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WILD COOT – Reverse mortgages


Harry Russell

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THE REVERSE mortgage is a cash cow for financial institutions. It has been offered in Jamaica for quite a while. Perhaps the fact that many of Jamaica’s financial institutions are locally owned may account for their being so proactive and indeed offering the service to their senior citizens. Barbados has a growing senior citizens population and our banks, although foreign-owned, should be at the forefront in popularising and offering this service, even if only through their mortgage arm. If the present downturn in the economy persists then demand for loans will weaken severely. People will put off buying cars. The recent invitation by some banks to take out a mortgage (with unheard of incentives) is indicative of the dearth of demand. Banks are not taking chances with working capital or new businesses. Mortgages are safe and the prices of property will remain firm despite the downturn. Why not look at the reverse mortgage? It is even better than a forward mortgage. From a bank’s point of view, the reverse mortgage offers many lucrative incentives. More so than anything else, it offers security, a solid portfolio platform and a profitable interest rate. It can cater to a captive population. The security of property is the second best security after cash security. In many cases a forward mortgage can be given for 100 per cent of the value of the property and, in case of default, can fall short of the debt that it is supposed to cover. In the case of a reverse mortgage the bank has the option of deciding to lend even half of the present value of the property. More often than not, when the mortgagor dies, the value of the property has increased and the loan amount still represents a fraction of the new value. Indeed, very often the estate or heirs of the deceased would be interested in acquiring the property, its being a marketable real estate. In such cases a forward mortgage would be an attractive proposition.Since the mortgagor does not have to make monthly payments, no creditworthiness check has to be done or updated; no losing of job; no failure of business has to be feared. All that the bank has to do is to keep a close watch on the payment of taxes and insurance – same as in a forward mortgage. One guideline usually applied by the bank is to reduce the percentage of the loan against the value of the property once the mortgagor applicant is closer to the qualifying age (usually 60 years).With regards to interest rates, here again the banks are in the driver’s seat. They can fix interest rates according to LIBOR, the Central Bank discount rate or whatever they like. In Jamaica the interest on reverse mortgages is taken immediately to profit. In the case of a forward mortgage, if a payment is 90 days overdue the bank ceases to put the interest into interest received but suspends it until payment is made. The reverse mortgage is different. Just as in the case of an overdraft where there is a limit, once the overdraft is below the limit, the bank takes the interest and puts it to profit; the same applies to a reverse mortgage. The argument is that the property is valued, say at $500 000, the bank has advanced $150 000 (30 per cent) and there is $350 000 in equity in the property. Until that equity is eaten up, the bank is entitled to put the interest to profit. The principle is the same. The bank is even happier as the value of the property increases as the years go by. The reverse mortgage is a cash cow for the banks. Pressure from a growing section of an ageing population is going to be felt by the banks and other financial institutions as the citizens, urged on by BARP, continue to focus on the issue. Government, on the other hand, ought to join the call as social pressures from the aged mounts. There is a limit as to how much a National Insurance or a free medical care can do and, despite its efforts, National Insurance should be constrained by actuarial reality.  • Harry Russell is a retired banker.

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