Reverse mortgages have been introduced into the Italian framework by law n. 284 on the 2nd of December 2005. The law defines such products as loans: a) granted by banks and financial intermediaries; b) reserved to retail customers aged above 65; c) having a medium-to-long duration with annual compound interest rate and secured by residential real estates; d) repayable in one lump sum at maturity.
These few specification immediately appeared not sufficient to guarantee a prompt start of the market. There were too many interpretative doubts leading to potential legal and reputational risks. Market players stood still.
In response, the Italian Banking Association (ABI) soon started a close dialogue with the Italian Ministry of Economy and, as first achievements, it obtained the introduction of the "no negative equity" guarantee and the bank's contractual right to sell properties upon death of the borrower (without incurring in "forfeiture agreements" explicitly forbidden by law), in a Bill soon to be approved by Parliament. The first gives certainty to borrowers that the value of the loan will never exceed that of the house; the second provides banks with a legal instrument for a quick credit recovery.
In spite of these first achievements, ABI will continue its activity in order to further improve the existing legislation and contribute to create a favourable environment to boost the development of equity release products.
Alfredo Varrati is a Senior Adviser at ABI, Italian Banking Association - Credit Department.