10 years ago, the reverse mortgage law was enacted. What did it give to seniors and the industry? Nothing.
This year marks the 10th anniversary of when the Government introduced regulations concerning reversed mortgage loans. The law was meant to regulate the reverse mortgage market and further secure the interests of seniors. Today it is known as a dead law as no bank implemented this solution in a decade. Mortgage funds, however, are continuously operating and are demanding for the regulation of the lifetime pension market. The entire industry’s potential is around 2.25 million homes. That’s how many properties (excluding houses), seniors own. If you were to convert this into volume, it would turn out that pensioners could release money from homes worth about 900 billion PLN.
In 2014, the Government adopted the Reverse Mortgage Act, which banks could offer to seniors if they decided to implement this solution into their offer. That same year, the Ministry of Economy presented the project for the Lifetime Annuity Act, also known as the Lifetime Pension. While the first one went into effect and is still considered a dead law, the second one was withdrawn from legislative work.
Reversed mortgage operates in Poland in two models. The first model is the reverse mortgage that banks could offer to seniors if they wanted to. The second model is the sales model (lifetime annuity), which is a service offered, among others, by mortgage funds. This part of the market does not have its dedicated Act, and that’s what it has been demanding for years. The basis for the operation of mortgage funds are currently general provisions concerning lifetime and annuity contracts in the Civil Code – reminds Robert Majkowski, CEO of the DOM Mortgage Fund.
What did the Ministry of Economy project assume?
The Lifetime Annuity Act project, which the Ministry of Economy was working on 10 years ago, was supposed to lay down the conditions for conducting economic activity concerning lifetime annuity contracts. According to the Act proposal, entities that wanted to operate in this market should conduct their economic activities in the form of a joint-stock company (or a European joint-stock company) with a minimum share capital of 2 million euros (importantly, this money could not come from undocumented sources, loans or credits). The company’s own capital should be at least 15 percent higher than the sum of all liabilities resulting from signed lifetime contracts for the next 2 years. In addition, these entities should have a so-called reserve fund to pay benefits, otherwise known as covering liabilities resulting from signed contracts. Moreover, the company’s board should consist of at least two members, staffed by managers with higher education and documented experience in a managerial position in the financial sector. Institutions that would meet these requirements would receive a permit to conduct their activities from the Financial Supervision Authority regarding lifetime annuities. Of course, data about these institutions would be included in a register maintained by KNF. If any of the companies violated the rules, and after KNF’s request to rectify irregularities did not do so, it would lose the right to conduct business.
Tightening the interest of pensioners
Under the Lifetime Annuity Act, seniors, who are particularly sensitive customers, would be protected because the Act would contain several provisions about the rules of entering into lifetime annuity contracts with a precise description of the rights and obligations of each party. Before signing the contract, the company should provide the senior with detailed information about his rights, contract, and the entire process. It should present a preliminary contract draft, including the estimated value of the services that were supposed to be paid in the future. It would be necessary to create a valuation report by a qualified and independent property valuer. The provisions would also include a clause preventing seniors from being offered other financial products, for example, loans or insurance together with the lifetime annuity contract.
It is worth remembering that many of the above provisions exist in the Good Practices, ethical regulations established under the auspices of the Association of Financial Enterprises, applied and followed by the largest mortgage funds in Poland. However, it should be noted that the company’s ethical rules application is an act of goodwill, not a requirement. This should change. Every market player should be obliged to provide high-quality services – says Robert Majkowski.
The market potential is 2.25 million homes worth about 900 billion PLN
Experts from DOM Mortgage Fund estimated that currently, around 2.25 million apartments are in seniors’ hands. If we assume (as GUS estimates) that the average size of a Polish apartment is about 52.1 sq. meters, and the average price per sq. meter in the secondary market is (according to NBP) about 7,200 PLN, it turns out that an average property (assuming that some seniors live in houses, which affects the size of the property) is worth about 400-430 thousand PLN. In this case, 2.25 million flats owned by seniors are worth about 900 billion PLN. This capital could be freed by pensioners thanks to their property value. Some of them do release it as data from the Ministry of Justice indicate that every year around 16 thousand new lifetime contracts are signed, transferring the property rights to private individuals or companies in exchange for lifetime benefits. However, this is still not enough to meet retirees’ financial needs.
To develop the Polish market, just like in the UK or the US, understanding the service and its role in building the state’s long-term senior policy is needed. Most importantly, dedicated regulations that regulate the industry and ensure proper safety for all market participants, especially seniors, are required. Since the introduction of the Reverse Mortgage Act, which is almost a decade ago, we have been waiting for regulations concerning lifetime annuities. We hope that the new Government will take up this task – summarizes Robert Majkowski.
