REVERSE MORTGAGE

(Final draft submitted in fulfillment of the project for the subject Transfer of
Property.)

Submitted to, Submitted by-

Ashutosh kumar
Dr. P.V.K. Sita Rama Rao. Roll no. 1616
Faculty of Law. B.B.A LL.B(Hons)
Chanakya National Law University,
Patna.
1

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CONTENTS

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 ACKNOWLEDGEMENT

With Candor and Pleasure I take opportunity to express my sincere thanks and
obligation to my esteemed guide Dr. Sita Rama Rao Sir because of his
indispensable and mature guidance and co-operation without which it would not
have been possible for me to complete my project.

Finally, I gratefully acknowledge the support, encouragement & patience of my

family, and as always, nothing in my life would be possible without my spiritual
Guru, Thank You!

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 DECLARATION

I hereby declare that this project work titled “ REVERSE MORTGAGE ” is my

original work and no part of it has been submitted for any other degree purpose or
published in any other from till date.

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 OBJECTIVES OF THE RESEARCH WORK
The prime objective of this project is to thrown light upon the following research
topics which are as follows here, the definition of reverse mortgage The objective
decides where we want to go, what we want to achieve and what is our goal or
destination. The objective of “Study of Reverse Mortgage” is to - 1. Analyze the
future prospects of this lending scheme. 2. Find out the Risks associated with it in
current scenario (Recovery after global economic meltdown). 3. To find out the
welfare gain to senior citizens from Reverse Mortgage Scheme.

HYPOTHESIS

Before starting the research work, the hypothesis which researcher has made is that
whether the feasibility of reverse mortgage loans as a retirement planning tool
good?, to find the major challenges against the acceptance of reverse mortgage
loan. The data has been analyzed by using various tools like five force analysis,
SWOT analysis etc. whether the retirement planning done by most of retired
people are not adequate to satisfy their current needs and majority of them are
dependent on transfer from their children as their current source of income. So
there is huge growth potential for reverse mortgage loan.

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 CHAPTERISATION

CHAPTER 1-INTRODUCTION :

A reverse mortgage is a type of home loan for older homeowners that requires no
monthly mortgage payments. Borrowers are still responsible for property
taxes and homeowner's insurance. Reverse mortgages allow elders to access
the home equity they have built up in their homes now, and defer payment of the
loan until they die, sell, or move out of the home. Because there are no required
mortgage payments on a reverse mortgage, the interest is added to the loan balance
each month. The rising loan balance can eventually grow to exceed the value of the
home, particularly in times of declining home values or if the borrower continues
to live in the home for many years. However, the borrower (or the borrower's
estate) is generally not required to repay any additional loan balance in excess of
the value of the home.1

Specific rules for reverse mortgage transactions vary depending on the laws of the
jurisdiction. For example, in Canada, the loan balance cannot exceed the fair
market value of the home by law.

One may compare a reverse mortgage with a conventional mortgage, where the
homeowner makes a monthly payment to the lender, and after each payment, the
homeowner's equity increases by the amount of the principal included in the
payment.

Regulators and academics have given mixed commentary on the reverse mortgage
market. Some economists argue that reverse mortgages may benefit the elderly by

1
"Reverse Mortgages: Report to Congress" (PDF). Consumer Financial Protection Bureau. Retrieved 1
January 2014

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smoothing out their income and consumption patterns over time. 2 However,
regulatory authorities, such as the Consumer Financial Protection Bureau, argue
that reverse mortgages are "complex products and difficult for consumers to
understand", especially in light of "misleading advertising", low-quality
counseling, and "risk of fraud and other scams".3 Moreover, the Bureau claims that
many consumers do not use reverse mortgages for the positive, consumption-
smoothing purposes advanced by economists. In Canada, the borrower must seek
independent legal advice before being approved for a reverse mortgage.

2
Reversing the Trend: The Recent Expansion of the Reverse Mortgage Market". Real Estate Economics. 39:
743–768. doi:10.1111/j.1540-6229.2011.00310.x. Retrieved 1 January 2014.
3
Reverse Mortgages: Report to Congress" (PDF). Consumer Financial Protection Bureau. Retrieved 1
January 2014.

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  Bank Overview In India.
ICICI Bank is India's second-largest bank with total assets of Rs. 4,062.34 billion
(US$ 91 billion) at March 31, 2011 and profit after tax Rs. 51.51 billion (US$
1,155 million) for the year ended March 31, 2011. The Bank has a network of
2,752 branches and about 9,225 ATMs in India, and has a presence in 19 countries,
including India. ICICI Bank offers a wide range of banking products and financial
services to corporate and retail customers through a variety of delivery channels
and through its specialised subsidiaries in the areas of investment banking, life and
non-life insurance, venture capital and asset management. The Bank currently has
subsidiaries in the United Kingdom, Russia and Canada, branches in United States,
Singapore, Bahrain, Hong Kong, Sri Lanka, Qatar and Dubai International Finance
Centre and representative offices in United Arab Emirates, China, South Africa,
Bangladesh, Thailand, Malaysia and Indonesia.4

Our UK subsidiary has established branches in Belgium and Germany. ICICI

Bank's equity shares are listed in India on Bombay Stock Exchange and the
National Stock Exchange of India Limited and its American Depositary Receipts
(ADRs) are listed on the New York Stock Exchange (NYSE).

4
"Mortgagee Letter 2014-07" (PDF).

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 CHAPTER- REVERSE MORTGAGE: THE TAX
LIABILITIES

When a reverse mortgage scheme is availed, payments can be received from a

lender directly or from a life insurance company under annuity. Here’s an analysis
of the options

Under the Reverse Mortgage Scheme (RMS), a senior citizen can opt to receive an
additional source of income on the security of an owned residential house, without
having to service it during his lifetime. Under RMS, a senior citizen has two
options. Either he can opt to receive periodical or lump sum payments from the
bank directly, or he can buy an annuity with the help of the lump sum amount paid
by the lender, to a life insurance company. This article deals with the tax
implications of both options.5

Receiving money from the lender-

As per the tax laws, profits made on the transfer of a capital asset is treated as a
capital gain and taxed. However, Section 47 (16) of the Income Tax Act, 1961,
provides that the act of mortgaging the property for reverse mortgage, will not be
treated as a transfer. So, there will not be any tax liability arising at the time of
mortgaging the property.

Mortgaging of the property will not be treated as a transfer but it will be when the
property is disposed of by the lender or the borrower or his legal heirs, and then it

5
https://housing.com/news/reverse-mortgage-tax-liabilities/

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shall be taxed accordingly. In case the property is sold by the lender, the capital
gains liability shall not fall on the lender but would have to be discharged by the
borrower if he is alive or his legal heirs.6
Please note that if the borrower or his legal heirs decide not to sell the property but
pay the dues fully from other resources, no tax implications will arise as
redemption of the property also does not amount to transfer.

With regards to the periodical or lump sum payments from the bank, as per the
provisions of Section 10 (43) of the Income Tax Act, 1961, any amount received
whether lump sum or installments from banks, is fully exempt from tax. Under
RMS, there is no tax implication till the property is disposed off.

Receiving annuity from the life insurance

company-
Instead of receiving direct payments from the bank, the borrower requests the
lender to hand over the eligible amount in a one-time lump sum amount to the life
insurance company. The company in turn, agrees to pay periodical amounts to the
borrower, which is treated as an annuity. The tenure and amount of the annuity
depends on the options exercised by the borrower. It could be for the lifetime of
the borrower which may be more than the period of 20 years stipulated for direct
payments from the bank under the RMS.

In such a transaction, the loan is provided by the lender to the borrower but is
handed over to the life insurance company. So, the transaction of disbursing the
money is not treated as transfer for the purpose of capital gains. However, the tax
treatment of annuity received, is different from the payments directly received

6
"Report to Congress on Reverse Mortgages" (PDF). June 2012. Retrieved 12 September 2017

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from the bank. As per the Indian tax laws, any annuity received is taxable income
under the head, ‘Income from other sources.’ Some amendments were made in the
RMS in 2013, so as to provide for payment of lump sum payment to the life
insurance companies under the scheme. However, corresponding amendments
were not made in Section 10 (43) to make the receipt of annuity from life insurance
companies as exempt. So, the annuity received continues to be taxable.

It becomes clear under the present tax laws, the option of receiving direct
payments from the lender is more tax efficient as compared to the option of
receiving an annuity. However, in the latter option, you can receive payment for a
lifetime which is not available under the direct payments from the lender.

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 QUALIFCATIONS FOR REVERSE
MORTGAGE ELIGIBILITY
 Should be a Senior Citizen of India above 62 Years of age.
 Married Couples will be eligible as joint borrowers provided one of them
being above 60 years of age and other not below 55 years of age.

Reverse mortgage aims at partially meeting the financial needs of senior citizens
without selling the property and enables recurring funds in fows to the senior
citizens during their life time. After the death of the senior citizen, the surviving
spouse can continue to occupy the property till his/her demise. It acts as a source
of income for the cash deprived individuals.7

Primary lien: A reverse mortgage must be the primary lien on the home. Any
existing mortgage must be paid off using the proceeds from the reverse mortgage.

Occupancy requirements: The property used as collateral for the reverse mortgage
must be the primary residence. Vacation homes and investor properties do not
qualify.

Taxes and Insurance: Borrowers must remain current on real estate taxes,
homeowners insurance, and other mandatory obligations, including condominium
fees.

https://www.researchgate.net/publication/307375120_Reverse_Mortgage_An_Empirical_Study_in_Indian_Perspe
ctive

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Property Condition: Borrowers are responsible for completing mandatory repairs
and maintaining the condition of the property.

Conveyance of the mortgaged property by will or operation of law to the estate or

heir after mortgagor's death: When a reverse mortgage becomes due and payable
upon the death of the last surviving borrower and the property is conveyed by will
or operation of law, the estate or heirs (or parties if multiple heirs) may satisfy the
HECM debt by paying the lesser of the mortgage balance or 95% of the current
appraised value of the property.

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 FEATURES OF REVERSE
MORTGAGES
With a reverse mortgage, the borrower always retains title or ownership of the
home. The lender never, at any point, owns the home even after the last surviving
spouse permanently vacates the property.

The amount of funds that a borrower is eligible for depends on the person's age (or
age of the youngest spouse in the cast of couples), home value, interest rates and
upfront costs. The older someone is, the more proceeds he or she may receive.

There is a limit on the amount of funds a borrower can access during the first 12
months after closing. If a borrower is eligible for a $100,000 loan, for example, no
more than $60,000, or 60 percent, can be accessed. In month thirteen, a borrower
can take as much or as little of the remaining proceeds as he or she wishes. There
are exceptions to the 60 percent rule. A borrower can withdraw a bit more if there
is an existing mortgage, or other liens on the property, that must be paid off. A
borrower can withdraw enough to pay off these obligations, plus another 10
percent of the maximum allowable amount. That's an extra $10,000, or 10 percent
of $100,000.

Lenders must conduct a "financial assessment" of every reverse mortgage borrower

to ensure the person can afford to live in the property and pay future property taxes
and homeowners insurance, over the life of the loan. Lenders look at all of the
borrower's income streams, including Social Security, pensions and investments.
Reverse mortgage borrowers must also provide tax returns and bank account
statements to help document income and expenses. Any credit trouble (i.e., late

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payments) must be explained. The lender determines whether the explanation
qualifies as an "extenuating circumstance" in getting the reverse mortgage
approved.

The lender subtracts what the borrower pays for taxes and insurance, debt
obligations and other living expenses from the borrower's income and assets. The
resulting "residual income" is the amount of money left over each month. This
figure is compared to a government threshold amount (based on region and family
size) that determines whether a borrower has enough monthly residual income to
pass the assessment.8

If the borrower passes the financial assessment, they can proceed with the getting
the loan. If, however, the lender determines that the borrower does not have
adequate cash flow, the borrower's loan application can be declined, or all (or
most) of the available loan proceeds will be placed in a Life Expectancy Set-Aside
and used specifically to pay property taxes and homeowners insurance for as long
as those funds last.9

8
Report to Congress on Reverse Mortgages" (PDF). June 2012. Retrieved 12 September 2012.
9
Hallman, Ben (27 June 2012). "Reverse Mortgage Foreclosures On The Rise, Seniors Targeted For
Scams". Huffington Post. Retrieved 12 September 2012.

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 CHAPTER- TYPES OF REVERSE
MORTGAGES

Home Equity Conversion Mortgage

HECM (pronounced HEKUM) is the commonly used acronym for a Home Equity
Conversion Mortgage, a reverse mortgage created by and regulated by the U.S.
Department of Housing and Urban Development.

A HECM is not a government loan. It is a loan issued by a mortgage lender, but

insured by the Federal Housing Administration, which is part of HUD.

FHA collects a Mortgage Insurance Premium (MIP) at closing that equals two (2)
percent of the home’s appraised value or FHA lending limit ($636,150), whichever
number is less. FHA also collects an annual premium equal to 0.5 percent of the
outstanding loan balance. Your loan balance thus increases by the amount of this
fee. The insurance purchased by this fee protects the borrower (1) if and when the
lender is not able to make a payment; and (2) if the value of the home upon selling
is not enough to cover the loan balance. In the latter case, the government
insurance fund pays off the remaining balance.

Currently, HECMs make up most reverse mortgages offered in America. HECMs

come with rules and regulations that include a requirement that the borrower
receive third-party counseling.10

10
"Reverse mortgages grow, but so do warnings". Australian Broadcasting Corporation (ABC). Retrieved 12
September 2012

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Proprietary Reverse Mortgage
Proprietary reverse mortgages are privately insured by the mortgage companies
that offer them. They are not subject to all the same regulations as HECMs, but as
a standard best practice, most companies that offer proprietary reverse mortgages
emulate the same consumer protections that are found in the HECM program,
including mandatory counseling.

Proprietary reverse mortgages are sometimes called “jumbo” reverse mortgages,

because they are taken on higher-valued homes. The maximum loan limit on a
Home Equity Conversion Mortgage is $636,150, so if you own a home worth
several million dollars, you may be able to get more funds from a proprietary
reverse mortgage.

American Advisors Group, based in Orange, CA, and Finance of America Reverse
Mortgage, based in Tulsa, OK, are the only companies that currently offer
proprietary reverse mortgages.

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 SWOT Analysis

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.

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.11

Borrower/heir can get mortgage released by paying loan with interest without
having to sell property at any time. Prepayment of loan is allowed.

Reassessment of property value will be done periodically or at least once every 5

years.

Borrower can cancel the mortgage within three days of approval/disbursement,

subject to return of loan amount.

Weaknesses:

This loan product has a maximum tenure of only 15 years. If the borrower outlives
this period, the regular cash flows will stop.12

11
https://www.uniassignment.com/essay-samples/finance/the-business-of-reverse-mortgage-finance-essay.php
12
"- REVERSE MORTGAGES: POLISHING NOT TARNISHING THE GOLDEN YEARS". www.gpo.gov.
Retrieved 2015-12-23.

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Basis of property valuation is not clear.

Requirement of clear title to property in the name of the borrower to get the loan.

Three days period to cancel loan is too less. Should be at least 15 days to go
through the fine print.

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.

Longevity increasing with nuclear families. However, 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.

Quantum of loan can increase favorably for borrower on revaluation of property.13

Threats:
Property valuations are ambiguous.14

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
13
Heinzl, John (31 October 2010). "The reverse mortgage quandary". The Globe and Mail. Retrieved 12
September 2012
14
"Reverse Mortgages Are Not the Next Sub-Prime". mtgprofessor.com.

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with interest exceeding assessed property value, banks may resort to strong-arm
tactics to force the borrowers to move out, if they live too long after the loan period
is over.

Rate of interest is at the discretion of lender. Any increase in the rate, if floating,
will increase the burden of the borrower.

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21
 CONCLUSION

Reverse mortgage as an innovative financial product enables senior citizens

to mortgage their house property with a lender and convert part of the home
equity into tax-free income without having to sell the house. Despite
growth in this market and the expected popularity of the concept, the results
are not satisfactory in India. The present study tries to explore various factors
affecting the choice of potential buyers of Reverse Mortgage Loan in India. It
tends to establish the linkage between demographic variables and their effect on
attitude towards reverse mortgage. The analysis resulted in extraction of five
factors using factor analysis technique, namely, Financial Independence,
Revenue returns, Risk involvement, Complex Structure and Ownership.

For most Senior Citizens, the house is the largest part of their assets. A reverse
mortgage loan is a loan where the lender pays the monthly installments to you
instead of you making any payments to the lender. Hence the name reverse
mortgage, as the payment stream is reversed. A Reverse mortgage enables senior
citizens to convert their home equity into tax-free income. Reverse mortgages
enable eligible homeowners to access the money they have built up as equity in
their homes. They are primarily designed to strengthen seniors’ personal and
financial independence by providing funds without a monthly payment burden
during their lifetime in their home. The major eligibility requirements are that the
applicant must be at least 62 years of age and own and occupy a home as their
personal residence. The type of home that qualifies as a personal residence can be a
single family residence, town home, multiple unit building (1-4 Units), or mobile
homes with a permanent foundation .

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BIBLOGRAPHY

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