Keeping an eye on things
The Equity Release seminar that Dean and I presented at the London School of Economics on Monday October 1st got a good turnout and prompted a lively, and at times, stormy, discussion.1 The most entertaining contribution to the discussion came from NUMIS equity release analyst Marcus Bernard, who has been pushing Just Group hard as a buy.
Marcus and I are on opposite sides on this issue.
In a recent posting Guy Thomas takes issue with my new friends at the Prudential Regulation Authority on Consultation Paper CP13/18 which deal with the valuation of the no-negative-equity guarantees (NNEGs) in equity release mortgages. Dean has responded to Guy here, but I would like to stick my own oar in the water too, particularly on the issue of whether the deferment price on a property should be less than the current price.
Continue reading “Deferment Price Less Than Spot Price? What Else Could It Be?”
Just’s quarterly results presentation on September 6th was a hoot. I couldn’t help noticing the cancelled dividend and the auditor (KPMG) suggesting that the final outcome of CP 13/18 could constitute a material uncertainty that may cast significant doubt on the Group’s ability to continue as a going concern. These look like red flags to me but I am not an analyst and may have missed the finer points.
One point however that did jump out at me was its innovative “NNEG loss shortfall” metric. This metric appears to be the loss that occurs when the loan is repaid and the house price is below the loan value. This metric sounds plausible at first sight and sure does make the NNEG risk look small.
Unfortunately this “NNEG shortfall” as used by the company tells us nothing about the valuation of the NNEG or the riskiness of the firm’s equity release portfolio.
In Asleep at the Wheel, I set out a base case No-Negative Equity Guarantee (NNEG) valuation based on a bunch of assumptions. Suppose I am 70 years old, have a house worth £100 and get an equity release loan of £40. Suppose too that the risk-free interest rate is 1.5%, the net rental rate is 2%, the loan rate is 5% and so on.
In this base case, my NNEG model comes up with a NNEG valuation – this valuation is the same as the cost of the NNEG to the lender – of £20.8, which is 52% of the amount loaned.
Remember too that we value the NNEG using information available now. As Dean and I have explained in various places (see here and here), our NNEG valuation is not dependent on a forecast of any future variable.
Continue reading “A bet on the house”
Most UK Equity Release mortgages2 involve a no-negative equity guarantee (NNEG) by which the lender guarantees that the borrower (or their estate, if they have passed away by then) will never need to pay back more than the value of their house when the loan is repaid.
The valuation of these NNEGs has become an issue in light of recent reports – Howard Mustoe’s BBC story “Home equity release may cost pension firms billions” and my Adam Smith Institute report, “Asleep at the Wheel: the Prudential Regulation Authority and the Equity Release Sector.”
In particular, our reports claimed that Equity Release firms are undervaluing their NNEG guarantees – and to a considerable extent.
So how big is the NNEG valuation ‘problem’ across the Equity Release sector?
Continue reading “How Big is the NNEG Across the Equity Release Sector?”
Kevin Dowd 28 August 2018
A number of our readers continue to be puzzled about why Dean and I have been insisting (see, e.g., here, here and here) that the net rental or q rates used for NNEG valuations should be positive.
This point matters because we are interested in how NNEG valuations are affected by deferment property prices.
Continue reading “Net Rental Rates and Deferment Prices”
Kevin Dowd 27 August 2018
Why do we use the Black ’76 model (Black, 1976) model to price the put options in No-Negative Equity Guarantees (NNEGs) instead of the better-known vanilla Black-Scholes (BS) model (Black and Scholes, 1973; Merton, 1973)?
Continue reading “Why Black’ 76?”
Kevin Dowd 20 August 2018
Earlier this week the Association of British Insurers and the Institute and Faculty of Actuaries issued a tender call for research on the valuation of the No-Negative Equity Guarantees (NNEGs) in Equity Release Mortgages (ERMs). Their timing is perfect, coming as it does a week after my report on NNEG valuation, Asleep at the Wheel: The Prudential Regulation Authority and the Equity Release Sector, and a few weeks after the PRA’s most recent Consultation Paper on the subject, CP 13/18, “Solvency II: Equity Release Mortgages.” One thing is for sure: the current manual used by practising actuaries for the valuation of NNEGs is not so much out of date as flat out wrong.
Kevin Dowd 16 August 2018
Adam Williams had an interesting article on this issue in the Daily Telegraph (14 August 2018) .
It’s a good question.
Let me quote from his article and add some comments:
‘What happens if my equity release provider goes bust? (Adam Williams, 14 Aug 2018) … ‘your fears are not unfounded. A report issued by the Adam Smith Institute, a free market pressure group, said the equity release market could be sent into meltdown if house prices were to fall substantially in future’.
Continue reading “What Happens If My Equity Release Provider Goes Bust?”
Kevin Dowd 14 August 2018
Harvey Jones had an article in the 12 August Sunday Express on my Equity Release report, Asleep at the Wheel: The Prudential Regulation Authority and the Equity Release Sector, which was published last week by the Adam Smith Institute.
The article included some comments on the report from a number of experts, including Baroness Ros Altmann, David Cameron’s former Pensions Minister.
“I never read a book I must review; it prejudices you so,” said Oscar Wilde. If she has read the report, I see no evidence of it in her comments.
Continue reading “Baroness Altmann Rather Too Quick to Dismiss Dowd Report on Equity Release”