European Supplement

Reverse mortgage law developments in France

European supplement

The Ruling of 23 March 2006 relating to guarantees brought reforms to how mortgages function in France. One of the measures of this reform was to introduce the ‘reverse mortgage’ to the range of mortgage loans granted by credit institutions. This measure is known as the prêt viager hypothecaire. As a reminder, this loan is similar to an in-fine loan, which matures upon the death of the borrower, and the repayment of which is according to the value of the property on the date of death. There are therefore no payments due on the amounts received by the borrower during his/her lifetime.

What is the situation one year on?

The essential legal framework has been laid out. The amount of the notary fees and the fee for the publication of the mortgage guarantee have been adjusted, the usury rate and the terms and conditions of early repayments have been specified. Finally, two decrees dating from 20 of February 2007 provide elements relating to the requirements in terms of equity capital and the prudential supervision of the loans.

The public is well informed and the regulatory possibilities that have been opened up are generating considerable interest among the population of senior citizens directly concerned, as credit institutions are receiving a number of calls of interest from their own clients. Opinions are also already being expressed on the scope of the reverse mortgage à la française, with a number of questions being raised on a range of issues including the financial resources and living standards of pensioners, inheritance, and the likely impact on consumption and works of renovation on old housing stock.

Yet, to date, no reverse mortgage is actually available in France.

However, certain financial establishments are thinking about offering reverse mortgages. Some are even working on their offer. Crédit Foncier (for its own business, and on behalf of the Caisse d’Epargne Group) is looking to have something in place to cater to qualified property-owners before the end of the year, in response to what the new regulation will allow. Crédit Foncier, via its chairman François Drouin, is repeatedly making clear its commitment to providing for the long-term needs of its customers in the area of housing loans. This commitment is also being expressed with regard to the elderly, no longer excluded from the loan market, for whom the opportunity to enjoy the benefits of the value of their assets without dispossession or loss of use is particularly welcome.

But it is likely that a whole range of factors is contributing to the delay in the actual availability of reverse mortgages in France, and the importance of these factors varies from one establishment to another.

Among the ‘technical’ factors, one can note in particular the consequences for the lender of the regulatory measures relating to the protection of the borrower, as unlike reverse insurance products, the lender does not have the option to share the asymmetry intrinsic to the product. For example, if the debt of the borrower is lower than the value of the property, the excess falls to the heirs, whereas inversely if the debt exceeds the value of the underlying property – due, for example, to a longer than expected longevity of the borrower or due to the evolution of real estate prices – the lender must cover the loss.

It therefore befalls to the lender to estimate somehow the likely accrued losses and consequent provisions resulting from the borrower protection measures that exist and to evaluate the maximum loan to value ratios proposed, based on the statistical life expectancy of the borrowers.

Other technical issues include the possible discrepancies between the necessary IT developments and developments linked to IFRS, Basel II, etc.

The legal constraints are another factor that explains difficulties faced by the banks: guarantees are no longer an exception that comes into play only in the event of default, but the ‘“normal’ method of repaying loans. This impacts on the deadlines, and therefore the profitability, and on the complexity of the procedures to be set up because of the potential intervention of the heirs during the repayment.

Finally, the ‘societal’ constraints should not be neglected: in France the word viager suggests the speculative character of an operation linked to the taboo subject of death. The relations between the senior citizen and potential heirs are also subject to strong psychological reservations. Using up property assets at the risk of leaving nothing to one’s heirs can be seen as the behaviour of the archetypal ‘frivolous old man’. A number of establishments can legitimately fear a negative impact of their image, despite the fact that the reasoned demand is strong and the usefulness of the measure undeniable.