France & Italy Find Need For “Reverse Mortgage” Type of Product

imageA couple months ago, the Wall Street Journal published A French Revival of Home-Equity Deals which details how seniors in European countries like France and Italy are turning to transactions that allow older homeowners to receive cash by selling their property yet still being able to live in their home. 

As an example, the WSJ uses Madeleine Schlosser, an 82 year old who sold her Paris home to buyers who paid her 18% of the property’s market value up front and will continue paying her a monthly pension.  The borrowers will eventually move into the house which they paid far less than market price for, unless the woman lives many more years. 

While these type of deals are becoming more popular, the market for these kind of transactions is still very small.  In Italy, it’s called a nuda proprietà — literally, "naked property."  Most sales involve a lump-sum payment and no monthly pension to the seller. There were 50,000 such transactions in 2007, about 6% of the Italian real-estate market, up from 18,000 in 2000.

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In France, where the system is called viager, after a word for pension, the numbers are still small, but have been rising. According to French statistics institute Insee, the annual number of viager deals rose to around 1,000 from 2002 to 2006, from around 700 from 1997 to 2001.

French lender Crédit Foncier started offering something like a reverse mortgage in 2007, by setting up more than 5,000 deals called the viager mortgage loan.  The mortgage functions much like a reverse mortgage her in the US without government insurance. 

The product reflects changes in the way people view their wealth: Because of longer life spans, children are now quite old when their parents die, and the inheritance of a house isn’t as useful as it once was says Alain Tourdjman, director of research at Caisse d’Epargne, the banking group that owns Credit Foncier.

A French Revival of Home-Equity Deals

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  • How is this any thing like a reverse mortgage? I am lost. Can someone tell me where I am going wrong?

    It is my understanding (based in part on the WSJ article) that with a viager:

    1. There is no debt and no accruing interest.
    2. The heir of the senior have no rights in the
    property.
    3. Any appreciation or decrease in value goes to
    the buyers.

    We have something very similar to this transaction in the U.S.; it is called a life estate. The current owner sells all other interests in the property for the right to live in the home for their life (or the life of another person. Other rights might be retained that goes beyond the intent of writing this comment.)

    In any real estate transaction, an annuity or annuity payments can be exchanged for an interest or any part of an interest in the remainder interest. As a real estate broker for over 20 years and as a student of some of the discredited “real estate gurus,” annuity payments have been a tool of buyers for years.

    Viagers are not the forerunners of reverse mortgages. They are the forerunners of life tenancies where a portion of the purchase is paid for with either a commercial or private annuity.

    We also have tax vehicles called GRATs, and CRATs, where private annuities are created to lessen the tax on transfers of a primary residences (and other eligible appreciated property) to family members and charities. The transferor (donor) usually retains the right to live in the home during life with the trust having an irrevocable ownership interest in the property. Specific tax rules must be rigorously followed but these are not reverse or any other type of mortgages.

  • Jim,

    Again, I learn something new almost everyday from your comments.

    When I said reverse mortgage “type” of product, I should’ve put more emphasis on how like a reverse mortgages, these products allows seniors to stay in their home while receiving some sort of payments.

    When I spoke in Istanbul, almost all of the executives thought our HECM product was a great idea, but they didn’t think their government would ever insure it and without that none of them thought their banks would offer it.

    They have had to rely on other types of products like these.

    John

  • John,

    I am humbled by your compliment. This website brings more relevant information to this industry on a daily basis than any other source. Keep up the good work.

    The foresight of the Reagan Administration and the creators of this program have done a great service for over 500,000 seniors up til now and who knows how many more senior homeowners in the future.

  • Correction, Jeanne Calment was only 122 when she died.
    In 1995, at age 120 she was still receiving payments from the investor, as reported in this NY Times article.:

    December 29, 1995
    A 120-Year Lease on Life Outlasts Apartment Heir
    AP

    Andre-Francois Raffray thought he had a great deal 30 years ago: He would pay a 90-year-old woman 2,500 francs (about $500) a month until she died, then move into her grand apartment in a town Vincent van Gogh once roamed.

    But this Christmas, Mr. Raffray died at age 77, having laid out the equivalent of more than $184,000 for an apartment he never got to live in.

    On the same day, Jeanne Calment, now listed in the Guinness Book of Records as the world’s oldest person at 120, dined on foie gras, duck thighs, cheese and chocolate cake at her nursing home near the sought-after apartment in Arles, northwest of Marseilles in the south of France.

    She need not worry about losing income. Although the amount Mr. Raffray already paid is more than twice the apartment’s current market value, his widow is obligated to keep sending that monthly check. If Mrs. Calment outlives her, too, then the Raffray children and grandchildren will have to pay.

    “In life, one sometimes makes bad deals,” Mrs. Calment said on her birthday last Feb. 21.

    The apartment is currently unoccupied, according to local media.

    Buying apartments “en viager,” or “for life,” is common in France. The elderly owner gets to enjoy a monthly income from the buyer, who gambles on getting a real estate bargain — provided the owner dies in due time.

    Upon the owner’s death, the buyer inherits the apartment, regardless of how much was paid.

    Mrs. Calment, who has lived through the administrations of 17 French presidents, has proven the nightmare of all those who buy real estate “en viager.”

    Mrs. Calment, physically active all her life, rode a bicycle until she was 100, and until 1985 occupied the several large rooms of her apartment on the second floor of a classic old Provencal building in the center of Arles, where Mr. Raffray was her notary public. She moved that year into a nursing home, which is now named after her.

    She has outlived her husband, her daughter and her grandson, who died in a car crash, and has no direct descendants.

    Mrs. Calment seemed to offer some consolation to the Raffrays when asked on her last birthday for her vision of the future, she replied: “Very brief.”

    Born in Arles in 1875, Mrs. Calment recalls working in her father’s shop at age 14 and selling colored pencils and canvases to Van Gogh, the Dutch impressionist who depicted Arles in several of his vibrant paintings.

    On Oct. 18, the Guinness Book of Records listed her as the world’s oldest person able to authenticate her age with official records, mostly civil and religious documents.

    Photo: Thirty years ago, Andre-Francois Raffray, bottom, agreed to pay Jeanne Calment 2,500 francs a month to get her apartment when she died; she was 90 then. She has not died yet, but this week he did. (Associated Press)

  • dduck,

    Great article. This is an excellent example of what happens when the remainder interests in a life estate transaction is purchased using a private annuity. Even though on a mortality table basis a commercial annuity should pencil out to be costlier to the remainder interests purchaser, using a commercial annuity removes one huge factor — the payout risk that comes from a very long life of a life tenant.

    A viager is a transfer of specific ownership rights at time of transfer. Reverse mortgages are loans with no transfer; however, the property serves as the sole security for repayment.

  • Jim,

    Could a HECM be made on a Life Estate (LE)agreement and if so, would it be possible for someone younger than 62 (owner) to extend a parent (over 62) an LE that would allow the parent to live with the under 62 child, while having the benefit of a HECM?

    Thank you,

  • Enrique,

    Most lenders will place a reverse mortgage on a life estate; however, those owning the remainder interests will have to sign off on the mortgage since the home still serves as the collateral. Now there are many issues to consider when children put a parent on title as the life tenant. First if a disagreement arises, legally the parent can boot the children out of the house. Second the parent can sell her/his interest in a life estate and the new tenant can do with the house whatever that person wants even again booting out the children. Certain protections can be put in place but like a pre-nup, these agreements have their own way of causing problems.

    As to gift and estate tax planning, an upstream gift of anything that is expected to be inherited by heirs is not the thing to do. However, if there is no potential gift or estate tax liability ultimately to the estates of the proposed life tenant and heirs, the concern greatly diminishes. But watch out for the Obama proposals; they could “bite”.

    Here is the most basic question to ask: Economically (including on a cash flow basis) will the family be better off with this transaction in light of when the life tenant(s) pass away, move out, or any other triggering event occurs, the reverse mortgage will generally become due and payable? In many cases where the children are about to lose a home, this may be a way for the parent to provide “bridge” financing while the children get their ducks in a row.

    This technique can bring great benefits or create a real mess; it all depends….

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