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A bill allowing the reverse mortgage mechanism (crédit logement inversé) to emerge in Belgian law has just been tabled in the Chamber. Fourteen years after the subprime crisis, caused among other things by aggressive and risky mortgage formulas in the United States, will Belgian law soon see this new form of credit, allowing mainly elderly people who own one or more properties to obtain extra liquidity for their old age?
1. The reverse mortgage in a few words
The reverse mortgage, better known to the public as the reverse home loan, is a form of bank credit allowing the owners of a property either to obtain a capital sum or to receive a monthly annuity. In return, the property is given as security to the bank, and the owners may remain there, if they live in it and so wish, until their death. At that point the beneficiaries face a choice: repay the bank or sell the property, by mutual agreement or by forced sale, within set deadlines. The obligation to repay the credit materialises on the borrower’s death. As its name indicates, the reverse mortgage reverses the classic roles of bank and client in a mortgage credit: the owner does not buy a property but sells it to the bank, which pays back a capital sum or a regular annuity until death. The mechanism can also involve a third-party mortgagor putting up its property as security, with the annuity or capital benefiting, for example, another family member. When the owner dies, the bank recovers the capital paid from the sale of the property.
2. The bill on the reverse mortgage: some key points
The reverse mortgage, which already exists in various forms in France and the Netherlands, but also in Canada, the United States, Australia, Taiwan and Hong Kong, requires certain adaptations to the rules applicable to mortgage credit in Belgian law. That is the purpose of the bill currently under discussion.
No solvency analysis, but a compulsory property valuation. In a reverse mortgage the lender would not need to analyse the borrower’s solvency and repayment capacity, such analysis being pointless. Only the value of the mortgaged property matters. Determining that value would require a prior independent property valuation by an intermediary approved by the parties, all the more important as the amount lent could in no case exceed the value of the mortgaged asset, save in particular cases (borrower’s fault, eviction, etc.).
Reinforced advisory and information duties. The banker’s information and advisory duties would be reinforced before granting a reverse mortgage, to ensure the inexperienced borrower is fully aware of the scope of the legal act.
More costs. Setting up a reverse mortgage requires the bank to manage each file specifically: it must ensure its security keeps its value, hence periodically check the condition of the property and the currency of the fire insurance. Management costs, chargeable to the borrower, would therefore be added to the file fees.
Mortgage publicity and registration with the central register. The credit would be subject to positive registration with the Central Individual Credit Register. Banks would presumably accept only a first-rank mortgage.
End of the credit agreement. Besides the contract reaching its term, fault by the borrower or third-party mortgagor could trigger early termination (non-payment of the fire insurance premium, refusing an inspection of the mortgaged property, neglecting it, etc.). Other causes such as expropriation or eviction by another creditor could also end the contract early. In certain cases the periodic payments owed by the bank could be suspended. When the mortgage ends, the parties would have a period of three months and forty days to reach an amicable agreement on the value of the property; repayment to the bank would have to occur within nine months of the debt becoming due.
Enforcement seizure of the property. Only the mortgaged property would be the lender’s (preferential) pledge. By derogation from article 7 of the Mortgage Act, the lender could not have recourse against the borrower’s other assets, except where the mortgaged property loses value through a fault attributable to the borrower or third-party mortgagor (lack of maintenance, lack of fire insurance, deliberate or grossly negligent damage, etc.). The requirement of an enforceable title (art. 1494 of the Judicial Code) would fall away, as the parties could amend the contract by mutual private agreement during performance. Finally, a collective debt settlement or another situation of concurrence would not necessarily end the reverse mortgage.
3. What to make of this reverse mortgage in Belgian law?
In Belgium the subject is not new. Back in 2007 it was already discussed within credit institutions. The absence of a legal framework and the onset of the US subprime crisis put the reverse mortgage on ice.
The bank’s point of view. The banker’s main concern, besides the specific management of such files, is that the risks incurred by the lender are far greater than with an ordinary mortgage credit: the duration of the credit (mortality risk), the movement of market rates (interest rate risk), the evolution of the property’s value and the market (property risk), etc. For these reasons the amount lent will no doubt be limited to a maximum proportion of the property’s value. The Higher Council for Housing had already commented on the reverse mortgage in an opinion of 16 January 2008, rightly noting that for lenders, for a number of years, it will be a pure investment without financial inflows (no credit repayments, no rental income, no proceeds from selling homes).
The borrower’s point of view. While the reverse mortgage allows a more comfortable standard of living, strictly economically it is costly in interest terms, since no amortisation of the capital is provided during the credit. Interest is therefore charged on the whole amount actually lent, until repayment. An article published in L’Echo in 2008 gave a fictitious example from Test-Achats to warn of the dangers: a 68-year-old woman owning a home valued at EUR 220,000 would receive, through the reverse mortgage, a single capital of EUR 88,000. At 87, moving to a retirement home, she would have to pay the bank a total of EUR 378,000, interest representing three times the initial capital. The bill’s obligation for the lender to provide an illustrative and forecast table before conclusion, along with the reinforced information duty, are essential given the potential cost of the formula.
4. Outstanding questions
Certain questions remain and will no doubt require amendments to the tabled bill, notably: how to guarantee the maintenance of the mortgaged property if the borrower leaves for a retirement home; could the borrower’s spouse enjoy particular security on the borrower’s death, with a right to remain in the property; what would be the tax regime of the mechanism; from a prudential viewpoint (Basel Committee standards, the CRD Directive and CRR Regulation), how should credit institutions develop their internal policy; how would interest actually be capitalised; could another creditor seize the mortgage annuity paid to the borrower; and so on.
This article is a translation and a condensed version. Only the French version is authoritative. It is provided for information purposes and does not constitute legal advice.
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