Chapter 7

The Concept of

Securitisation

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 Securitization is a process of pooling and repackaging of

homogenous illiquid financial assets into marketable securities that

can be sold to investors. The process leads to the creation of financial

instruments that represent ownership interest in, or are secured by a

segregated income producing asset or pool of assets. The pool of

assets collateralises securities. These assets are generally secured by

personal or real property such as automobiles, real estate, or

equipments loans but in some cases are unsecured, for example credit

card debt and customer loans.

Reserve Bank of India, in its Guidelines on Securitisation, has

defined securitisation as a process by which assets are sold to a

bankruptcy remote special purpose vehicle (SPV) in return for an

immediate cash payment. The cash flow from the underlying pool of

assets is used to service the securities issued by the SPV.

Securitisation thus follows a two stage process. In the first stage there

is sale of single asset or pooling and sale of pool of assets to a

'bankruptcy remote' special purpose vehicle (SPV) in return for an

immediate cash payment and in the second stage repackaging and

selling the security interests representing claims on incoming cash

flows from the asset or pool of assets to third party investors by

issuance of tradable debt securities.

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 If the assets are secured by real property such as automobiles or

real estates, then these are called mortgage backed securities. Here

the lender has the right to sell the property if borrowers default. If the

assets are credit card receivables than these are unsecure and the

investor has to rely on the performance of the assets that collateralise

these securities. These are known as assets backed securities.

Securitization of credit card receivables is an innovation that has

found world wide acceptance.

Securitization Process:

The securitization process involves following steps:-

1. Asset are originated through receivables, leases, housing

loans, or any other form of debt by a company and funded

on its balance sheet. The company is normally referred to as

th

2. Once a suitably large portfolio of assets has been originated,

the assets are analysed as a portfolio and then sold or

assigned to a third party, which is normally a special

purpose of funding the assets. It issues debt and purchases

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 receivables from the originator. The SPV is owned by a trust

/ the originator.

3. The administration of the asset is then subcontracted back to

the originated by the SPV. It is responsible for collecting

interest and principal payments on the loans in the

underlying pool of assets and transfer to the SPV.

4. The SPV issues tradable securities to fund the purchase of

assets. The performance of these securities is directly linked

to the performance of the assets and there is no recourse

(other than in the event of breach of contract) back to the

originator.

5. The investors purchase the securities because they are

satisfied that the securities would be paid in full and on

time from cash flow available in asset pool. The proceeds

from the sale of securities are used to pay the originator.

6. The SPV agrees to pay any surplus which, may arise during

its funding of the assets, back to the originator. Thus the

originator, for all practical purposes, retains its existing

relationship with the borrowers and all of the economies of

funding the assets.

7. As cash flow arise on the assets, these are used by SPV to

repay funds to the investors in the securities.

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History Of Securitization

Securitization has evolved from its tentative beginnings in the

late 1970s to a vital funding source. Securitization only reached

Europe in the late 80's, when the first securitizations of mortgages

appeared in the UK. This technology only really took off in the late

90's or early 2000's, thanks to the innovative structures implemented

across the asset classes, such as UK Mortgage Master Trusts,

Insurance-backed transaction or even more esoteric asset classes such

as lottery receivables for the Greek government.

As the result of the credit crunch, precipitated by the subprime

mortgage, the market for bonds backed by securitised loans was very

weak in 2008 unless the bonds were guaranteed by a federally backed

agency. As a result, interest rates are rising for loans that were

previously securitised such as home mortgage, student loans, auto

loans and commercial mortgages. However, in India, the concept of

mortgage backed securitization is almost new. It got impetus with

financial reforms initiated by Government of India towards the end

nineties.

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Credit Enhancement

Investor in securitised instrument takes a direct exposure on

the performance of the underlying collateral and have limited or no

recourse to the originator. Hence, they seek additional comfort in the

form of credit enhancement. It refers to the various means that

attempts to buffer investors against losses on the asset collateralising

their investment. The credit enhancements are often essential to

secure a high level of credit rating and for low cost funding. By

shifting the credit risk from a less known borrower to a well known,

strong and large credit enhancer, credit enhancements correct the

imbalance of information between the lenders and the borrowers.

The credit enhancer can either be external or internal. The

external credit enhancer includes insurance, third party guarantee

and letter of credit. Since any of these services will be provided by

the third party, a fee is to be paid to it for the service received. The

internal credit enhancement may include a number of measures. The

most popular is credit trenching which means that the Special

Purpose Vehicle Company (SPV) issues two or more tranches of

securities and establish a pre-determined priority in their servicing,

where by first losses are borne by the holders of subordinate

tranches. The holders of other tranche i.e. senior class debt are at

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comfort. The securities belonging to the subordinate tranche may be

class may be k

enhancement is over-collateralisation which means that the

originator sets aside assets in excess collateral required to be assigned

to the Special Purpose Vehicle (SPV) Company.

Parties To Securitisation Transaction

There are three primary parties to a securitisation deal. The first

is the originator. This is the entity on whose books the assets to be

securitised exist. It is the prime mover of the deal. It sells the assets

on its books and receives the funds generated from such sale. In a

true sale, the originator transfers both the legal and beneficial interest

in the assets to the SPV. The scheduled commercial banks and the

housing finance companies, which lend for the housing, are

originator in securitisation transaction.

The second party to securitisation transactions is SPV. It is the

entity, which buys the assets to be securitised from the originator. A

SPV is typically a low-capitalised entity with narrowly defined

purposes and activities and usually has independent directors or

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trustees. It holds the assets in its books and makes the upfront

payment for them to the originator.

The third party to the securitisation transaction are investors

who may be individuals, financial institutions, mutual funds,

provident funds, pension funds, and the insurance companies. These

investors buy a participating interest in the total pool of receivable

and receive their payments in the form of interest and principal as

per agreement.

The other parties to a securitization transaction are obligors,

rating agency, administrators or servicers and agents and trustees.

The obligors are the borrowers of the original loan. Rating agency

would assess the strength of the cash flow and mechanism designed

to ensure full and timely payment. The administrator and servicers is

responsible for collecting the payment and passing it to SPV.

Generally, the originator acts as a administrator or servicers. The

agent and trustee are responsible to look after the interest of the

investor.

Instruments Of Securitization

Securitization can be implemented through different kinds of

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instruments which differ mainly in their maturity characteristics. The

first instrument is Pass Through Certificates. These reflect ownership

rights in the assets backed by securities. The cash flow from the

underlying collateral are passed through to the holders of the

securities in the form of monthly payment of interest, principal and

pre-payments. The cash flows are distributed on a pro- rata basis to

the holders of pass through certificates. The pay through security is

another instrument of securitization which overcomes the single

maturity limitation of the pass through certificates.

National Housing And Habitat Policy 1998 And Securitization

The Government of India has announced its support to the

securitization so that the primary lending institutions can convert

their illiquid assets in liquid and get resources to boost their lending

operations. The National Housing and Habitat Policy, 1998 was a

major policy initiative of Government of India to give support to

mortgage backed securitization. It enjoined upon the National

Housing Bank to play a leading role in starting mortgage backed

securitization and develop a secondary market in the country.

National Housing and Habitat Policy, 2005 announced that foreign

financial institutions will be permitted to invest in Residential

Mortgage Backed Securitization (RMBS).Further, higher rates of

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stamp duty on securitization is a major hurdle in the process of

securitization as it makes the process a costly affair. The policy

recognised it and it was stated that the stamp duty on the RMBS

would be rationalised. It will be either reduced or waived on the lines

of the Gujarat, Maharasthra, Tamil Nadu, Karnatka and West Bengal.

The central Government announced that it would incentivise the

State Governments to undertake such reform oriented measures.

Further, the Policy stated that regulatory measures will be favourable

for the banks and HFCs to engage them in RMBS both as originator

and investor. The National Urban Housing and Habitat Policy, 2007

further emphasised the importance of RMBS as an innovative

financial tool and reaffirmed the commitment of Government of

India to develop the mortgage backed securitization market and

secondary mortgage market. The Eighth and Ninth Five Year Plans

have also focused on the need to augment larger resources for the

housing sector through assets securitisation.

Amendment In National Housing Bank Act, 1987

The National Housing Bank Act, 1987 was amended in 2000 to

make NHB eligible to enter into securitization market. The NHB

(amendment) Act, 2000 was passed by Parliament with the object of

providing NHB greater regulatory powers over the HFCs, increased

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scope of mobilization of additional resources for the housing sector

through the introduction of mortgage backed securitization and

creation of a secondary market. Under the amendment, NHB has

been authorized to purchase, sell, or otherwise deal in any loans or

advances secured by mortgage or charge on the immovable property

relating to scheduled banks or HFCs. NHB has also been allowed to

create trusts and also to act as a trustee. To facilitate transfer of

securities while undertaking this function, NHB has been exempted

from compulsory registration under the Registration Act both at the

time of issue of securities by NHB and at the time of their transfer by

the investors. Further, in order to instill confidence among the

investors in the securities issued by NHB, the Bank acting as a trustee

or otherwise in the transaction relating to securitization of loans has

been authorized to recover the dues as arrear of land revenue.

Recognizing the role of mortgage backed securitization (MBS)

in linking the housing sector with the capital market and pursuant to

the credit policy announcements of April 2002, the Reserve Bank of

India issued guidelines in May 2002 for investments by banks in

MBS. In terms of the RBI guidelines, investments by banks in MBS

backed by the mortgages of housing finance companies recognized

and supervised by National Housing Bank, will carry risk weightage

of 50 per cent for the purpose of capital adequacy and shall qualify

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for inclusion in the annual housing finance allocation stipulated for

the banks by the RBI.

In the Union Budget for the year 2005-

Minister announced that the definition of eligible securities in the

Securities and Contracts (Regulation) Act, 1956 would be amended to

cover securitized mortgage debt. The Securities and Contracts

(Regulation) Act, 1956 has been amended. This is expected to

facilitate listing of RMBS in stock exchanges and improve its

tradability.

NHB Policy Measures On RMBS

In accordance with the role assigned to it by National Housing

and Habitat Policies, and Reserve Bank of India and the amendment

in the NHB Act, 1987, it has been the endeavour of the National

Housing Bank to set up a conducive policy environment and

operational mechanism for mortgage backed securitization

transactions in India. It set up a Working Group to suggest modalities

for widening the investor base in MBS, improving the quality of

assets, creating liquidity for trading in such assets and other related

issues. NHB has developed operational systems and behavioral

models of MBS as an on-going exercise based on the experiences

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drawn from its previous issues. Frequent MBS issuances are expected

to spur the secondary market activity in the MBS products paving the

way for a vibrant and deep secondary mortgage market in the

country.

The Bank also formulated an RMBS Policy, so as to ensure

minimum level of standards and unambiguity in the RMBS issues

brought out by it. The Policy details the entire gamut of activities to

be taken up by NHB and also sets forth guidelines for the same.

The Bank assumes the responsibility of the Trustee for RMBS

issues to ensure transfer, payment and timely servicing to the

investors in the PTCs. The Bank also has the mandate to invest in its

own issues of RMBS. Recognizing the dual role required to be played

by the Bank, i.e. of a Trustee as well as an investor, the Bank set up a

Chairmanship of a retired High Court Judge to supervise the

activities of the Trust periodically in respect of MBS issues where

NHB is interested in capacities other than that of trustee, so as to

ensure that the interest of investors is duly protected.

NHB has also initiated the process of introducing Credit

Enhancement measures such as guaranteeing the senior portion of

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the RMBS and Financial Support for subordinate RMBS by way of

refinance etc. to facilitate more MBS issues by HFCs and Banks. At

that the risk weight on investment by Banks and Financial

Institutions in RMBS originated by another Bank would attract a risk

weight of 50 per cent. Earlier, this concession was available only to

RMBS issues originated by HFCs regulated and supervised by NHB.

With a view to facilitate the development of secondary

mortgage market and bring about standardization in the primary

home loan market, NHB has commissioned the Administrative Staff

College of India (ASCI) to undertake a study with the main objective

to understand, analysis and assess the credit and prepayment risks in

the housing finance sector. NHB has also constituted a Working

Group with representatives from the housing finance companies to

recommend measures for standardization in the primary residential

mortgage finance sector. NHB has also entered into an Agreement

with the Asian Development Bank (ADB) and Housing Development

Finance Corporation Ltd. (HDFC) for undertaking a study for

development of a Secondary Mortgage Institution in India along

similar lines as the Fannie Mae in USA.

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 The NHB initiated steps to setup a Mortgage Credit Guarantee

Corporation as early as 2003-04. But it could not come into existence.

Now it is expected that this institution will be setup by March 2012.

NHB is also looking to set up a separate credit enhancement

company. The housing finance regulator has formed separate

working groups to look at credit enhancement and covered bonds.

It is clear that NHB has taken measures to develop market for

securitization and initiated policy measures for widening the investor

base in mortgage based securitization; improve the quality of assets

and creating liquidity for trading in such assets. The NHB will learn

from its experiences and further take measures for a vibrant and deep

secondary mortgage market in the country.

Issues Related To Mortgage Backed Securitization

To Treat Mortgage Backed Securitization As Security

To develop the MBS in the Indian market, it was urgently

required that Mortgage Backed Securities should be treated

as security under the Securities & Contracts (Regulation)

Act, 1956 in order to include securitized mortgage debt

under the definition of eligible securities. This was needed

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to facilitate listing of RMBS on Stock Exchanges and hence

make them tradeable which is expected to provide the

desired moment for development of secondary market for

RMBS. This would sustain the pace of growth of the Indian

housing finance system and ultimately benefit the home

loan borrowers.

Reduction In Stamp Duty On Securitized Instruments

The higher rates of stamp duty on the securitized housing

loan portfolio are a major hurdle in the development of

RMBS market. Bank has taken up the matter relating to

rationalization of stamp duties in respect of instruments of

securitization and is following up with the respective State

Government authorities in this regard. Issue related to

reduction of stamp duty or waving of stamp duty has been

raised in the National Housing and Habitat Policy and by

Reserve Bank of India. As a result of the measures taken by

NHB, the stamp duty on instruments of securitization of

housing loans or assignment of debt with underlying

securities in Delhi was reduced to 0.1 per cent of the amount

of securitized loans, subject to a maximum of rupees one lac.

This is expected to provide a major fillip to the mortgage

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 backed securitization transactions through the increased

supply of residential mortgages originated in the State of

Delhi.

Slow Progress

The concept of RMBS has not picked up the desired speed.

Housing loans were securitised under the scheme up to 2006-07 and

thereafter no securitisation has been made till June 2011. The reasons

for slackness are not clear. Neither the annual reports of NHB

mention any reason for the same. RMBS scheme is a very high profile

scheme of NHB which it wanted to pursue vigorously so that greater

degree of liquidity is provided to illiquid housing loan portfolio of

the HFCs and Scheduled Commercial Banks. In the initial phase, a

good tempo was build up but later on the performance is nil.

Mortgage Credit Guarantee Corporation

A mortgage guarantee company provides credit guarantee to

housing finance companies and banks on behalf of home loan

borrowers. The guarantees are invoked in case of default by home

loan borrowers. The Mortgage Credit Guarantee Company (MCGC)

was conceived in India to facilitate rural penetration of housing

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finance. The company would guarantee the loans given by a housing

finance company, thereby protecting it against defaults. Such a

guarantee company would also help develop the market for

mortgage-backed securities (MBS), or home loan securitization. These

guarantee companies play an important role in developed country

like USA and U.K. where guarantee or insurance is mandatory in

cases where the loan given was more than 80 per cent of the value of

the property. The borrower had to bear the cost of the insurance.

Recognizing the need for a Mortgage Credit Guarantee

Company, National Housing Bank initiated step to create the

company as early as in 2003-04. It entered into talks for collaboration

with Canada Mortgage and Housing Corporation (CMHC), United

Guarantee (UG), International Finance Corporation (IFC) and Asian

Development Bank (ADB). During the year 2003-04, term sheet was

also finalized with the partners. But the corporation could not be

setup. During 2005-

perusing it ad

setting up the mortgage credit guarantee company was on account of

some concept selling because there was no such a final product in the

market. Further, the problem was partly in the difficulty that MCGC

would have in recovering dues after it has paid a claim.

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 As reported in Sept.2011, the Chairman of NHB is of the view

that Mortgage Credit Guarantee Corporation will take off by March

2012. The technical partner would be a US-based mortgage insurance

entity named Genworth Financial and would pick up 36 per cent

stake in the proposed joint venture. All the shareholder, technical

services and subscription agreements have been executed among the

partners as of February 3, 2012. The US based entity is expected to

approach the Foreign Investment Promotion Board (FIPB) for foreign

investment approval. Asian Development Bank (ADB) and

International Finance Corporation (IFC) will each take a 13 per cent

stake. NHB, as the lead partner, will hold 38 per cent stake in the

proposed venture. The Chairman of NHB is of the view that

mortgage guarantee will ensure softening of interest rates as well as

more credit availability for retail home loan borrowers. The

guarantee fee will be the main source of revenue for the proposed

company which has been named India Mortgage Guarantee

Company. The guarantee fee could be either fully borne by the

borrower or shared between that borrower and the lender.

The initial paid-up capital of the venture will be Rs 120 crore.

The proposed mortgage guarantee company would be a non-banking

finance company (NBFC). Current regulations require mortgage

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guarantee companies to have a minimum paid up capital of Rs 100

crore.

The Progress Of RMBS

The progress of Mortgage Backed Securitization Scheme can be

measured in terms of various parameters like number of tranche

issued, number of housing loan portfolio securitized and the amount

involved. This has been shown by the table 7.1 given below:

Table 7.1

Progress of RMBS Scheme

Individual
Cumulative Cumulative
Year No. Of Cumulative Housing Amount
Housing Loan Amount
Ending Tranche Tranche Loan (Rs.Crore)
Account (Rs.Crore)
Account

June 2001 4 4 19655 19655 273 273

June 2002 1 5 4526 24181 87 360

June 2003 0 5 0 24181 0 360

June 2004 5 10 10935 35116 303.92 663.92

June 2005 3 13 2892 38008 99.33 763.25

June 2006 0 13 0 38008 0 763.25

June 2007 1 14 801 38809 98.95 862.2

June 2008 0 14 0 38809 0 862.2

June 2009 0 14 0 38809 0 862.2

June 2010 0 14 0 38809 0 862.2

June 2011 0 14 0 38809 0 862.2

Source: Compiled from Annual Reports of NHB

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 Graph 7.1

Progress of RMBS Scheme

Cumulative Amount (Rs.Crore)

900

800

700

600

500
Cumulative Amount
(Rs.Crore)

400

300

200

100

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 The Scheme of RMBS was launched in 2000-01 where two

separate tranche of housing loan portfolio were securitized by NHB.

The first two pilot issues of MBS comprised 11106 individual

Housing Loans involving Rs.135 crore originated by two HFCs

namely HDFC Ltd and LIC Housing Finance Ltd. Following the

success of the first two pilot issues, the NHB placed its next two pilot

issues of MBS during May 2001 comprising 8549 individual housing

loans involving Rs.138 crores originated by LIC HFL and Canfin

Homes Ltd. In total fourteen issues of MBS have been securitized.

These involve 38809 individual housing loans with a loan amount of

Rs.862.20. No tranche of MBS has been securitized after the year

2006-07.

Further, a few HFCs, Banks and HF Institution promoted by

Banks and insurance companies have participated in the scheme.

These are LIC HF Ltd, Canfin Homes Ltd, BOB Housing Finance Ltd,

Dewan Housing Finance Corporation Ltd, Birla Housing Ltd and

Andhra Bank. The scheme has not been much popular due to its legal

and structural complexities.

Performance Of The Pool Of Housing Loan Securitized

The performance of the securitized pool housing loan mortgage

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backed securities has been quite good. In the initial phase, the issue

got an overwhelming response from the investor community which

mainly comprised of institutional investor. The respective originators

of the RMBS have also been appointed as Service and Paying Agents

(S&P Agents) to ensure that collections in respect of each of the pool

of securitized loan are satisfactory and the same is distributed to the

respective pass through certificate holders and service providers.

Further the NHB has acted as trustee in all these tranches of

securitized pool. So it has acted as Special Purpose Vehicle Trust

(SPV Trust) working as a trustee for RMBS issues, the NHB has

assured transfer, payment, and timely serving to the investors in the

Pass Through Certificates. Further, NHB has also initiated the process

of introducing Credit Enhancement measures such as guaranteeing

the senior portion of RMBS and final support for subordinate RMBS

by way of Refinance to facilitate more issues by HFC.

The operation of the RMBS has ensured the yield to class A

Pass through Certificate which is consistent with that indicated at the

time of issue. The average collection efficiency in each of the

subscribed pool ranged between 95-99 per cent. The total collection

from the pools were adequate to service not only the scheduled

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payment but also contributed to substantially to the residual income

of the holders of subordinate RMBS.

Some of RMBS pool launched earlier are in the process of

redemption. Five Mortgage Backed Securitization transactions

amounting to Rs. 358.85 crore have been redeemed successfully in the

year 2008-09 and the SPV trust have been closed. One Mortgage

Backed Securitization transaction was redeemed during 20010-11.

One more MBS transaction involving a sum of Rs.72.16 crore was

fully redeemed and SPV trust was closed successfully. Hence only

seven Mortgage Backed Securitization transactions are in operation

which will be completed very soon.

Concept Of Reverse Mortgage Scheme

Reserve mortgage scheme is a home loan product designed

basically for the senior citizens. Under this scheme senior citizens can

convert their fixed assets i.e. residential home into an income channel

without liquidating their equity in case of any requirement. The

reserve mortgage scheme involves two parties i.e. bank-the lender

and the senior citizen-the borrower. The borrowers pledge their

home property to the lender. In return of the home property pledged,

the borrower gets a lump sum money or periodic payments say

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monthly or quarterly spread over life time of the borrower that can

be utilized by the borrower to add to his income existing by way of

pension or interest or rent income so that in the old days when the

flow of income falls, he do not suffer because of paucity of income.

He enjoys the shelter of his property and simultaneously gets a

regular flow of income from his property without disposing of the

same. During the life time, the borrower need not repay the loan and

the interest thereon. However, he is required to pay property tax and

insurance and maintain the house in a condition so that the value of

the house does not fall due to ill maintenance of property. After the

death of the second of the spouses, the legal heir of the property can

repay the loan along with the accrued interest to the bank, and the

bank will release the pledged property to the legal heirs of the

deceased. Alternatively, the bank can sell the property, recover all the

dues and if any excess, will pay to the legal heirs of the deceased. If

the senior citizen wants to get released the property during his life

time, he can do so by making the payment to the bank. If the senior

citizen needs to mortgage the same property again in his lifetime, he

can do so and get the benefits of Reverse Mortgage Scheme again.

The reserve mortgage scheme operates in a manner opposite to

that of the typical mortgage home loan scheme of the bank. In the

home loan scheme bank grants lump sum money to the borrower at

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the time of mortgage and monthly payment starts from the

borrowers to the bank immediately which includes payment of

interest plus the principal. This is known as equated monthly

installment (EMI). The property is pledged in favour of the bank and

released when full payment of loan plus interest is paid to the bank

by the borrower. So in typical mortgage scheme, which we generally

see in the market, where people take home loans from the bank, the

flow of funds starts from borrower to bank and in Reverse mortgage

scheme, the things are vice versa. That is why it is called Reverse

Mortgage Scheme.

The Reserve Mortgage Scheme originated in U.K during the

Great Depression of 1929. It is known there as life time mortgage.

However it is more popular in USA. American of 62 years old or

more can take the benefit of the scheme. In India, National Housing

Bank (NHB) has conceptualized the Reverse Mortgage Loan (ML)

product, exclusively for house owning senior citizens. Pursuant to

Finance Minister on February 28, 2007, NHB notified Operational

Guidelines for Reverse Mortgage Loan (RML) in May 2007 after

extensive consultation with the Housing Finance Companies (HFCs)

and Banks. Further, NHB drafted model formats of the loan

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Finance Minister in the Union Budget Speech for the year 2008-09,

made two major announcements relating to the proposed

amendments to the Income Tax Act. These are: (i) a new sub-section

(xvi) to Section 47 of the Income Tax Act providing that reverse

sub-section (43) under Section 10 of the Income Tax Act to the effect

that the stream of payments received by the senior citizen under

they are in the nature of the capital receipts. These two amendments

exempt the receipts in the hands of senior citizen from income tax

and have made the scheme more beneficial for the senior citizen.

Launch Of Reverse Mortgage Loan Enabled Annuity (RMLeA)

The reverse mortgage Scheme introduced in the year 2007 had

two major limitations. First the stream of income to the senior citizen

was limited to a maximum of 20 years. What happens if a senior

citizen remains alive beyond 20 years? From where he will get the

monthly flow of payment because the bank will stop it after 20 years.

And secondly in the event of adverse movements in property prices,

the Banks/HFCs had the discretion to cease to make further payments

to the senior citizen borrowers, at any given point of time. However,

the Senior Citizen shall not make any repayment and may continue

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to occupy the house as owners. Because of these two reasons the

scheme did not become popular and the Ministry of Finance has to

make amendments in the scheme.

NHB conceptualized an extended RML scheme ensuring

assured life-time annuity for the senior citizens from a life insurance

company. Further the scheme provides an option for married couple-

both husband and wife- to be joint borrowers for availing the

periodic annuity payments throughout their life time i.e. the

payments shall continue to flow till the demise of the last surviving

borrower. The new scheme was launched by NHB in association with

Star Union Dai-ichi Life Insurance Company Ltd., (SUD Life) and

Central Bank of India (CBI) in December 2009. The SUD Life has

obtained necessary approval from Insurance Regulatory and

Development Authority (IRDA) for introducing the annuity part of

the RML product in India. This scheme is a significant improvement

over the initial RML scheme (2007) which limited the loan

disbursement tenure to a fixed term of twenty years causing

uncertainties to the senior citizen borrowers. The new scheme will

now facilitate the senior citizen borrowers to receive assured life-time

payments i.e. even after completion of the fixed term of 20 years, in

accordance with the announcement in Budget 2007-08. NHB has also

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formulated operational guidelines for new RML enabled Annuity

product.

A Review Of Progress

The Lending bank under Reserve mortgage scheme has to be

careful enough to decide the amount of loan because there is a risk

that the amount of outstanding loan may exceed the value of the

property at the time of death of borrower. So if there is a short fall in

the value of property over a period of time, the bank will have to bear

the loss. This may happen due to a number of factors like a higher

amount of loan than warranted by the value of property, fall in the

value of property in the years to come, longer life of the borrower

than expected and a rise in rate of interest in the later years. So the

bank has to decide the amount of loan carefully. Various

considerations like the value of property, condition of property,

location of property, expected changes in the rate of interest, the age

of the borrower and the cost of repairs the property may demand in

the years to come should be taken care of. Normally the loan amount

is around 65 to 70 percent of the market value of the property. Once

the loan is granted, the lending bank will reassess the value of

property from time to time and if it finds that the value has increased

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substantially, the borrower can be given the option of increasing

monthly installments.

The Reverse mortgage scheme, though in its infant stage, has

huge potential market in the future. It can serve as a substitute of

social security for the senior citizens who have strong preference for

their own house. They have ready equity for mortgage and are

eligible to borrow under Reserve mortgage scheme. In the times of

rising inflation and fall of the joint family system the need for social

security has assumed more importance for most of the Indians.

However the Reserve mortgage scheme has more potential in

metropolitan cities than small towns. Further the level of education

among the senior citizens in towns and metropolitan cities and

awareness of the scheme could be other factors which can create the

market for Reserve mortgage scheme in big towns. However, it has

been observed that the commercial banks are not taking enough

interest in the scheme.

The researcher has undertaken a survey of the senior citizens

residing in the NCR region. Eighty senior citizens were contacted by

the researcher with a structured questionnaire for the purpose. All

these eighty senior citizens were owner of residential properties and

were living their houses. Out of these eighty senior citizens, only

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sixty four filled up the questionnaire and the remaining 16 did not

respond. Twenty five per cent of the respondents were found to be

pension holders and twenty percent of the respondents were getting

their income from rent and bank interest. Remaining twelve percent

reported that they depended on their sons and daughters. Forty three

per cent of the senior citizen reported that they are still doing jobs or

business or engaged in consultancy or any other gainful activity and

were getting income from there. Forty per cent of senior citizen

reported that they knew about the scheme. So lack of awareness

about the scheme was found as a major hurdle in the way of scheme.

Forty five per cent of the respondent reported that their present

income is enough and that they do not require any additional flow of

income. Twenty nine of the respondents did not give any response

that weather their income was sufficient or not. Twenty six per cent

of the respondents required additional flow of income. Ten senior

citizens applied for loan and out of these only four could get loan

sanctioned. The application of remaining 6 could not be considered

for a number of reasons like lack of clear title, non compliance of

formalities as required by the bank and lack of persuasion by the

senior citizen borrowers. It was reported to the researcher by two

applicants that they still hoped to get the loan though the bank has

taken more than enough time. Out of the four borrowers under

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Reverse Mortgage Scheme, two reported that loan was granted to

them in normal routine and remaining two reported that the bank

took undue time and were not friendly to the borrower. Further, it

was reported by the all the borrowers that loan sanctioned by the

bank was less than the loan applied by them. It was 60 to 90 per cent

of the loan applied.

A study of State Bank Of India, Secundrabad, Andhra Pradesh

conducted by Mr. N. sravanthi shows that during the period October

2007 to February 2009, 29 loan applications for a loan amount of

Rs.4.90 crores were forwarded by the branches to the regional office

and out of these only 11 applications were sanctioned a loan amount

of Rs.2 crore. The all India figures for the first year show that only 150

people borrowed under the scheme. As on 30 June, 2011, 23

commercial banks and 2 housing finance companies had launched

Reverse Mortgage Loan Scheme and a sum of Rs.1740 crore was

sanctioned to 8903 senior citizen borrowers. Lack of clear title over

the property was the major reason cited by State Bank of India office

for rejecting applications. The bank officer having conservative

outlook hesitate to sanction loan. The time horizon is too long and

longer the time period greater will be the risk. Added to that is

uncertainty. The Reverse Mortgage Scheme is little bit more risky for

the banks compared to mortgage loan scheme for the reasons cited

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earlier. The amount of loan plus interest may exceed the realizable

value of property. Further, the repayment of loan plus interest will be

feasible at the time of death of the borrower and spouse and not

earlier.

Counseling Centre

The NHB, as an apex institution in the field of housing finance

in India is taking steps to implement the scheme and popularize it

among the senior citizen of the country. NHB has launched

counseling programme for senior citizen to popularize the scheme of

RML. Under the programme, the concept is explained to the senior

citizens and their doubts are removed. The NHB has adopted a

partnership approach with reputed NG

programme. During the year 2010-11, NHB organized and conducted

16 seminars for the senior citizens, in various cities of the country.

Further, the NHB has taken initiatives to setup the counseling

centers for senior citizen on Reverse Mortgage Loan Scheme. Up to

June 2010, seven counseling centers has been setup in the cities of

New Delhi, Chandigarh, Hyderabad, Chennai, Kolkata and

Bengalura. During the year 2010-11, three more counseling centers

were opened, increasing the total number to 10. These three centers

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were opened at Lucknow, Mumbai, and Ahmadabad.

Not only the seminars are being organized and the counseling

centers are setup, NHB is taking steps towards capacity building

among the commercial banks and HFCs for implementing the

scheme. NHB is arranging training programmes and seminars for the

personnel of these institutions. The Bank is eager to spread the

concept of RML Scheme for senior citizen in Tier II cities as well.

The Senior Citizen Scheme has a huge potential in the Indian

context and this needs to be tapped by banks and housing finance

companies and supervision and mentorship of National Housing

Bank.

To conclude, it can be observed that the Reserve Mortgage

scheme is a boon to the senior citizens who have residential property

in their names and need additional flow of regular income in their

old age. The National Housing bank, Reserve Bank of India and the

Government of India have been taking the steps to make the scheme

more beneficial and popularize it among the senior citizens. The

stream of income in the hands of senior citizen is exempted from

Income Tax. Further, the modified Reserve Mortgage loan enabled

annuity scheme is friendly to senior citizens as the stream of income

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is not limited to twenty years and there is no fear of reduction in the

amount of monthly payment. But in spite of the best efforts of NHB

and the Govt. of India loaning under the RMS has not picked up yet.

It is because of some technical problems like lack of clarity of title

over the property. Further, the banks find that loaning under RMS is

more risky compared to the ordinary home loan scheme. As the

scheme serves a very important socio-economic purpose and opens a

new channel of loaning for the banks, the bank should adopt a liberal

attitude for loaning under the scheme.

Conclusion

The process of securitization involves a lengthy and

cumbersome procedure with a lot of legal formalities. It involves a

number of stake holders like originators, Special Purpose Vehicle

Company, and the investors. These are primary stake holders. With

the amendment in National Housing Bank Act, 1987 and Securities

and Contracts Act 1956, the ground for the Residential Mortgage

Backed Securitization has been cleared. The NHB has completed only

14 tranche of RMBS till June 20s11. The portfolio was of the size of Rs.

862.20 crore and 38809 housing loans were covered in these 14

tranche. The scheme of residential securitization ran successfully till

2006-07. In all the tranche NHB acted as Trustee and special vehicle

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company to ensure that the operation run smoothly and timely

payments are ensured. The originators were appointed as

administrator and servicer to collect the timely payments of interest,

payment of the principal and repayment so that these proceeds can

be transferred to the SPV which in turn could pass on these benefits

to the holders of the Pass through Certificates. It has been observed

that all the securitized transactions performed well as far as collection

and recovery is concerned. Further the yield to class a pass through

certificates has also been consistent with that indicated at the time of

issuances. However, it is a matter of concern that no securitization

transaction has taken place after 2006-07.The National Housing Bank

should probe the causes behind it so that the securitization of

housing loan portfolio of the banks and the housing finance

companies gets liquidity. Further, the conceptualization and

implementation of reverse mortgage scheme for senior citizens is a

land mark in the history of financial products and the NHB should

ensure that the scheme is popularized among the senior citizens

living in towns and small cities as well and that legal hurdles are

removed.

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