Probably the most laughable commentary on the Equity Release scandal arrived yesterday from Tom Moloney, corporate partnerships manager at the utterly neutral Age Partnership, writing for the completely independent Mortgage Finance Gazette.
I won’t bother to reply in detail, as so much has already been said. For example, Moloney quotes those well-known experts on derivative pricing, Ros Altmann and, er, Robert Sinclair from the Association of Mortgage Intermediaries, who ‘responded to refute the report’s findings’. I already responded to Sinclair on 9 August, and Kevin to Altmann on 14 August. Both committed the elementary error of failing to read either Kevin’s report or the PRA’s consultation paper on which they were pontificating, and so did not realise what the reports were actually saying, namely that firms are valuing the guarantee incorrectly, not that they were failing to manage the risk.
Moloney falls into the same error, saying that the ASI report suggests ‘every lenders [sic] risk management framework is flawed’. The report makes no such claim and in fact says nothing at all about firms’ risk management. Similarly, he misrepresents it as saying ‘in the event of a severe property crash, the protection offered by the no negative equity guarantee was likely to generate significant losses for the lenders and funders’. This claim misses the report’s core message that firms appear to be greatly under-valuing their NNEGs now.
Read the report, Tom.
Moloney’s only original thought is the jaw-dropping claim that ‘the [ASI] report’s findings have been strongly disputed by the equity release industry and the PRA.’ As far as I am aware, the PRA has never commented on the Dowd report, let alone ‘strongly disputed it’. Neither has it commented on the model proposed by Kevin Dowd, nor would it, for it proposes an identical valuation model. See p. 20 of CP 13/18, and compare with p.27 of ‘Asleep at the Wheel’. The papers differ in tone and interpretation, for example the PRA uses statesmanlike language like ‘a wide variety of practice regarding valuation of the embedded guarantee, with suggestions that sometimes diverged from conventional approaches to the valuation of guarantees in incomplete markets’, whereas Kevin, whose strongest point is not understatement, says things like ‘In plain English, firms were all over the place on NNEG valuation’.
Both are making the same point.
Moloney says he has been assured ‘that each lender and funder operates sophisticated and complex risk management systems that model multiple future scenarios’. This Moloney baloney misses the point that the risk management systems seem to be run by nitwits. Ditto the ERM firms’ NNEG models. As the Irish News recently commented
Simply put, they [ERM firms] have mixed up the ‘forward price’ of property and a ‘future price’ – schoolboy error. One is based upon house price growth assumptions based on the past, and the other is based upon a financial instrument called an option. They are as related as Trump and Corbyn.
My emphasis. In any case, Moloney says that there are people far more qualified than himself to comment.
He is right about that.