Keeping an eye on things
Dean and I have had a fair bit of behind the scenes back and forth on equity release valuation, and especially on the PRA’s Equity Release Valuation Principles, which continue to be as misunderstood as ever. As someone once said, it can be extremely difficult to persuade people of something that they do not wish to be true, and especially so where their living depends on their not understanding it.
Here is the link to our new Discussion Paper on the subject.
The great American jurist Louis Brandeis once wrote:
‘Publicity is justly commended as a remedy for social and industrial diseases. Sunlight is said to be the best of disinfectants; electric light the most efficient policeman. And publicity has already played an important part in the struggle against the Money Trust.’
Which reminds me of the delicate subject of actuarial standards. Here is our take.
In ‘Equity release sector releasing own equity’ I worried a bit about the dreadfully low returns equity release firms were looking at from their investments in ERM mortgage loans. By dreadfully low, I meant negative for younger borrowers.
It turns out that I was over-optimistic.
Continue reading “ERM Investment Returns are Worse than Even We Feared”
One of the problems writing about equity release is to get hold of up to date ‘real world’ data. The Equity Release Council has some useful data, but their data are somewhat limited.
Continue reading “‘Real World’ Estimates of ERM Profitability with a Just a Touch of Alchemy”
Our friend Golden Retriever at golden.retriever@dogs.gov writes in about our last post on the profitability of equity release mortgage loans:
My first thought was that, surely with any investment, you know the profitability only once the asset has been redeemed, sold, or otherwise disposed of. At this point, you don’t need Black 76, or any other model, to work out profitability: you just look at actual cash inflows and outflows. Do I therefore take it that what you are looking at is actually expected profitability?
To quote Churchill:
The trouble with the ex post measure of profitability is precisely that you don’t know it until the loan has been repaid. We are interested in assessing expected profitability because we want to work out the valuations of the NNEG and ERM ex ante, so that firms have solid valuations at the time the loans are taken out. The only alternative ex ante I can think of is a crystal ball that works.
Of course, we recognise that NNEG valuation is a bit of a dog’s dinner.
Dean and I have just had a paper accepted by Economics Letters on the profitability of ERM loans to lenders. Economics Letters is a distinguished refereed economics journal.
Continue reading “Equity Release Sector Releasing Own Equity”
Eumaeus is pleased to announce the release of the second edition of our equity release valuation report, THE EUMAEUS GUIDE TO EQUITY RELEASE VALUATION Restating the Case for a Market Consistent Approach.
The new edition involves some simplification and tidying up, including: a simpler treatment of volatility estimation; a simpler treatment of the Market Consistent approach reflecting our more recent work on option pricing (of which more later); a brief discussion of Professor Mario Wüthrich’s 2011 European Actuarial Journal article on market consistent valuation; and a discussion of the IFoA Equity Release Working Party’s magnificently flawed approach (“A Discussion Note on the Economic Valuation of Equity Release Mortgages as Part of the PRA’s Effective Value Test”) to the PRA’s Principle III (“The present value of deferred possession of a property should be less than the value of immediate possession”).
As always, we thank the many people who have contributed to it.
Please keep the comments flowing in through our contact box.
An interesting passage from the IFRS accounting standards
The core principle in IAS 36 is that an asset must not be carried in the financial statements at more than the highest amount to be recovered through its use or sale. If the carrying amount exceeds the recoverable amount, the asset is described as impaired. The entity must reduce the carrying amount of the asset to its recoverable amount, and recognise an impairment loss. IAS 36 also applies to groups of assets that do not generate cash flows individually (known as cash-generating units). [My emphasis]
IAS 36 applies to all assets except those for which other standards address impairment. The exceptions include inventories, deferred tax assets, assets arising from employee benefits, financial assets within the scope of IFRS 9, investment property measured at fair value, biological assets within the scope of IAS 41, some assets arising from insurance contracts, and non-current assets held for sale.
Continue reading “UK Banking System is One Big Impaired Asset”
Dean and I have updated our banking report, and the new version is available here.
The new version gives figures updated to May 29th and is a little trimmed down. Its main highlight is a new Figure 1 which gives UK banks’ share prices since the start of 2007
UK Bank Share Prices Since the Beginning of 2007
and is based on Howard Mustoe’s lovely share price chart in his BBC report “Are Britain’s banks strong enough for coronavirus?”
The exam question is: Explain how this Figure shows that UK banks are well capitalised.
Answers to Sam W, c/o Bank of England, Threadneedle Street, London EC2R 8AH.
In my earlier writings (here, here, here and here, for a start) I may have given the impression that I am not a great fan of the Bank of England’s so-called stress tests, mainly because the Bank’s stress scenarios barely break into a sweat.
My skepticism was heightened further when a little birdie from Moorgate suggested that the stress tests were really designed to ensure that the big institutions passed, ‘cos otherwise there’d be problems.
I had long known that the exercises had zero credibility, but even so, it comes as a bit of a shock to learn that people on the stress test team were more cynical about them than I was.
So now we know what I had long suspected: the stress test project is one big con job PR exercise to sell the Bank’s ‘Great Capital Rebuild’ fairy story to the public.
Continue reading “The Bank’s ‘No Stress’ Stress Tests, 2019 Edition”