alsoacted as a bankers bank by holding theirsurplus cash and granting them advances against authorized securities. The managementof the bank clearing houses also continued with it at many places where the ReserveBank did not have offices. The bank was also the biggest tendered at the Treasury billBABASAB PATIL MBA FINANCE PROJECT Page 18
  19. 19. REVERSE MORTGAGE AT SBI BELGAUMauctions conducted by the Reserve Bank on behalf of the Government. The establishmentof the Reserve Bank simultaneously saw important amendments being made to theconstitution of the Imperial Bank converting it into a purely commercial bank. The earlierrestrictions on its business were removed and the bank was permitted to undertakeforeign exchange business and executor and trustee business for the first time. • Imperial BankThe Imperial Bank during the three and a half decades of its existence recorded animpressive growth in terms of offices, reserves, deposits, investments and advances, theincreases in some cases amounting to more than six-fold. The financial status andsecurity inherited from its forerunners no doubt provided a firm and durable platform.But the lofty traditions of banking which the Imperial Bank consistently maintained andthe high standard of integrity it observed in its operations inspired confidence in itsdepositors that no other bank in India could perhaps then equal. All these enabled theImperial Bank to acquire a pre-eminent position in the Indian banking industry and alsosecure a vital place in the countrys economic life.When India attained freedom, theImperial Bank had a capital base (including reserves) of Rs.11.85 crores, deposits andadvances of Rs.275.14 crores and Rs.72.94 crores respectively and a network of 172branches and more than 200 sub offices extending all over the country • First Five Year PlanIn 1951, when the First Five Year Plan was launched, the development of rural India wasgiven the highest priority. The commercial banks of the country including the ImperialBank of India had till then confined their operations to the urban sector and were notBABASAB PATIL MBA FINANCE PROJECT Page 19
  20. 20. REVERSE MORTGAGE AT SBI BELGAUMequipped to respond to the emergent needs of economic regeneration of the rural areas. Inorder, therefore, to serve the economy in general and the rural sector in particular, the AllIndia Rural Credit Survey Committee recommended the creation of a state-partnered andstate-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 inParliament 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 thedirect control of the State. Later, the State Bank of India (Subsidiary Banks) Act waspassed 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 wasthus born with a new sense of social purpose aided by the 480 offices comprisingbranches, sub offices and three Local Head Offices inherited from the Imperial Bank. Theconcept of banking as mere repositories of the communitys savings and lenders tocreditworthy parties was soon to give way to the concept of purposeful banking subserving 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 theIndian banking system into the exciting field of national development.BABASAB PATIL MBA FINANCE PROJECT Page 20
  23. 23. REVERSE MORTGAGE AT SBI BELGAUMReverse MortgageIntroduction to Reverse Mortgage Until recently, there were two main ways to get cash from your home the first oneis you could sell your home, but then you would have to move and the second one isyou could borrow against your home, but then you would have to make monthly loanrepayments. Now there is a third way of getting money from your home that does notrequire you to leave it or to make regular loan repayments that is “Reverse Mortgage”. Areverse mortgage is a loan against your home that you do not have to pay back for as longas you live there. With a reverse mortgage, you can turn the value of your home into cashwithout having to move or to repay a loan each month. No matter how this loan is paidout to you, you typically don’t have to pay anything back until you die, sell your home, orpermanently move out of your home. Reverse mortgages is a powerful tool to helpeligible homeowners obtain tax-free cash flow. Reverse mortgages enable eligiblehomeowners to access the money they have built up as equity in their homes. They areprimarily designed to strengthen seniors’ personal and financial independence byproviding funds without a monthly payment burden during their lifetime in the home. Themajor eligibility requirements are that the person must be at least 62 years of age andshould own a home. Reverse mortgage is emerging as a significant financial security toolfor senior homeowners because of the broad range of needs these unique loans cansatisfy. Senior homeowners of all income levels have taken out reverse mortgages formany different reasons. For some, reverse mortgages provide the extra money that letthem stay securely in their homes throughout retirement. For others, reverse mortgagesprovide a means to live more comfortably and pursue their dreams. Its a special type ofmortgage which allows the senior homeowner to access their equity which they havebuilt up in the form of the home and use the money according to their wish, all this whileletting owner stay in his home. It’s called a reverse mortgage because the flow ofpayments is reversed from a traditional mortgage.BABASAB PATIL MBA FINANCE PROJECT Page 23
  24. 24. REVERSE MORTGAGE AT SBI BELGAUM The lender makes payments to the owner, or arranges a line of credit that isavailable for the owners use. This differs from a traditional mortgage used to purchase orrefinance 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 howmuch he can afford to pay back each month. But with a reverse mortgage, he doesn’thave to make monthly repayments. So the owner or the applicant doesn’t need aminimum 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 tomake his monthly repayments, he could lose his home. But with a reverse mortgage, hedoesn’t have any monthly repayments to make. So he can’t lose his home by failing tomake them. Reverse mortgages typically require no repayment for as long as the owneror co-owner live in the home. So reverse mortgage differ from other home loans in theseimportant ways, the first one is the applicant don’t need an income to qualify for areverse mortgage and the second one is he don’t have to make monthly repayments on areverse mortgage. Reverse mortgages have a different purpose than forward mortgages do. With aforward mortgage, you use your income to repay debt, and this builds up equity in yourhome. But with a reverse mortgage, you are taking the equity out in cash. So with areverse mortgage your debt increases and your home equity decreases. It’s just theopposite, or reverse of traditional mortgage. During a reverse mortgage, the lender sendsyou cash, and you make no repayments. So the amount you owe (your debt) gets larger asyou 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 reversemortgage becomes due and payable, you may owe a lot of money and your equity may bevery small. If you have the loan for a long time, or if your home’s value decreases, theremay not be any equity left at the end of the loan. In short, a reverse mortgage is a “risingdebt, falling equity” type ofBABASAB PATIL MBA FINANCE PROJECT Page 24
  25. 25. REVERSE MORTGAGE AT SBI BELGAUMdeal. But that is exactly what informed reverse mortgage borrowers want to “spenddown” their home equity while they live in their homes, without having to make monthlyloan repayments.BABASAB PATIL MBA FINANCE PROJECT Page 25
  26. 26. REVERSE MORTGAGE AT SBI BELGAUM  Difference between traditional mortgage and reverse mortgageItem Mortgage Reverse MortgagePurpose of loan to purchase a home to generate incomeBefore closing borrower has no equity in borrower has a lot of the home equity in the homeAt closing borrower owes a lot, and borrower owes very little, has little equity and has lot of equityDuring the loan, makes monthly payments receives paymentsborrower... to the lender from the lender loan balance goes down loan balance rises equity grows equity declinesAt end of loan, owes nothing owes substantial borrower... amount has substantial equity has much less, little, or no equityType of Falling Debt- Rising Rising Debt- FallingTransaction Equity EquityBABASAB PATIL MBA FINANCE PROJECT Page 26
  27. 27. REVERSE MORTGAGE AT SBI BELGAUM  History and Origin of reverse mortgage The history of reverse mortgage goes back to 1961.In the year 1961 the first reversemortgage 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 firstproperty tax deferral program offered in Oregon, financed through Public EmployeesRetirement Fund.In 1970 Survey research on a "housing annuity plan" was conducted inLos Angeles by Yung-Ping Chen of UCLA. In 1975 Technical monograph on "CreatingNew Financial Instruments for the Aged" authored by Jack M. Guttentag of TheWharton School.In 1977 First RM loan program, "Equi-Pay", introduced by Arlo Smithof Broadview Savings & Loan in Independence, OH.In 1978 "Reverse Mortgage StudyProject" funded by Wisconsin Bureau on Aging, directed by Ken Scholen and Firststatewide deferred payment loan program offered by WI Dept of Local Affairs andDevelopment, designed by William Perkins.In 1979 First national "Reverse MortgageDevelopment Conference"sponsored by WI Bureau on Aging in Madison, WI on May21-22.San Francisco Development Funds "Reverse Annuity Mortgage(RAM)" programfunded 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 EquityConversion Project" funded by U.S.Administration on Aging, directed by Ken ScholenFHA reverse mortgage insurance proposal by Ken Scholenendorsed by housing pre-conference to 1981 White House Conference on Aging.In 1981 National Center forHome Equity Conversion (NCHEC) incorporated as independent, non-profit organizationin Madison, WI; directed by Ken Scholen U. S. House Select Committee on Aging hearsfirst Cong- ressional testimony on reverse mortgages, by Ken Scholen White HouseConference on Aging endorses proposal for FHA RM insurance, recommending that "theFHA should develop an insurance program for reverse mortgage loans" Newsweek,Time, U.S. News, Good Morning AmericaBABASAB PATIL MBA FINANCE PROJECT Page 27
  28. 28. REVERSE MORTGAGE AT SBI BELGAUMprovide first national media exposure for reverse mortgages San Francisco RAM programcloses first loans.In 1982 "National Potential for Home Equity onversion" authored byBruce Jacobs (University of Rochester) San Francisco RAM program expands to newsites in California, directed by Bronwyn Belling.U. S. Administration on Aging fundsNCHEC research on federal issues - including FHA RM insurance U. S. Senate SpecialCommittee 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 mortgageinsurance Garn-St. Germain Depository Institutions Act clears regulatory path forreverse mortgages; first federal statutory recognition of reverse mortgages. In 1983 Federal Council on Aging supports proposal for FHA reverse mortgageinsurance. 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 MortgageGuaranty Insurance", authored by Maurice Weinrobe (Clark University) "NationalDevelopment 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 EquityFinancing of Long-Term Care for the Elderly" byBruce Jacobs (University of Rochester)and William Weissert (Urban Institute)FHA insurance proposal by Sen John Heinzadopted by Senate;House-Senate conference committee mandates HUD study. In 1984First open-ended, risk-pooling reverse mortgage offered by American Homestead in NewJersey SF RAM program and NCHEC provide training and technical assistance to newreverse mortgage programs in AZ, MA, NY, WI Prudential-Bache announces marketingagreement with American Homestead Social Security Administration releases policymemo on treat- ment of income from HEC plans.BABASAB PATIL MBA FINANCE PROJECT Page 28
  29. 29. REVERSE MORTGAGE AT SBI BELGAUM In 1985 HUD sponsors conference on home equity conversion.U. S. Senate & HouseAging Committees sponsor joint briefing session for Congressional taffers, moderated byKen Scholen Line-of-credit development project initiated by United Seniors HealthCooperative (DC), directed by Bronwyn Belling First "split-term" RM offered by CTHousing Finance Agency, designed by Stuart Jennings and Arnold Pritchard . In 1986"Home Equity Information Center" established by AARP, directed by Katrinka SmithSloan American Homestead expands into CT, OH, and PA California Home EquityConversion Coalition established by RAM program counselors MA Elderly EquityProgram funded by Commonwealth of Massachusetts, directed by Len Raymond HUDreleases study opposing a federal reverse mortgage insurance demonstration AARPreleases analysis by Ken Scholen critiquing HUD study; AARP urges enactment offederal RM insurance demo. In 1987 NCHEC completes studies on home equity financing of long-term carefor Minnesota and Connecticut U.S. House Ways and Means Committee hears testimonyon HEC and long-term care by James Firman United Seniors) and Ken Scholen(NCHEC) Congress passes FHA reverse mortgage insurance proposal AmericanHomestead expands into DE, MD, and VA "Home-Made Money: A Consumer Guide toHEC" published by AARP, authored by Ken Scholen .In 1988 National survey ofmembers reverse mortgage needs and preferences by AARP FHA reverse mortgageinsurance legislation signed by President Reagan on 2/5/88; Judith V. May named todevelop program HUD announces HECM development team including EdwardSzymanoski, Jr, Patrick Quinton, Donald Alexander, and Mary Kay Roma "Innovation inHone Equity Conversion" conference sponsored by AARP; attracts 200 participants from25 states New plan announced by Capital Holding Corporation (Louisville, KY); 10thlargest 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 VAHousing Development Authority American Homestead expands into CA ProvidentialHome Income PlanBABASAB PATIL MBA FINANCE PROJECT Page 29
  30. 30. REVERSE MORTGAGE AT SBI BELGAUM(San Francisco) offers shared-appreciation plan throughout CA HUD releases proposedregulations for FHA reverse mortgage insurance program Fannie Mae announcesintention to purchase reverse mortgages insured by FHA U. S. Administration on Agingannounces cooperative agreement with HUD to sponsor training of reversemortgage counselors. In 1989"A Financial Guide to Reverse Mortgages" by Ken Scholen for NCHECintroduces total loan cost rate method for analyzing costs HUD selects 50 lenders bylottery to make first FHA-insured reverse mortgages. Software for determining reversemortgage loan advances developed by FHA and made available to the public WendoverFunding (NC) announces program for servicing FHA-insured reverse mortgages HUDreleases "Home Equity Conversion Mortgage" (HECM) Fourteen 2-day HECMcounselor training sessions conducted by Bronwyn Belling (AARP) and Ken Scholen(NCHEC) for FHA Capital Holding expands into CA and FL FNMA announces policiesfor purchasing FHA-insured (HECM) reverse mortgages First FHA-insured HECM madeto Marjorie Mason of Fairway, KS by the James B Nutter Co National Center for HomeEquity Conversion (NCHEC) moves from Madison, WI to Marshall, MN .In 1990 AARPreleases FHA Counselor Training and Reference Manual, by Bronwyn Belling and KenScholen American Homestead and Providential suspend lending as recession and fallingappreciation expectations dry up debt sources for new loansFourteen more 2-daycounselor training sessions conducted by Bronwyn Belling (AARP) and Ken Scholen(NCHEC) for HUD "Reverse Angle" newsletter published for FHA counselors by AARPHome Equity Information Center Congress increases FHA insurance authority to 25,000loans by 9/31/95; requires disclosure of total loan cost & development of equity reserveoption AARP publishes "Model State Law on Reverse Mortgages" HUD publishes "FHAHome Equity Conversion Insurance Demonstration: A Model to Calculate BorrowerPayments and Insurance Risk," by Edward Szymanoski Jr.BABASAB PATIL MBA FINANCE PROJECT Page 30
  31. 31. REVERSE MORTGAGE AT SBI BELGAUM In 1991 Los Angeles County Employees Retirement Association sponsorsinformation seminar on reverse mortgages as a potential fund investment and memberbenefit AARP publishes 3rd edition of "Home-Made Money" by Ken Scholen;distribution tops 250,000 New consumer guide developed by Federal Trade Commissionin partnership with NCHEC and AARP HUD publishes new regulations making reversemortgage insurance available to all FHA lenders Interim report on FHA program byJudith V. May Retirement Income On The House: Cashing In On Your Home With A"Reverse" Mortgage, First lifetime reverse mortgage programs proposed by PeterMazonas of Homefirst (San Francisco) and Robert Bachman of Home Equity Partners(Irvine, CA) FNMA expands funding for expanded HECM program; developscomprehensive "Instruction Package" Wendover Funding announces correspondentprogram and "starter kit" for lenders First multi-state HECM lending programs developedby 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-timenetwork television ads in CA and FL for its "Homearnings" plan Initial public stockoffering by Providential Home Income Plan attracts strong investor interest AARPpublishes 79-page discussion paper on reverse mortgage counseling by Ken ScholenAARP releases videotape for counselor training written and narrated by Ken Scholen U.S. Securities & Exchange Commission issues directive prohibiting interest accrual inreverse mortgage accounting U. S. Securities & Exchange Commission rescinds previousdirective; issues directive on effective yield method for reverse mortgage accountingAARP sponsors community coalition-building seminars in support of HECMdevelopment in OH, WI, IA, NY, NJ, PA, IL Retirement Income On The House: CashingIn On Your Home With A "Reverse" Mortgage named best book of 1992 on financialservices for the elderly by the National Association of State Units on Aging (NASUA)HECM preliminary evaluation released by HUD.BABASAB PATIL MBA FINANCE PROJECT Page 31
  32. 32. REVERSE MORTGAGE AT SBI BELGAUM In 1993 Transamerica announces reverse mortgage product including deferredannuity from MetLife Fannie Mae convenes roundtable on developing a conventionalreverse mortgage Capital Holding discontinues "Homearnings" plan NCHEC preparesreport on taxation of reverse mortgage transactions for AARP Home Equity Partners(Irvine, CA) & Union Labor Life announce new "Freedom" plan including optionalimmediate annuity from MetLife Wendover convenes 2-day conference of HECMoriginators AARP sponsors community seminars in support of HECM programdevelopment in CA, LA, MI, & MS Fannie Mae initiates series of information sessionsfor financial planners and elderlaw attorneys Andrus Gerontology Center (USC)convenes national telecon- ference on reverse mortgages National Center for HomeEquity Conversion (NCHEC) moves from Marshall, MN to Apple Valley, MN At yearsend, the HECM program is all states except AK, SD, & TX); Unity Mortgage offers it in25 states; Senior Income in 14 states; Directors Mortgage in 14 states; AmerifirstMortgage in 9 states; ARCS Mortgage in 6 states; & International Mortgage in 4 states.In the year 1994 Household Senior Services offers "Ever Yours" creditline reversemortgage in FL, GA, IL, KY, MD, MI, OH, and VA Congress enacts "total loan costrate" disclosure requirement for all reverse mortgages; Federal Reserve publishesproposed regulations NCHEC prepares report on "Reversing Foreclosures" for AARPNew York rescinds mortgage tax on reverse mortgages U. S. Court of Appeals barrier toRM lending in Texas; Rep. Gonzales legislates statutory override of court decision CAPublic Employees Retirement System (CALPERS) initiates study of reverse mortgageinvestment Transamerica introduces creditline plan and expands into NY, NJ, PA, andCT At years end, Unity Mortgage is offering the HECM in 42 states and DirectorsMortgage has merged with Norwest Mortgage . In 1995 HUD releases "Evaluation of the Home Equity Conversion MortgageInsurance Demonstration" HUD releases first major revision of HECM handbook.HUDapproves direct endorsement processing of HECM loans NCHEC publishes Your NewRetirement Nest Egg: A Consumer Guide to the New ReverseBABASAB PATIL MBA FINANCE PROJECT Page 32
  33. 33. REVERSE MORTGAGE AT SBI BELGAUMMortgages by Ken Scholen.AARP publishes 5th edition of "Home-Made Money" by KenScholen; distribution tops 400,000 HECM program lapses at end of federal fiscal yearAARP sponsors national conference on reverse mortgages in MD on 11/14-15 FannieMae announces "HomeKeeper" plan; media coverage includes front-page, above-the-foldarticle in USA Today FHA Commissioner’s Award resented by Nicolas Retsinas to KenScholen for his work on reverse mortgages . In 1996 HECM program re-authorized on January 26, 1996 Fannie Mae beginslender training for "Home Keeper" NCHEC issues Second Edition of Your NewRetirement Nest Egg: A Consumer Guide to the New Reverse Mortgages by KenScholen, Hartford Life tests annuity complement to HECM and Fannie Mae reversemortgages HUD initiates counselor training via satellite TV. In 1997 AARP releases consumer videotapes written by Ken Scholen featuringScholen and Bronwyn Belling AARP sponsors HUD counselor training via satellite TVfeaturing Belling and Scholen Referral fee scams denounced by AARP, HUD, FannieMae Household Senior Services discontinues "Forever Yours" plan AARP announcescounselor support fund capitalized by HUD and Fannie Mae NCHEC initiates "preferred"lender and counselor program and releases "Reverse Mortgage Counselor" software IbisSoftware (SF) releases "Reverse Mortgage Originator" Texas approves referendum topermit RMs, but technical errors make impact uncertain, problematic AARP sponsorsnational reverse mortgage leadership round- table and conference National ReverseMortgage Lenders Association (NRMLA) organized by Jeffrey Taylor with Peter Bell asstaff . In 1998 NCHEC circulates discussion papers on "Strengthening Cost Disclosures onReverse Mortgages" by Ken Scholen AARP releases "HECM Training-in-a-Box"including videotapes, workbook, HECM handbook, and counseling manual Fannie Maeconducts market research to identify reverse mortgage market segments NCHECpublishes "Reverse Mortgages for Beginners: A Consumer Guide to EveryHomeowner’s Retirement Nest Egg”.NCHEC establishesBABASAB PATIL MBA FINANCE PROJECT Page 33
  34. 34. REVERSE MORTGAGE AT SBI BELGAUMwebsite.Transamerica HomeFirst (SF) discontinues originating its proprietary"HouseMoney" loans and servicing new HECM and HomeKeeper loans Federal Reserveclarifies inclusion of annuities in TALC disclosures . In 1999 Neighborhood Reinvestment Corporation (NRC) provides HECM training incooperation with AARP Texas approves reverse mortgage lending in statewidereferendum but prohibits creditline choices preferred by most consumers Fannie Maeannounce new consumer protections in 5/22 lender letter NRMLA and AARP supportabsolute limit on origination fees, refinancing reforms, and research on a single national203b limit AARP initiates test of HECM counseling by telephone and develops reversemortgage counselor exam in cooperation with HUD, Fannie Mae, and NRMLA.In 2000First national reverse mortgage counseling exam is taken by 425 counselors in 43statesNRC provides 2-day HECM training in Atlanta, Minneapolis, Oakland, Tampa,New Orleans, and San Antonio AARP completes "Model Specifications for ComparingReverse Mortgages;" Financial Freedom and Fannie Mae agree to develop new softwareimplementing the specifications Congress approves absolute limit on origination fees,refinancing reforms, and research on a single national 203b limit Fannie Maediscontinues "equity share" pricing option AARP Foundation selects 30 HECMcounselors to participate in HUD-supported pilot "telecounseling" project FinancialFreedom becomes largest reverse mortgage originator via merger with UnityMortgage.In 2001 AARP releases new 68-page consumer guide, creates new reversemortgage portal announces new tollfree consumer infoline and availability of HECMcounseling by telephone Fannie Mae announces it will waive the equity share fee on allloans in its Home Keeper portfolio Financial Freedom releases counseling softwaremeeting AARP model specifications. In 2007 HECM program re-authorized (ReverseMortgage)BABASAB PATIL MBA FINANCE PROJECT Page 34
  35. 35. REVERSE MORTGAGE AT SBI BELGAUM  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.BABASAB PATIL MBA FINANCE PROJECT Page 35
  36. 36. REVERSE MORTGAGE AT SBI BELGAUMReverse mortgage in the US Reverse mortgage was introduced in the US in the late 1980s. Since then, thenumber of people pledging their property for reverse mortgage has been on the rise. Takea 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 theone in the US.To be eligible for reverse mortgage, you should be at least 62 years old andown a property."In a reverse mortgage, you borrow money using your home as collateralbut there arent 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 debtgets paid off," says Jeffrey D. Voudrie, CFP, CEPP, president, Legacy Planning GroupInc.Once you pledge your property for reverse mortgage, you will receive funds as longas you live in that property. There are three main sources that home owners can tap in theUS. One of these is the federally insured Home Equity Conversion Mortgage,administered by the Department of Housing and Urban Development.The majority ofpeople opting for reverse mortgage go for HECM as it offers the best interest rates andloan amount. However, if they opt for government-insured reverse mortgages, then theywill also have to pay a fee for Federal Housing Administration insurance that will protectagainst the value of the home going below the loan amount.There are also single-purposereverse mortgages, offered by state or local government agencies for a specific reasonand, lastly, proprietary reverse mortgages offered by banks, mortgage companies andother private lenders.People planning a property reverse mortgage have to undergo a freemortgage counselling from an independent government-approved "housing agency".Reverse mortgages offered by other financial institutions also require individuals toundergo similar counselling. "Seniors like this product because it allows them to stay intheir 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 thecost of the loan.BABASAB PATIL MBA FINANCE PROJECT Page 36
  37. 37. REVERSE MORTGAGE AT SBI BELGAUM 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.BABASAB PATIL MBA FINANCE PROJECT Page 37
  38. 38. REVERSE MORTGAGE AT SBI BELGAUM  Risks to RM LendersThere are some risks faced by a Reverse Mortgage lender. These risks are at the heart ofthe reluctance of lenders to get into reverse mortgage lending, in the absence of publicpolicy support. The principal and unique problem facing the lender is that of predictingaccumulated future loan balances under a reverse mortgage, at the time of origination.The uniqueness is because reverse mortgage is a ‘rising debt’ instrument. Since reversemortgage is a non-recourse loan, the lender has no access to other properties, if any, ofthe borrower. Even if the collateral property appreciates in value, it might still be lowerthan the loan balance at the time of disposal of the property. The following are the basicsources of this risk:-  Mortality Risks:-This is the risk that a reverse mortgage borrower lives longer than anticipated. The lendermight get hit both ways he has to make annuity payments for a longer period; and theeventual value realised might decline. However, this risk is usually ‘diversifiable’, if thereverse mortgage lender has a large pool of such borrowers. Possibility of adverseselection is counterbalanced by the possibility that even borrowers with poor health maybe attracted by Reverse Mortgage’s credit line or lump sum options. However, there is noliterature on one possible source of systematic risk. Since reverse mortgage is projectedto substantially improve the monthly income and/ or liquid funds of the reverse mortgageborrowers, would it not itself result in a systematically higher life expectancy amongstthem than otherwise, now this is a big question.BABASAB PATIL MBA FINANCE PROJECT Page 38
  39. 39. REVERSE MORTGAGE AT SBI BELGAUM  Interest Rate Risks:-Said that the typical reverse mortgage borrower is elderly and is looking for predictablesources of income/ liquidity, reverse mortgage loans promise a fixed monthly payment /lump sum / credit line entitlement. However, for the lender, this is a long-termcommitment with significant interest rate risks. While fixing the above, the lender has toaccount 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 tominimize interest rate risks to the lender, like in SBI the interest rates are revised forevery 5 years. However, since there are no actual periodic interest payments from theborrower, 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 bepointed 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.BABASAB PATIL MBA FINANCE PROJECT Page 39
  40. 40. REVERSE MORTGAGE AT SBI BELGAUM • 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 houseso as to preserve or enhance market value. This might be especially true when the loanbalance is more or less sure to cross the sale value. Since the benefit would accrue mainlyto the lenders and the cost borne by the homeowner, it is perhaps not sensible to assumeotherwise. They conclude that in a competitive market, the lenders will respond by eitherreducing the loan amount or by charging a risk premium in interest or both. The moreimportant point is that some time during the tenure of a reverse mortgage, an elderlyborrower may simply be physically incapable of maintaining the home as per loanrequirements. Though the reverse mortgage loan contract provides for foreclosure undersuch conditions, this seems to be impractical and sure to result in litigation and badpublicity for the lender.  Liquidity Risks:-In Reverse mortgage loans where the borrower draws down on his loan through a creditline, there is a risk of sudden withdrawals.BABASAB PATIL MBA FINANCE PROJECT Page 40
  41. 41. REVERSE MORTGAGE AT SBI BELGAUM  Risk MitigationRisk mitigation is the key for the success of any financial product including reversemortgage. Some of the risk mitigation techniques which the providers that is the bankercan apply to reduce the risk on their books are as follow• Proper eligibility criterionsThe first mitigation of risk can be done at the time of providing loans. This can be donethrough proper verification of the title of the property, age of the borrower; his/her creditanalysis etc. This reduces the risk of default by the borrower• Variable interest rates loan as compared to fixed interest rate loanTo avoid interest rate risk, the lender can go for variable interest rates based on somemarket benchmark like MIBOR. This will also reduce the risk of Pre-payment as theborrower will not have interest arbitrage on prepayment of the loan• Proper analysis of mortality trendsAs the product has significant longevity risk, the lender can do a detailed mortality trendanalysis on a macro level and also in the market where it is operating.• Geographical diversificationThe lender can look at spreading the business across the country by promoting theproduct in secondary and tertiary cities also so that the law of large numbers may workproperly and if the provider has a bad experience in one market; it can be compensatedwith good experience in other cities• Develop the product for lower age groupsThe lender can develop home equity conversion mortgages for all households and not justfor elderly. This will significantly reduce loan to value ratio and that will take care ofmany of the risks inherent in the product.BABASAB PATIL MBA FINANCE PROJECT Page 41
  42. 42. REVERSE MORTGAGE AT SBI BELGAUM• SecuritizationOne of the most effective ways of mitigation risk is securitization It involves many otherfinancial players and thus it spreads the risk of default/prepayment to many otherparticipants.• Repayment scheduleIn the Repayment schedule, some default conditions or changes that affect the security ofthe 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 thehome’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 thisinnovative 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 homeBABASAB PATIL MBA FINANCE PROJECT Page 42
  43. 43. REVERSE MORTGAGE AT SBI BELGAUM 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.BABASAB PATIL MBA FINANCE PROJECT Page 43
  44. 44. REVERSE MORTGAGE AT SBI BELGAUM • 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 thefollowing 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 decadesBABASAB PATIL MBA FINANCE PROJECT Page 44
  45. 45. REVERSE MORTGAGE AT SBI BELGAUM • 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 IndiaAs of 1994, the estimated percentage among the elderly, dependent on various sources ofincome was as follows:Source Men Women All elderlyPensions/Rent 9-10% 5% 7-8%Work 65% 15% 40%Transfers 30% 72% 52%Of which, from 22% 58% 40%ChildrenIn 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 elderlyreported that about 5% of them lived alone, another 10% lived with their spouses onlyand another 5% lived with relatives/ non-relatives, other than their own children. In otherwords, 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 tooBABASAB PATIL MBA FINANCE PROJECT Page 45
  46. 46. REVERSE MORTGAGE AT SBI BELGAUM • 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 SegmentsNow let us see specification of the potential target segment for Reverse Mortgage. • Age GroupAbove 58 years, assuming 58 is the typical retirement age. Older the individual, moreattractive will be reverse mortgage. Additional considerations will include the minimumage specified for preferential treatment as ‘senior citizens’ in matters such as income taxor the recently introduced Varishta Bima Yojana. • High House EquityThe current monthly annuity payout by LIC under its immediate annuity product JeevanAkshay is 844 Rs for a single premium payment of Rs 1 lakh, for a person aged 65. Theannuity will be lower in case of joint life or annuity certain options. If we were to use aminimum of Rs 5000 as the monthly annuity that makes reverse mortgage a worthwhileactivity, we need an RM loan of around Rs 6 lakhs. Assuming a loan to home value ratioof 60%, this implies a current market value of Rs. 10 lakhs. • Low Current Incomes Relative to Desired Standard of LivingAmongst such households, we are looking for those whose current levels of income areinsufficient to afford their desired standard of living. The salary replacement ratessuggested in the literature, for maintaining the same standard of living after retirement asbefore, 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 beBABASAB PATIL MBA FINANCE PROJECT Page 46
  47. 47. REVERSE MORTGAGE AT SBI BELGAUMone 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 HomeReverse Mortgage is attractive to a borrower especially when he values continued stay inhis current residence and plans to do so for a long term into the future. This is likelywhen he has already stayed in his current home for a relatively longer period- say aminimum of 10 years. Additional indicators for such a desire could be a person currentlyresident in one’s home town/ state. • Lack of Other SupportsIf such an individual is living alone, as in the case of a widower or widow, reversemortgage 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 MotiveIt can be said that there is a basic conflict between taking an reverse mortgage loan and adesire to bequeath property to one’s heirs. If an elderly homeowner has no children, thisquestion may not arise. Otherwise, we need to look for attributes indicating a weakbequeath motive. For example, in the Indian context, it could mean ‘no sons’. Or it couldbe that the entire next generation of the family has migrated toanother metro or abroad with no intention of coming back. They may be much better offthan the older generation and may not value bequests, if any. • Independence and Quality of LifeA potential reverse mortgage borrower must be an elderly person who values hisfinancial independence. He must be interested in maintaining his desired quality of liferather than curtailing consumption for lack of current cash income. This implies he mustBABASAB PATIL MBA FINANCE PROJECT Page 47
  48. 48. REVERSE MORTGAGE AT SBI BELGAUMbe mentally prepared to consider borrowing in old age, let alone through innovativefinancial products like reverse mortgage. This implies certain minimum education andexposure to financial savings/ assets/ markets.  Considerations in Product DesignNow let’s see what are the aspects which need to be focused for a product design likely tobe 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.BABASAB PATIL MBA FINANCE PROJECT Page 48
  49. 49. REVERSE MORTGAGE AT SBI BELGAUM • 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 propertyappreciation rates. There is no simple way to explore these except through financialmodelling. Some alternatives for limiting risks in the learning phase can be suggested asbelow. • 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.BABASAB PATIL MBA FINANCE PROJECT Page 49
  50. 50. REVERSE MORTGAGE AT SBI BELGAUM  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 lenders 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.BABASAB PATIL MBA FINANCE PROJECT Page 50
  51. 51. REVERSE MORTGAGE AT SBI BELGAUM • 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. Heres 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.BABASAB PATIL MBA FINANCE PROJECT Page 51
  52. 52. REVERSE MORTGAGE AT SBI BELGAUM • 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.BABASAB PATIL MBA FINANCE PROJECT Page 52
  53. 53. REVERSE MORTGAGE AT SBI BELGAUM • 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 doesnt get loan according to proper value of property. • Lender has right to foreclose loan by forcing sale of property if borrower doesnt 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.BABASAB PATIL MBA FINANCE PROJECT Page 53
  54. 54. REVERSE MORTGAGE AT SBI BELGAUM  Steps to followed for getting a Reverse mortgageThe following are the important steps which are to be followed by every person who isgoing 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 & InsuranceBABASAB PATIL MBA FINANCE PROJECT Page 54
  55. 55. REVERSE MORTGAGE AT SBI BELGAUM 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:-BABASAB PATIL MBA FINANCE PROJECT Page 55
  56. 56. REVERSE MORTGAGE AT SBI BELGAUMThe following are the cases where in the reverse mortgage contract may be terminatedthat is terminating the contract of giving regular payouts to the borrower by the bankbefore 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 houses title, changing the houses 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.BABASAB PATIL MBA FINANCE PROJECT Page 56