Category: Property Rights

China, the Reverse Mortgage and the Emergence of Private Property?

By , October 8, 2013

 

China's increasing elderly population

China’s increasing elderly population

Chinasmack recently translated a fascinating article regarding the introduction of reverse mortgages to the senior citizen population in China.  For those familiar with the foreclosure crisis in the United States, reverse mortgages have a bad reputation.  But even though issued as a predatory product in the mid-2000s (as most mortgages were back then), reverse mortgages, when issued responsibly, do have their place.

Basically, a reverse mortgage is the stripping of equity from your home and usually reserved only for the elderly.  Ideally most seniors own their homes outright.  In the United States, they have paid off the mortgage they took out to purchase their homes 30 years ago and own a piece of property worth, in a place like New York City, over $300,000.  Now in their twilight years, and with an underfunded retirement savings plan, these seniors want to access that equity while remaining in the house.  Refinancing into a regular mortgage likely would not be available to most seniors who are often on a lower fixed income like social security and/or pension and wouldn’t be able to support a monthly mortgage payment.

Enter the reverse mortgage.  A reverse mortgage only looks at your age and the equity remaining in your house and allows you to take that equity out either in a lump sum or in monthly increments.  Instead of making mortgage payments every month, with a reverse mortgage, the bank pays you every month (or as a lump sum when you close on the reverse mortgages – this is usually left at the discretion of the homeowner).

Where’s the catch?  Even though you are stripping the equity out of your house, the bank that has given you the reverse mortgage charges you interest on the money it gives you.  The collateral is your house – when you die, the full amount owed comes due.  If your heirs want to keep the house, they must pay off what is owed or if they can’t, the bank will foreclose.  But you are guaranteed your house until you die, sell it or move out (like to a nursing home) even if housing prices fall.

reversemortgageFor some seniors, the extra monthly cash is essential to survive their later years.  As the Chinese government has recognized, this is especially true in China where – even with reforms to health insurance – out of pocket medical expenses are astronomical.  For seniors, those expenses are even more exorbitant.

Recognizing that by 2025, China’s senior population (defined as 60-plus) will be over 300 million (today the government estimates a senior population of 194 million – see Chinese State Council announcement here), on September 6, 2013, China’s State Council issued its Opinion Concerning the Accelerated Development of the Elder Care Industry.  While the document is more general in stating the problem, the government is rather frank in realizing that elder care and the inability of the government to fund it in addition to pension funds, will become an increasing problem.  Muddle in the middle of the 5 page Opinion is the one sentence announcement that localities should look to experiment with reverse mortgages (“住房反向抵押养老保险”, aka “以房养老”) as a way to fund elder care.

As the Southern Weekend reported, since as early as 2003, various cities in China – including Shanghai, Nanjing and Beijing – have encouraged

What's this apartment worth?

What’s this apartment worth?

the use of reverse mortgages but with little success.  One major hurdle to the success of the reverse mortgage is the fact that people in China do not own their land – they only have a 70 year land-use right to the piece.  What happens when that land-use right expires in 70 years is unclear, giving the banks or insurance companies major pause in issuing reverse mortgages, especially for land-use rights that are approaching the 70 year mark.

So what is the Chinese government to do?  It realizes that it has a ballooning senior population and insufficient funds to support it.  A reverse mortgage – especially with China’s increasing housing bubbles – can be an important private financing tool of one’s later life.  But banks and mortgage companies don’t want to lend in an environment with such uncertainty.  Does the State Council’s Opinion signal a possible change to the current land-use rights system?  Clearly it must recognize its dilemmas as all the domestic media outlets have been openly commenting on the 70 year problem as a major roadblock.

According to the Southern Weekend, the Chinese government is to issue more specific parameters of reverse mortgage lending in the first quarter of 2014.  While it is doubtful that those parameters will deal particularly with the 70 year land use limits, hopefully the regulations will guard against other risks inherent in dealing with a senior population.  The Southern Weekend pointed out a 2011 case in Shanghai where the court rescinded a reverse mortgage contract between a 90 year old woman and the nursing home, where her 550,000 RMB-valued property rights served as her monthly maintenance fee and her funeral expenses.  It was the son who brought the case in his mother’s name.

In the United States, to deal with the vulnerability of senior citizens, all seniors must receive independent credit counseling regarding the reverse mortgage prior to obtaining it.  Such education is important for two reasons: (1) seniors develop a basic understanding of the product and what it means and (2) proper counseling should prevent seniors from taking out a reverse mortgage too early.  Ideally, the longer you can wait to take out a reverse mortgage, the greater your monthly payment will be.  For seniors this is an important factor to consider because as they age, care becomes increasingly more expensive.

Without protection for spouses in a reverse mortgage, this lady could be out in the cold!

Without protection for spouses in a reverse mortgage, this lady could be out in the cold!

Further, the Chinese government should look to protect the spouse of land-use title holder.  In the United States, federal law prevents reverse mortgage holders from foreclosing on a property when there is still a spouse – even if she is not on the title – living in the property after the mortgage holder dies.  This protection is even more imperative in China where only 30% of married women add their names to the title.

Additionally, the Chinese government should regulate who can give reverse mortgages.  As the case from Shanghai demonstrated, having the nursing home able to enter into a reverse mortgage with one of its residents is likely not best practices.

Finally, the reverse mortgage likely will not be a useful tool in the rural areas.  Reverse mortgages contemplate high property/land use values and an increasing property market.  For seniors in the countryside, the reverse mortgage is likely not an option and to the extent it is, there is likely not enough equity to pay for the care they will need.  The Chinese government will still need to find a way to deal with the health care crisis in the rural areas.

Follow Up on the Wukan Protests – A Constitutional Challenge?

By , February 7, 2012

It's a Constitution We are Propounding!

In the beginning of January, we posted a piece on the recent protests in Wukan, admitting that while there was something happening in Wukan, we at China Law & Policy where unclear what it was.  Enter Prof. Keith Hand of UC Hastings School of Law, a specialist in Chinese constitutional law, who on Friday published a fascinating piece in the China Brief interpreting Wukan as a manifestation of the villagers’ constitutional discontent.

Hand’s piece teaches the lesson that, in analyzing legal developments in China,  we are often prisoners of our own legal systems.  Case in point is constitutional law.  China is often criticized by foreign scholars about not having constitutional law; yes there is a law on paper, but the courts are prevented from hearing any constitutional claims and for American legal scholars used to constitutional jurisprudence being propounded by the courts, this is almost anathema.

But as Hand’s piece, “Constitutionalizing Wukan: The Value of the Constitution Outside the Courtroom,”  emphasizes, the constitution is alive and still kicking in China.  Courts may not hear constitutional claims, but such claims are still being made and still being interpreted in China, just outside the courthouse doors.  For Hand, protests like Wukan and the subsequent government response serve the same role as the courts in interpreting the constitution.  In Wukan, the villagers protested for their version of the Chinese constitution and the government, in its compromise with the villagers, provided theirs, moving constitutional jurisprudence forward.  As Hand points out, this explains why Chinese constitutional scholars are interpreting the Wukan protests in a positive light and as one of the most important constitutional cases of 2011, even though it never made it to a courtroom.

Why do these guys get to have all the constitutional fun?

This grassroots, constitutional interpretation is not absent from America.  In fact, as Hand mentions, some American constitutional scholars view many popular protest movements as an important part of moving society – and in the U.S., the courts – forward to a different view of the constitution and have called this “popular constitutionalism.”  Could the Supreme Court handed down all of its decisions of the 1960s without the Civil Rights Movement and the Women’s Rights Movements?

Will constitutional claims ever be heard in a Chinese court?  Who knows, but as Hand makes clears, constitutional jurisprudence i happening in China, just not where most Americans might look to find it.

For a deeper understanding of popular constitutionalism in China, read the Hand’s short piece here.

The Wukan Protests –Because Something Is Happening Here But You Don’t Know What It Is

By , January 2, 2012

The tale of Wukan village is not an uncommon one in China. Rural farmland is constantly taken by corrupt village officials for real estate development and the villagers – the owners of the land through the collective – receive little to any compensation. For certain Wukan’s story is a little different from other run-of-the-mill land taking protests: the length of the protests (close to three months), the unity of the group (close to 20,000 villagers), the complete expulsion of the Chinese government from the village, the death of a protest representative in police custody, and the attention from the western media distinguishes Wukan from other taking protests.

But now that it appears that the villagers and the provincial government have reached some sort of agreement, has Wukan ended differently from other protests?

Some China watchers have argued that it has and see Wukan as the general populace’s deepening understanding of its rights under the law and its willingness to fight for those rights (see here and here). But given the discriminatory structure of China’s Real Property Rights Law (“the PRL”) and the Land Administration Law (“the LAL”), one hopes that these villagers are not really fighting for their rights under the law as it stands now. As Prof. Eva Pils points out in “Waste No Land: Property, Dignity and Growth in Urbanizing China”, China’s property laws have been written specifically to render villagers into “second class property rights holders” and permit their land to be legally taken for urban development. The below summarizes much of the article and views the Wukan protest in light of Prof. Pils’ analysis.

How Villagers in China Get Screwed

(1) The Limitations on Rural Land Use Rights

As a nominal communist country, land cannot be privately owned in China. The PRL, passed in 2007, maintained that distinction. Instead, the land is owned publicly; in urban areas, the land is owned directly by the state; in rural and suburban areas, the land is owned by the village collective, usually through the villagers’ collective economic organization or the village committee. This difference in ownership between urban land and rural/suburban land is not just limited to who owns the land, but extends to what individuals can do with the land.

Although not directly owned, individuals are able to own certain usage rights associated with the land that they occupy. These land usage rights differ depending on the underlying ownership of the land – if it is owned by the state or if it is owned by the collective. In urban areas, these usage rights include the ability to live on and to construct non-primary residence buildings on the land (known as “construction rights”); rights to the land can last for 70 years in urban areas. As a result of the ownership of these “usage property rights” and the fact that these rights last for 70 years give urban residents the ability to buy, sell and lease their usage rights, providing somewhat of an appearance of actual individual ownership.

But in rural areas, the usage rights are much more restricted and this is where the problem first begins. First, villagers are pretty much limited to one type of usage right: the right to farm (there are other rights, such as the right to building housing). Under the LAL, which was adopted in 1986 and last amended in 2004, this land use right cannot be transferred or rented for “non-agricultural construction.” (See LAL Art. 63). Urban land use rights have no such restriction. The Property Rights Law (“the RPL”), passed eight years later, continued the limitation on rural usage rights.

Furthermore, rural land use rights are limited to 30 year terms. As a result of these restrictions, there is no free flowing market for the sale of rural land use rights – real estate companies interested in building a housing complex in a suburban area do not go directly to the owners of the rural land use rights; all they would be able to purchase is the right to farm the land (note that Prof. Pils does discuss the illegal minority use rights market between the farmer and the real estate investor).

Instead, where a real estate company is interested in building a housing complex or a factory in a rural area, the land must first undergo a transformation from a rural (where usage rights are limited to agricultural purposes with 30 year terms) to urban land (with “construction usage rights” for 70 years). To undergo such a transformation, the land must go from being collectively owned by the villagers to being state-owned. Under Article 60 of the PRL, it is the “village’s collective economic organization” or the “villagers’ committee” that acts on the villagers’ behalf, negotiating the compensation for the villagers’ land use rights.

As Prof. Pils points in her example of the Nongkou village in “Waste No Land,” the village committee itself often acts in its own interest, not that of the villagers. It appears that in the case of Wukan, the village committee was not representing its constituents; part of the reason that the Wukan villagers deposed of its government was the allegation that the village committee was corrupt and not reflecting the interest of the villagers.

(2) No Just Compensation

The first problem for villagers is the fact that the law leaves them with second class property rights – usage rights that can never be sold for non-agricultural purposes, necessitating the expropriation of the land by the village committee. But the second major issue is that the compensation villagers receive – if they receive anything at all after the village committee is done with the transaction – is nowhere near what is being paid for the transformation of agricultural land into urban land.

Under Article 47 of the LAL, when agricultural land is expropriated, compensation is “made according to the original purposes of the land being expropriated.” As a result, farmers are only entitled to compensation of the value of what they would have farmed over the remaining life of the 30-year lease rights (there are also other compensation other than the value of the land use right, such as resettlement fees but the largest part of the compensation package is for the land use rights).

The villagers themselves do not reap the benefit of the market value of the underlying land or even the full value of what they are relinquishing. In fact, as Prof. Pils notes, for most villagers, the compensation is a mere 5% to 10% of the value of transforming agricultural land to urban land. Article 49 of the LAL requires transparency to the village regarding money received by the collective for the land, but as the Wukan protesters point out, they had little knowledge of anything that was going on.
Furthermore, any complaint regarding the amount of compensation occurs after the compensation plan has been set (see LAL Article 48), making one wonder – what can really be done after the fact. Again, as Prof. Pils notes, because the compensation schedule is considered an administrative decision, it is not subject to judicial review, leaving the villagers with little legal recourse to contest the compensation (although petitioning always remains as an option).

Compensation appears to be a major in the Wukan protest. As part of the brokered settlement between the villagers and Guangdong provincial officials, the low-level of compensation will be reconsidered. (See China Media Project’s translation of a Nanfang Daily article). Hopefully, the villagers will be able to recoup some of the value of the actual transfer of the land to urban use and not just the value of their agricultural land use rights.

(3) The Discriminatory Definition of Public Interest

As Prof. Pils argues in “Waste No Land,” given China’s economic development philosophy over the past 35 years and the fact that land takings account for a significant portion of the local GDP, converting agricultural land into urban land is inherently defined as a taking for the “public interest.”

In fact, the whole drafting of the 2007 Property Rights Law has been predicated on the ability of governments to easily and cheaply take rural lands without providing the villagers with a more realistic compensation. Although both the Chinese Constitution and the PRL reiterate the government’s commitment to equal protection of the laws, the purposeful distinction between urban land use rights and rural land use rights, Urban land use rights are not under the same restrictive

The third and biggest challenge to being a villager in rural China is the expansive definition of “public interest.” Takings of rural land against the villagers’ wishes are legal in China if it is done in the public interest.
In January 2011, the State Council promulgated new regulations (in Chinese here) better defining “expropriation for the public interest.” But those regulations were limited to state-owned land, or in other words, urban lands. In the countryside, what is the public interest remains intentionally vague.

So What Happened in Wukan?

Wukan is not an example of villagers seeking their rights under the law. China’s property laws – the PRL and the LAL – provide little rights to villagers.

But there is certainly something happening here….I’m just not so sure what it is and perhaps it is still too early to determine if Wukan is in fact a harbinger of something more. Protests in China against rural land takings and the lack of just compensation occur on an almost daily basis. But in Wukan, these protests were large, public and extreme. Add to the mix that one of the protest leaders died while in police custody.

On some level Wukan had the potential to end differently, to end violently. But it didn’t. Instead, the provincial government stepped in to admonish the local officials (although interestingly enough such punishment is going to happen outside of the legal system and under shuangguai, the Party adjudication method – see Nanfang translation), praise the villagers, admonish against further protest and agree to provide greater compensation.
But how often can the provincial or central government step in and continuously calm these tensions? Arguably the government must recognize that it is the structure of the law itself that leads to such discontent. But such a discriminatory law is necessary to provide for real estate development, an increasingly important part of China’s GDP. Will the government change this paradigm and provide equal property rights to villagers? Right now it is unclear. Wukan seems to have ended in the same way as all of these protests do. But perhaps this time the central leadership will realize that constantly involving itself in these local protests is unsustainable.

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