U.K. senior citizens aren't putting all of their eggs in the pension's basket. According to Fitch Ratings, demand for reverse-mortgage schemes from the over 65 population - financial products that allow homeowners to make use of any equity they have in their property - is on the rise in the U.K. But financing these mortgage pools can prove tricky. Securitization, analysts say, offers a route to tap funds and structure the various risks off-balance sheet in a form attractive to medium-term investors.
Fitch reports that a strong housing market, coupled with the erosion of state support for retirement and consumers' inertia about saving for retirement makes ideal conditions for the expansion of this market segment. "As the populations of [the U.K.] ages, there is an increasingly broad awareness of the need to develop new ways of releasing personal wealth to the elderly population," said Stuart Jennings, head of Fitch's U.K. RMBS group. "Given the large improvements in life expectancy, the rising cost of healthcare and the potential shortfall in pension provisions, many elderly individuals may have to tap the wealth held in their homes to bolster their income."
To date, several reverse-mortgage securitizations have been launched in the U.K. and, given the scale of the potential markets (Fitch estimates that approximately 90% of U.K. properties are owned outright by homeowners over the age of 65), the entry of new originators and the success of recent transactions, further deals can be expected going forward. And there are signs that investors have a better understanding of this mortgage product. Earlier this year Norwich Union - which accounts for 37% of the U.K. reverse mortgage market - made a return to the market, issuing a new transaction from its equity-release mortgage securitization program. The deal priced well within its prior securitization, issued last year. This improvement in pricing was due to better familiarity with such products - greater than 50 U.K, accounts participated, with additional interest from investors in Germany, Ireland, France and the Netherlands.
The market is better positioned for growth when compared to the boom this segment of the market experienced in the 1980's. Earlier versions of the product were first introduced in the U.S. in the 1980's, then spread to the U.K. later in the decade. But its birth coincided with the U.K. property market crash, thus slowing its growth, said analysts. "In the U.K., a dangerous combination occurred: the U.K. property market crash of the late 1980s occurred at a time when equity-release products were being sold in combination with investment products - essentially a highly leveraged investment portfolio whose leverage was secured by the investor's home at full recourse to the borrower," explained the Fitch report. "The subsequent poor performance of the stock market halted growth, forcing lenders to rethink their strategies for this type of product."
Today's product offers features such as the "no negative equity" guarantee, assuring borrowers that their outstanding loan balance will never be greater than the value of the property (in the event that home prices fall below, the difference is assumed by the lender). The products are also more strictly regulated today. The industry, through the creation of Safe Home Income Plans now has a forum and benchmark for self regulation. And since last October, the Financial Services Authority has taken statutory responsibility for the regulation of business conduct in the mortgage industry, including the regulation of reverse mortgages.
But these reverse-mortgage products still pose a significantly different risk profile for investors than traditional mortgage products. "The fact that there are no cashflows until each loan's maturity and that the lender is exposed to property price risk over an unspecified future period means the analysis is focused on actuarial analyses of death rates, and rates of entry into aged care," said Fitch Associate Director Philip Sullivan. "Repayment from the sale of the property means the ongoing creditworthiness of the borrower and affordability is largely irrelevant for these products."
While Fitch foresees more activity within the sector, ultimately analysts said market expansion has suffered from the relatively low number of players active in the market, coupled with the absence of the larger prime mortgage lenders, such as Halifax and Abbey National. In all, 27 lenders offer this product, including Northern Rock, GE Life, Portman Building Society, Hodge Equity Release, New Life Mortgages and National Counties Building Society.
The annual growth of the market in the first half was 5% lower than in the previous year and the lowest level since the first half of 2003, according to data from the Council of Mortgage Lenders. "This apparent decline in the growth of the market could be partially explained by borrowers' current expectations about the future of the housing market and, to a certain extent, by some recent negative press from the FSA regarding the quality of advice offered to borrowers," added Fitch analysts.
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