Define Salient Features

Salient Features

Reverse Mortgage Loan (RML) enables a Senior Citizen i.e. to avail of periodical payments from a lender against the mortgage of his/her house while retaining the ownership and occupation of the house.

The Senior Citizen borrower is not required to service the loan during his/her lifetime and therefore does not make monthly repayments of principal and interest to the lender.

RMLs are extended by Primary Lending Institutions (PLIs) viz. Scheduled Banks and Housing Finance Companies (HFCs) registered with NHB

The loan amount is dependent on the value of house property as assessed by the lender, age of the borrower(s) and prevalent interest rate.

The loan can be provided through monthly/quarterly/half-yearly/ annual disbursements or a lump-sum or as a committed line of credit or as a combination of the three.

The maximum period of the loan is 20 years.

The loan amount may be used by the Senior Citizen borrower for varied purposes including up-gradation/ renovation of residential property, medical exigencies, etc. However, use of RML for speculative, trading and business purposes is not permissible.

Valuation of the residential property would be done at such frequency and intervals as decided by the reverse mortgage lender, which in any case shall be at least once in every five years.

The quantum of loan may undergo revisions based on such re-evaluation of property at the discretion of the lender.

The borrower(s) will continue to use the residential property as his/her/their primary residence till he/she/they is/are alive, or permanently move out of the property, or cease to use the property as permanent primary residence.

The lender will have limited recourse i.e. only to the mortgaged property in respect of the RML extended to the borrower.

All reverse mortgage loan products are expected to carry a clear and transparent ‘no negative equity’ or ‘non-recourse’ guarantee. That is, the Borrower(s) will never owe more than the net realizable value of their property, provided the terms and conditions of the loan have been met.

On the borrower’s death or on the borrower leaving the house property permanently, the loan is repaid along with accumulated interest, through sale of the house property.

The borrower(s)/heir(s) can also repay the loan with accumulated interest and have the mortgage released without resorting to sale of the property.

The borrower(s) or his/her heirs also have the option of prepaying the loan at any time during the loan tenure or later, without any prepayment levy.

Benefits

Pay off existing liens or mortgages - eliminate monthly obligations

Provide additional monthly income for medical expenses and home repair

Create a cash reserve for emergencies or special needs

Can be used for estate planning and wealth management

Vulture Funds

Vulture funds are forms of financial services in the corporate debt markets. It is a fund that buys securities in distressed investments, such as high yield bonds in or near default, or equities that are in or near bank-ruptcy. Every highly leveraged firm may be targeted if there is a chance that the owners will not be able to make all required debt payment. As the name implies, these funds are like circling vultures patiently waiting to pick over the remains of a rapidly weakening company. The Goal is high returns at bargain prices. Some people looked down upon hedge funds that operate like vulture funds which have preyed on the cheap debt of strug-gling companies and forced these companies to pay it back, plus interest.

Illustrations

These funds often operate in secret through shell companies based in tax havens. Large US based financial institutions such as hedge funds own some. It has been shown that these companies are often set up simply to pursue on debt and then shut down again.

Potential

There is huge potential for Securitization in India especially in respect of infrastructure projects. Securitization will be of great help to tide over the financial constraints. Further, it is considering the present state of capital market. Securitization offers a very good source of funding for corporate sectors. It has been seen that companies hold large quantum of securities in their investment portfolio and may not be inclined to sell them in times of liquidity crunch for various reasons. An opportunity also exists to use these securities as collateral by pledging them with a custodian and issuing bonds backed by such security. The collateral can serve as a credit enhancement and would enable issuers to obtain a higher credit rating. The shift in the method of bank finance from the traditional cash credit to a loan based system offers opportunity to securities some of the blue chip company loans to start with. This could provide the much needed relief to banks hard pressed to improve their capital adequacy.

Conclusion

Securisation is a right hand side of the Balance sheet approach of raising funds based on the cash flows and values of the specific pool of assets. Intense competitions, balance sheet management and high funding cost make exclusive relief on the left and side funding strategies both risky and costly. Firms can improve their liquidity position and improve certain key ratios like ROE and ROA through securisation. Securitization also enables banks and institutions to borrow at a lower cost. An improvement in the liquidity position will lower working capital requirements and thus reduce the interest burden. The proceeds from securitization can also be invested in projects which give a higher rate of return, thus improving the overall performance of the institutions.

The securitization market in India, though in infancy stage holds good promise especially in the Mortgaged Based Securities (MBS) area. While more complex securitization transactions and public issuances of securitized paper are still distant possibilities, appropriate legislation and investors’ education could give the securitization market in India a much needed thrust.