As most of our readers already known there is an event tonight at Staple Inn Hall to deliver the results of Professor Tunaru’s research project on Equity Release Mortgages.
Kevin and Dean won’t be able to attend. However we have published Part I and Part II of our own commentary on the research paper. In addition, for anyone attending who would like to ask, here are the questions we would like to have asked, if we had been able to attend.
1. (Tunaru) The difference between the values of immediate and deferred possession reflects the cost of foregone rental or foregone use of the property. Given that this cost depends on 100% of the net rental yield on the property and not 20% of the net rental yield, why did you recommend that the latter be used in NNEG valuation? Can you point to any academic or textbook literature that would justify such a treatment or to any other experts who would endorse it?
2. (Tunaru) How do you justify your baseline volatility calibration of 3.9% when the PRA recommends a minimum volatility calibration of 13%?
3. (Tunaru) Given that a short put position is equivalent to a long position in the market, and given that autocorrelated markets exhibit long downward trends (such as Japan housing market, 1991 to date), how would you accommodate the risk of loss from such trends in your general risk management framework?
4. (Tunaru) As well as regional basis risk, there is individual property risk. Data from securitisations suggests a wide dispersion around national and regional indices. Have you examined this risk or quantified it?
5. (Review Group) At least one claim in the paper (i.e., the claim that the rental rate should be multiplied by 20% for purposes of NNEG valuation) is controversial and is presented as the opinion of the author’s own opinion, and possibly his alone. Will the Review Group review this claim and if so, how? Is the Review Group prepared to give a view or recommendation on this issue?
6. (Panel) Some claims in the paper are controversial and could have a material impact. How has the panel satisfied itself that the peer review process was robust and adequate, and that any potentially controversial claims have received appropriate challenge? And would they comment on Professor Tunaru’s claim that the net rental rate should be multiplied by 20% on the grounds that less than 20% of people are renters?
7. (ARC/IFoA) Would the ARC or IFoA be willing to publish our comments on Tunaru, and if not, why not?