Keeping an eye on things
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”
The chart above shows one of the stranger features of equity release mortgages: the wide variation between the projected indexed value of a property, and the actual sale value it achieved at auction. The data is based on Aviva’s Equity Release Funding No. 4.
The red line is the rebased value of the property index used by the fund, the Halifax, from October 2007 to July 2020.
From the Just Group 2020 interim:
There has been significant academic and market debate concerning the valuation of no negative equity guarantees in recent years, including proposals to use risk-free based methods rather than best estimate assumptions to project future house price growth.
To be sure, there has been significant debate about the subject, but there still seems to be significant confusion about what the debate is.
Just published, “Valuation of no-negative-equity guarantees with a lower reflecting barrier” by our friend Guy Thomas (University of Kent at Canterbury).
Another great piece on insurance accounting from the Eye this week. As we always say, support great investigative journalism and buy a copy, but the crux of the article is our longstanding claim that the potential costs of no-negative-equity guarantees have been drastically understated.
Apparently there have been complaints about this since October 2018 to the Financial Reporting Council (FRC), the accounting regulator. After nearly two years, ‘the dozy regulator’ has finally addressed the point, concluding that “the guarantees should be valued at what they would sell for in the market, and since most equity release providers who might buy them (they wouldn’t, in reality) all value them in the same way, there’s no problem!”.
The FRC did not ask shareholders or policyholders what value they might place on these products, of course.
“If and when the final reckoning comes for the life insurance companies, as it did for Equitable Life 20 years ago, it might well be the bean-counting that does for them.”
We shall see.
The IFoA working party on equity release mortgages chaired by our friend Craig Turnbull has just issued an interesting ‘discussion note’ about equity release valuation. You might have thought that the WP might have had something to say about some of the rude things we have said about the subject, or about the IFoA or even about the WP itself, but no.
At one level, the WP’s non response is admirable. From a scientific perspective, however, it isn’t helpful to ignore research that gives conclusions they might not like. Better to confront and rebut, otherwise people might be tempted to draw their own conclusions.
There is also nothing about the ostrich elephant in the room, which is whether the industry are getting it wrong, like getting NNEG valuation an order of magnitude wrong.
Published on Friday 28 Feb, although dated earlier, this Discussion Note on the Economic Valuation of Equity Release Mortgages has some interesting stuff. It is written by the IFoA Equity Release Mortgages Working Party, published by the Institute (although the Institute has the usual disclaimer).
We will be commenting shortly.
We reported here and elsewhere about Age Co (a company owned by the trusted brand Age UK) referring potential borrowers to Hub Financial, who routinely recommended equity release deals from its own parent company (i.e. Just), despite the suggestion of a whole of market offering and a ‘panel’ of providers.
Neither the FCA or the Charity Commission have commented.
In a follow-up to the article we mentioned here, Sarah Bright has revealed that the Treasury Committee may (at long last) investigate the equity release problem.
Steve Baker, who was last week re-elected as Conservative MP for Wycombe, says: ‘Close scrutiny of equity release is long overdue and I welcome the FCA’s action. In the event I am re-elected to the Treasury Select Committee I will certainly want to see an inquiry carried through.’
In This is money today.
Homeowners told to take equity release could have been given the wrong advice it has emerged, as the City watchdog confirmed it is looking at mortgage lending practices in the later life market. This is Money can reveal exclusively that the Financial Conduct Authority has been engaging with firms to help it better understand the market to reduce any potential harms.
Hard to say whether the review is connected with the issues we have raised here and elsewhere, though.