Innovations in Housing Finance Reverse Mortgages and More

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Innovations in Housing Finance Reverse Mortgages and More

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Title: Innovations in Housing Finance Reverse Mortgages and More


1
Innovations in Housing FinanceReverse Mortgages
and More
2
Agenda
  • Historical context of Australian mortgage market
  • Equity release market
  • Reverse Mortgages
  • Home Reversion Schemes
  • Shared Appreciation Mortgages

3
Historical context of Australian mortgage market
  • Historically a commodity product offering
  • Banking deregulation did little to change this
    until 1997
  • Introduction of non-conforming / sub-prime
    markets altered the traditional landscape of the
    market
  • Mainstream lenders identified Low Doc as an
    sector that they could service which now forms
    approximately 20 of total market

4
Equity Release Products
  • Early development stages of product life
  • Initially driven by shortfall in the incomes of
    seniors
  • Expectations that products will become mainstream
    but in the context of the overall mortgage
    market
  • Market will develop beyond the funding
    requirements of the current seniors generation

5
Reverse Mortgages
  • Product specifications
  • Amount based on borrower age / property valuation
  • No regular repayments (bullet repayment)
  • A number of draw down and interest rate options
  • No negative equity guarantee
  • Targeted at seniors market
  • Growing market acceptance and understanding of
    the product
  • Borrower risks
  • Inheritance passed on to beneficiaries
  • Capacity for provider to fulfil obligations for
    annuity payments
  • Potential to lose flexibility in age care funding

6
Reverse Mortgages
  • Funder risks
  • No negative equity guarantee
  • Cash flow
  • Long term funding capability
  • Specific issues
  • No negative equity guarantee
  • Cash flow
  • Long term appetite for securitisation
  • Repayment speeds
  • Future reputation impact

7
Home Reversion Schemes
  • Product targeted at seniors market
  • Product specifications
  • A percentage of the security property is sold to
    a provider at a discount rate in return for
    receiving a loan amount (lump sum or annuity) and
    life tenancy
  • No regular repayments (bullet repayment)
  • As an example 50 of value is sold with an amount
    between 35 and 60 received by the borrower
  • Sale mortgage / sale lease back
  • Borrower risks
  • Availability of product dependent upon geographic
    location
  • Capacity for provider to fulfil obligations for
    annuity payments
  • Incur 100 of maintenance cost while holding less
    than 100 of security property value
  • Property appreciation shared with provider that
    could be beyond a debt capital cost

8
Home Reversion Schemes
  • Reluctance to offer product by originators driven
    by product complexity, the UK experience and the
    failure of a local product provider

9
Shared Appreciation Mortgages
  • Broader market appeal first home owner
    application
  • Recent product release Rismark / Adelaide Bank,
    Greenway Capital
  • Product also being offered by some government
    agencies to assist low income earners into home
    ownership
  • Product specifications
  • Introduces a second equity holder via an
    agreement between the home owner and the provider
    to share in a percentage in the appreciating
    value of the property
  • Improves affordability by reducing the debt
    component required to fund a property
  • Repayment (usually) involves some level of
    leverage
  • Variable structures that share the risks /
    returns between the parties
  • As with equity, no ongoing repayments. Private
    providers apply a term with a bullet repayment
    due

10
Shared Appreciation Mortgages
  • Borrower risks
  • Availability of product dependent upon geographic
    location
  • Loan term may drive repayment that is
    inconsistent with the time frame of the owner
  • Product may not improve the owners position in
    the market
  • Leveraged repayment amount reduces product
    attractiveness
  • Funder risks
  • Security structure likely to hold 2nd mortgage
    position behind any debt component
  • True characteristics of equity does not provide
    cash flow for operations
  • Access to capital that has a long term maturity
    profile
  • Reputation impacts from leverage structure

11
Shared Appreciation Mortgages
  • Specific issues
  • Market acceptance of a product that has a high
    level of complexity
  • Limitations on product offering
  • Product structure being watered down by similar
    offering from government agencies
  • Product attractiveness / funding attractiveness
    matrix
  • Share on improvements how is this commercially
    determined
  • Reputation term repayment, leverage,
    limitations

12
In Summary
  • Equity release market will grow but likely to
    remain the territory of niche providers in the
    short to medium term
  • Products dont suit the commodity type processes
    employed by the majors
  • Potential reputation risks imbedded in these
    products is a barrier
  • Education of the market and the level of
    understanding by the market will drive take-up
  • Expectation that capital markets will respond to
    the needs of the retail market
  • Develop the product, develop capital market
    funding
  • Debt market is looking for yield and different
    asset classes
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