Reverse mortgage as a product gaining ground

- Latest study projects $860bn market size on modest ticket size of Rs25lakh

- Almost half senior households are 'dissatisfied' or very dissatisfied' with their financial conditions

- Regulation protects senior citizens from eviction and foreclosure until any of the two spouses is alive

Mumbai: Nearly 26 million households in India will be eligible for Reverse Annuity Mortgage (RAM) in the next decade. With a modest ticket size of Rs 25 lakh, the market is worth $860 billion. Even if 12 per cent of the market is captured, it will be around a $100 billion market for the product, says a study conducted by two MBA students of IIM-Ahmedabad, Akshay Thakur and Rasika Nishtane.

In recent decades, the net worth of Indian senior citizens has increased as a larger portion of their wealth is allocated to real estate.

Yet, 65 per cent of the elderly are financially dependent, and majority of people aged over 70 lead a 'lonely or neglected' life (Agewell Foundation). Nearly half the senior households are 'dissatisfied', or very dissatisfied' with their financial conditions.

Reverse annuity mortgage (RAM) is an effective tool to break that kind of punishment. It allows senior citizens (60+) to convert their homeownership into cash. In a typical RAM contract, lenders underwrite the loan for disbursement over 10-20 years in monthly instalments.

At maturity, the payments stop and, clubbed with the accumulated interest, turn into a lumpsum (payable by homeowner to lender).

The demographics of India is changing rapidly – not in the most comprehensible ways though. Population growth has been slowing down over the last four decades and is currently as low as one per cent, which would fall even further in the coming decades. Also, around 12.4 per cent of India's population lies between the age of 40-49, which will grow to the age of 50 in the coming decade. This rate is bound to rise with ageing of the massive young population.

Regulation protects senior citizens from eviction and foreclosure until any of the two spouses is alive. The lumpsum continues to attract interest until both the spouses pass away. Eventually, the

lender liquidates the home, claims the outstanding balance, and hands over the rest to legal heirs. Homeowners receive a dignified, pension-like payment to supplement, or enhance their living standards with a security of possession.

An improving atmosphere of asset recovery by lenders is actually a good sign for the economy,. There have always been NPAs, but now the economy has superior ways to address the issue of NPAs.

"The roadblocks from the demand side are mostly irrational and sentimental. For lenders, it appears nothing more than the fear of the unknown. Both the sides are less informed about the product than economists would desire," Dr Prashant Das, Associate Professor (Real Estate Finance) at IIM Ahmedabad, told Bizz Buzz. A section of bankers gives a special mention of recent incident of former SBI chairman Pratip Chaudhuri being arrested and sent to judicial custody and say that it would be pertinent to understand bankers' unwillingness to market RAM enthusiastically.

Interestingly, since their inception in 2007, the total number of RAMs issued in India barely beats three digits. Some lenders never issued such loans, and many others suffer from the "fear of the unknown." Some lenders were concerned about risks, primarily related

to the asset liquidation. Others blamed it on poor demand.

According to Dr Ashish Gupta, an Associate Professor of Real Estate at RICS School of Built Environment, Amity University, Noida, "RAM has been available in India since 2007 for senior citizens to unlock equity in their residential property. Theoretically, RAM seems to be an attractive proposition with the increasing life expectancy, absence of social security/ formal pension for employees and breaking up of joint family structure in India. However, RAM has met with limited success due to a lack of awareness and emotional attachment to homeownership. Traditionally, a house is considered a family heirloom that is passed from one generation to another."

The lukewarm demand is a puzzle. Indeed, RAM partially limits the bequest motive: The heirs will only be entitled to the residual cash leftover by the lender. On the other hand, only 16 per cent seniors live in joint families while 66 per cent live independently and 18 per cent are one-member households (AgeWell). In other words, the heirs are not keen at occupying the parental homes. Mortgagors can pass on the RAM payments to the heirs, if the motivation is strong. However, a SEBI survey (2015) suggested that less than 10 per cent respondents consider "bequest" as their investment motive. Thus, the lack of demand for RAM is caused by lack of awareness or supply.

Shivam, senior vice president, SBI Mutual Fund, says, "A clear-cut policy may be issued by RBI to transfer the loan to ARC by the bank in case legal heirs do not pay the outstanding. Sales of house should be left to ARC and they only should be accountable for all due diligence."

The main risks for the lender are financial and relate to the uncertainties in asset price growth, depreciation in the asset and foreclosure discount.

Nearly 15 per cent of such loans may run into loss and the loss severity in such loans averages at 30 per cent. Yet, with adequate risk measures, the returns at the portfolio level very well match those on regular mortgage loans. A great deal of the risks can be mitigated by contractual prudence, including adequate documentation of heirs, conservative loan to value (LTV) ratio and fair but adequate premium for legal costs.

The roadblocks from the demand side are mostly irrational and sentimental. For lenders, it appears nothing more than the fear of the unknown. Both the sides are less informed about the product than economists would desire

- Dr Prashant Das, Associate Professor (real estate finance) at IIM-A