Damages sought from NTUC Income over alleged contract breach
REVERSE mortgages - launched with much fanfare over a decade ago to help retirees unlock the cash value of their homes - will, for the first time, be at the centre of an upcoming court case.
Mr Derek Chua, 72, and his wife Madam Colleen Ng, 57, have filed a suit against insurer NTUC Income after their reverse mortgage turned sour.
In the writ of summons obtained by The Straits Times, the couple claim that the reverse mortgage scheme entitled Mr Chua to live in the property until he died or sold the property.
They also claim that Income was not entitled to force them to repay the loan if the loan exceeded 80 per cent of their property's market value.
When the reverse mortgage scheme was launched in 1997, it was seen by the Government as a way for the elderly to get some income from their homes without having to move out.
It offered an income stream for cash-poor but asset-rich retirees. They could use their homes as security for a loan that would be dispensed in monthly cash payouts.
Under the scheme, the lender would usually recover the cash it had paid out through the sale of the property after the borrowers had died. Any surplus would go to the estate.
Mr Chua and his wife signed up.
The property, which they bought in 1975, was valued at $2.1million in 1997. This allowed Income to lend them up to 80per cent of the valuation or about $1.68million.
Income also settled an outstanding overdraft of $495,000 that the couple had taken out from a bank using the house as collateral.
Income paid out $2,000 a month.
But things went wrong for the couple when property prices crashed after the Sars crisis in 2003. Their home's valuation virtually halved to $1.1million in 2004 and they were told by Income that the loan was reaching its 80per cent limit. As a result, the couple's monthly payouts were cut successively from $2,000 in 2004 to $300 by 2006.
In June 2006, the couple were told that their loan amount had exceeded 80per cent of their property's market value at the time. The monthly payouts stopped the following month.
By then, the couple owed Income almost $1.05million - comprising the $495,000 to clear their overdraft, plus the monthly payouts and the compounded interest on these payouts.
It became necessary to sell the property to recover the sum.
According to the couple, Income found a buyer who paid $1.05million in November 2006, but there was still a shortfall of almost $55,000, which the couple were to pay off in monthly instalments over the next 10 years.
The couple started making these payments and kept them up until recently when they decided to take legal action.
Mr Chua, a retired flight engineer, and his wife, a housewife, who now rent an HDB flat, will be represented by Senior Counsel Michael Khoo. The appointment of a lawyer was made by the director of the Legal Aid Bureau, after the couple passed a means test.
Mr Khoo said the case was 'the first of its kind', and declined further comment as the suit has been filed.
In the writ, the couple are seeking damages for an alleged breach of contract to be assessed, and costs.
Both Income and OCBC Bank - the only other institution to offer reverse mortgages - stopped offering such loans last year as their take-up was not high. Income has issued 500 such loans since 1997 but only 134 remain active.
Property consultant Nicholas Mak, former head of research at Knight Frank, said it was not surprising that the scheme fizzled out as its success relied on 'many factors, including the size of the market and its culture'.
A recent HDB initiative called the lease buyback scheme has broadly replaced the reverse mortgage, he said.
But this is available only to elderly folk who live in three-room or smaller flats. It monetises their flats to create annuities.
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NTUC: We have been more than reasonable
NTUC Income said it empathises with Mr Derek Chua and Madam Colleen Ng, but believes it has acted more than reasonably to assist them.
Income's chief financial officer Jeffrey Lee told The Straits Times that before signing the deal, the couple were 'advised by lawyers on all the terms and conditions of the reverse mortgage'.
Under a reverse mortgage, the maximum that Income would lend to a borrower is capped at 80 per cent of the prevailing value of the property. When the ratio reaches or exceeds 80 per cent, it indicates that the maximum loan limit has been reached and steps would have to be taken to recover the loan in accordance with the terms of the reverse mortgage.
During a review in 2004, Income found the ratio of the loan to the home's valuation had exceeded the upper limit of 80 per cent, said Mr Lee.
Income's managers met the couple to discuss their options, which included transferring the loan to another family member and renting out rooms for income. The borrowers considered, and elected to sell their property, he added.
Income also said it did not insist that the property be sold immediately, and it gave a grace period of more than two years. It also gave the couple a 10-year loan, at their request, to repay the shortfall, starting in July 2007.
'NTUC Income has been more than reasonable in trying to assist the borrowers throughout the years,' it said.
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Under the reverse mortgage scheme, the lender would usually recover the cash it had paid out through the sale of the property after the borrowers had died. Any surplus would go to the estate.
Source: Straits Times, 28 July 2009
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