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Wholesale changes

The recession has had a noticeable effect on the equity-release market, with some big names withdrawing, but many commentators now believe providers have an opportunity to overhaul their products and the way they fund their lending.

Falling house prices and a freeze in wholesale funding markets have resulted in several big players pulling out of the sector. Over the past year, Bradford & Bingley, Standard Life Bank and Bristol & West, all of which used wholesale markets to fund new business, pulled out of the sector.

In July, equity-release firm In Retirement went into administration after being unable to secure funding and, in a further blow to the market, Coventry Building Society said last month it would be withdrawing its Godiva range of lifetime mortgages and would not replace them in the foreseeable future.

“Equity release still has a future and a sustainable one. We are all aging and equity release is being used now to help with school fees and first-time buyers.”

Kevin Duffy, MortgageForce

First Action spokesman Jonathan Cornell says the departure of some big players will have a significant impact on the supply and choice of equity-release products.

He says: “The more players that leave the market, the harder it will be for borrowers to find equity-release mortgages. The remaining players will have only a limited appetite to increase their market share.”

Just Retirement head of research Nigel Barlow says there may be some short-term confusion or concern caused by the withdrawal of these providers but the long-term demand for equity release is unlikely to be affected. He cites the usual combination of a future wave of retirements, high levels of debt, lower pension pots and changing demands for care.

Mortgage Force managing director Kevin Duffy agrees that short-term problems will not affect the future of a growing market. He says: “It still has a future and a sustainable one. We are all aging and equity release is being used now to help with school fees and first-time buyers.”

But the companies in the equity-release market and their methods of funding, could be quite different in future.

Barlow says the financial crisis has highlighted the fact that relying on funding from the wholesale markets is not the best model for equity-release providers.

He says: “Potential providers will need to consider thoroughly if the particular characteristics of equity release fit with their business models. Typically, exposure to longevity risk is a specialism of life insurance providers, so there is an obvious match.”

He says banks and building societies may find their interest and expertise is best used in other areas, particularly when the equity-release market is equivalent to a very small proportion of the mortgage market.

He predicts more life insurers will enter the equity-release market as they have a business model and source of funding more suited to the business.

Cornell says: “I think funding equity-release mortgages through wholesale funding is going to be challenging for the foreseeable future. I think funding from life insurance companies as an investment of their annuity books makes sense until there are other funding sources available.”

Ship director general Andrea Rozario considers that funding through the wholesale markets does have a future. She says the market will need to return to more economically stable times before the sector decides how big a part it will play.

She says: “Funding via annuity books is certainly something that some big Ship members choose to do, so this may develop further. In addition, the industry as a whole is researching other potential sources of funding as part of our work following the Ship discussion paper and we will report on this in due course.”

Home & Capital director Simon Little does not think the readjustment of the market is negative.

He says: “In many ways, this is a healthy development while the market readjusts to the new business conditions and providers and advisers examine their business models.”

Equity Release Solicitors Alliance chairperson Claire Barker says providers will have to be innovative with product design and funding to move the sector onwards.

She says: “It will inevitably be a challenging time as funding seems to be becoming more of an issue but as we climb out of recession, industry stakeholders need to take the Ship discussion paper forward and try to implement changes to the sector to allow necessary growth, even if that means comp- letely shaking up the prod- ucts as we know them.”

Little says: “In three years, we may well look back at this time as the catalyst that injected growth and innovation into the market. I am certainly very optimistic about the long-term future of this market.”

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