Separate laws needed for reverse mortgage

During the 70’s and 80’s having your own house as a property was looked up on as a big thing but it was not considered as an asset, one paid notional tax for living in one’s own property. But today, house as a property is a big asset and not a mere perception for the one who can weight the value of the house.

The people who rented their house, was at best an illiquid asset, at worst a liability. And the ones who lived happily in the house occupying an area of3500 sq. ft. at Rs 200-a month for twenty years — the perception was life couldn’t be better, till the realization that the asset lacked bank ability.

And the smart ones, who lived in their own house, avoided renting it, spent a major part of income on maintenance, and lived their old age between penury and pension. This was the time, when consumer loans were virtually non-existent, interest rates were very high, and acquirement of real estate without a black component almost impossible.

With the introduction of investment products, the returns have some what eased lifestyles, but fixed deposits and LIC returns may perhaps go so far and no further. High real estate rates effectively made the middle class citizen’s sole fixed asset to a shelter.

The limited cash resource is applied towards its preservation. How the asset can be best leveraged against the rising real estate prices to flow over the insufficiency of the current income is the problem.

The solution is the Finance Minister’s gift to senior citizens in last year’s budget — the reverse mortgage scheme. Earlier, such informal arrangements were worked out with property dealers or close relatives, but there was always a risk, whereas the reverse mortgage is a credit instrument under which, the owner of the house provides the property as security, and receives payments in installments, as a “loan”, while continuing to reside in the premises.

The qualifying criteria for reverse mortgage includes, other than the borrower’s age i.e. sixty plus, a clear, unencumbered title to the property having a residual life of twenty years. An independent valuation of the premises is carried out at market rates, and forms the basis on which the loan amount, interest components and installments are worked out.

Adequate flexibility is given in right of pre-payment without penalty, first right of settling loan with sale of security, which option is also made available to the legal heirs. On foreclosure and sale, any balance surplus is payable to the deceased’s legal heirs.

However, there are certain obligations on the Borrower’s part, most important being the restrictions on testamentary disposition. The Borrower has to keep the property fully insured, in proper state of repair and maintenance, and pay all taxes, electricity, water charges etc. The renting of the premises, changing user, deployment of the money for speculation is also not allowed otherwise it will lead to foreclosure.

This should have proved to be a bonanza for the target customer. Instead, the scheme flopped because of lack of clarity in the regulatory framework. According to the sources there were only hundred-odd takers, in the entire financial year.

The major concern of banks and beneficiaries is taxation issues. Is the amount of loan in the nature of a capital receipt? Is the creation of security by the borrower a transfer of capital asset under the Income Tax Act? If so, which is the point at which the tax is triggered and who is liable to pay? Does the tax arise on disbursements, or the sale of the property on foreclosure? What are the permissible deductions? Is indexation to be applied from the date of discharge of loan or date of acquisition by the original owner?

The tax issues have been touched in the current Financial Bill. For one, a proviso will be inserted in Section 47 of the Income Tax Act to clarify that the mortgage will not be treated as a transfer. Section 10 will also be amended to provide for exemptions from tax on capital receipt, to provide that disbursements are not treated as capital gain, which will arise only on sale of the property, for recovery of the loan.

The modalities of foreclosure and repossession however remain unclear. There is no concrete event of default as there is no regular repayment depicted.

Therefore, the only resultant stage of foreclosure is termination on owner’s death. Is the right under Section 13 of SARFAESI available for enforcement of security? Will banks be able to repossess a house property as they do vehicles? Guidelines or general laws are not enough, separate laws should be formulated to address these issues.

Lastly, with life expectancy over 80, 60-plus is not the time to go for reverse mortgage. This should be the last resort.