Category: replies

Kevin spotted this discussion at the House of Lords on 5 September. Lord Bates:

My Lords, the Government take the issues raised in this report very seriously. Equity release offers an effective way for home owners to enhance their standard of living in later life, but must not threaten their financial stability or place consumers at risk. The Prudential Regulation Authority is alert to the issue. It is acting to set a clear and more precise prudential expectation for insurance companies’ risk management of equity release mortgages.

Incorrect. The PRA expectations are about the valuation of ERMs not risk management. See our August 23 post. Although to be fair, Bates later on says that it is ‘an issue of pricing’.

Baroness Altmann:

…as the Equity Release Council figures show, most equity release loans are only about 30% of loan to value—some may be around 50%? Even if house prices were to decline by 30% or more, the problems in the conventional mortgage market would be far greater than those in the equity release market. I was rather surprised to see such scary headlines on this particular segment of the market.

This is the ‘loan to value’ fallacy. If we are modelling the embedded guarantee as a series of European put options, then all such options have a strike price, which will be the compounded loan value at expiry, i.e. the value rolled up without periodic interest payments as with a conventional mortgage. For long periods this strike will be a significant multiple of the original loan to value, and certainly not the 30-50% that Altmann quotes.

Kevin commented on Altmann in an earlier post on August 14. ‘If she has read the report, I see no evidence of it in her comments.’

Fair enough, noble lords.

 

 

Following the publication of Asleep at the Wheel and the launch of this blog Kevin and I have received a steady stream of mail objecting to our claims (and the claims of the PRA) about the valuation of the no negative equity guarantee. There is one idea that dominates, namely that asset growth assumptions should in some way affect the value of a deferment or forward contract, contrary to what we claim. Don’t Kevin and I invest in UK property? Is UK property as a valid asset to hold in a diversified portfolio as an investor? Etc etc.

Now I have already addressed this fallacy in an earlier post. But let’s go through it ‘one more time’, hopefully for the last time.

Continue reading “ONE MORE TIME”

A reader writes questioning my claim in the 7 August BBC interview that Matching Adjustment is fake equity. Compare a gilt and a perpetuity issued by an insurance company, he says. Assume the gilt is highly liquid and can be sold in the secondary market, but the perpetuity is not. Then if the two instruments are priced the same, shouldn’t I choose the gilt every time? And doesn’t this, by implication, suggest that they cannot have the same value?
Continue reading “From the postbag”

The spate of publicity surrounding ‘Asleep at the Wheel’ unleashed a torrent of nonsense into the printed media and the internet. It will take some time to unravel this, although Kevin has already posted on the subject. See here, on Baroness Altmann’s mistaken idea that he was publishing a risk-model, rather than a valuation model, and here, on the Equity Release Council’s misconception that ‘price trends’ are in any way relevant for pricing or valuing the NNEG.
Continue reading “No comprende”