Clarify reverse mortgage laws

LEGAL EYE

That a house is more than a home is a perception that arises only if one can leverage its value. In the 70's and 80's, a house property was not necessarily viewed as an asset, one paid notional tax for living in one's own property.

For an absentee owner in the rent control era, a house was at best an illiquid asset, at worst a liability. For the happy ones occupying 3500 sq. ft. at Rs 200-a month for twenty years "" the perception was life couldn't be better, till the realisation that the asset lacked bankability.

And the smartest, who lived in his own house, avoided renting it, spent a major part of his income on maintenance, and lived his old age between penury and pension. These were the times, when consumer loans were virtually non-existent, interest rates were exorbitant, and acquisition of real estate without a black component virtually impossible

With the boom in investment products, the returns did ease lifestyles, but fixed deposits and LIC returns could go so far and no further. Soaring real estate rates effectively rendered the middle class citizen's sole fixed asset to a shelter.

The limited cash resources were applied towards its preservation. How the asset could be best leveraged against the rising real estate prices to tide over the inadequacy of the current income was the problem.

The solution was 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, 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 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 afforded 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.

Expectedly, 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. Renting, changing user, deployment of the money for speculation would lead to foreclosure.

This should have been a bonanza for the target customer. Instead, because of lack of clarity in the regulatory framework, the product flopped. Reportedly, there were only a hundred-odd takers, in the entire financial year.

The major concern of banks and beneficiaries were 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 addressed 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 tangible event of default as there is no regular repayment envisaged.

Therefore, the only determinable 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 will not suffice, separate laws will be necessary to address these issues.

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

The author is a Partner in Rajinder Narain & Co.

kumkumsen@rnclegal.com