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Sense of release

Retirement Plus chief executive Duncan Young says equity-release failures have produced positive responses and 2010 will be a good year for the sector

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Since the collapse of Lehman Brothers in the autumn of 2008, over half of equity-release providers have suspended activity or withdrawn completely. Retirement Plus is no exception, having suspended new business last spring, and is now limiting itself to the odd further advance.

While equity-release provision has arguably been more robust than other forms of lending, especially sub-prime and second-charge lending, the paucity of active participants does restrict consumer choice. The recent loss of Stonehaven’s suite of products is an example of this.

Funding equity-release provision is not a straight-forward matter as the term is long and uncertain, payment comes at the end and, perhaps more critically, it calls for a mixture of equity and funding risk.

Both lifetime mortgages and reversions take an equity risk on house prices. This is obvious in the case of reversions but is also true of lifetime mortgages through the no negative equity guarantee.

With the concerns over the housing market throughout 2009, equity to assume this risk has been scarce. In addition, the margin that banks and consumers have demanded for long-dated loans has increased sub-stantially, so achieving a profitable product to meet the needs of the equity provider has been well nigh impossible.

The only exception to this has been a few lifetime mortgage providers who fund through their annuity books but even here the equity risk has been reduced by lowering loan to value ratios.

Funding equity release is not straightforward as the term is long and uncertain, payment comes at the end and it calls for a mixture of equity and funding risk

However, as 2010 pro-ceeds, there is some light at the end of the tunnel and perhaps we can envisage the return of the now dormant providers.

The attitude towards housing risk has changed. Yes, the market is fragile and all the normal caveats remain but investors are out there and are willing to look at supporting equity-release provision.

That by itself is not sufficient to allow the market to arise phoenix-like as the long-term funding of the product remains difficult but there are positive signs that surprisingly have come out of past failure.

There are the first tentative steps of a secondary market in lifetime mortgages originated by dormant product providers – it will take a while for the first deals to become public but the ability to buy and sell portfolios will give funding banks more confidence and lead to lower margins.

This in turn will lead to greater competition and new entrants.

But there is one prob-lem on the horizon. The EU Solvency II regime for life companies is due to change shortly.

I am sure the existing major players in equity release will have taken this into account but as the proposed purchasers of lifetime mortgages in the secondary market are small life companies, one has to be concerned about future expansion of trading activities.

Maybe I am an eternal optimist but I see 2010 as a successful year for provi-ders of equity release, if not for the market as a whole, where I am more sanguine. Funding equity-release is not straightforward as the term is long and uncer-tain, payment comes at the end and it calls for a mixture of equity and funding risk

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