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mathschoc

Home Equity Loans Trouble looming

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https://www.bbc.co.uk/news/business-44992836

UK pension companies may be harbouring billions of pounds of losses from home equity release loans, according to research seen by the BBC.

Under equity release, homeowners borrow money against their house's value and don't repay anything until it's sold. 

That's fine for the borrower, but there are fears lenders have underestimated how much these loans could cost them. 

At least one firm assumes house prices will rise 4.25% a year. If they don't, firms face losses - or even bailouts.

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Has to be losses not bailouts......that is the risk they take when getting the sums wrong....can see therefore the price increasing in future, paying others to enable to spend the house....

Rewarded for failure, madness.....else everyone would be into doing it.😉

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43 minutes ago, mathschoc said:

https://www.bbc.co.uk/news/business-44992836

UK pension companies may be harbouring billions of pounds of losses from home equity release loans, according to research seen by the BBC.

Under equity release, homeowners borrow money against their house's value and don't repay anything until it's sold. 

That's fine for the borrower, but there are fears lenders have underestimated how much these loans could cost them. 

At least one firm assumes house prices will rise 4.25% a year. If they don't, firms face losses - or even bailouts.

I know a few people in the (corporate & finance) insurance business. They just laugh at this stuff and normally reply with 'I'll be moved on by then'. ie... when the sh1t hits the fan they'll be offski.

Booting 1000's of folks grannies into the streets doesn't get votes. You and I will bail out the system, once again.

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I would have thought the the equity release lenders have to make a estimate of how long people might live for and this metric is more important than the house value.

I understand that equity release loans only have loan-to-value ratios that are quite low 20-25% from memory of someone who did take one out.  The interest on this loan can be paid monthly or simply compounded until the house is sold (usually due to death) and in the latter case the lender has no monthly cashflow from that loan (although there equity stake in the house is growing due to compounding interest well within 100%).

Maybe it surviving this no cash flow period is their real problem?

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Yes they have the government (sorry you and me) and the BoE will bail them out. Do you really think they wont this time?

1 hour ago, Errol said:

This is just farcical. Have none of these companies been paying any attention to what has been going on in the last 15 years? 

 

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39 minutes ago, Pebbles said:

Yes they have the government (sorry you and me) and the BoE will bail them out. Do you really think they wont this time?

 

They will let one go to the wall, to some degree a la Norther Rock. But they will bailout the rest

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2 hours ago, Errol said:

This is just farcical. Have none of these companies been paying any attention to what has been going on in the last 15 years?

Nope. What made you think they would?

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Assume the research they refer to is this Adam Smith Institue report released today.. https://static1.squarespace.com/static/56eddde762cd9413e151ac92/t/5b68633aaa4a9945b5157201/1533567805346/Dowd+Report-Insurance+OnlineCopy.pdf

Anyone know which companies are likely to be most exposed? Interesting to see if their share prices have fallen on the back of this

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42 minutes ago, PropertyMania said:

Assume the research they refer to is this Adam Smith Institue report released today.. https://static1.squarespace.com/static/56eddde762cd9413e151ac92/t/5b68633aaa4a9945b5157201/1533567805346/Dowd+Report-Insurance+OnlineCopy.pdf

Anyone know which companies are likely to be most exposed? Interesting to see if their share prices have fallen on the back of this

Google.

Some life insurers have a bit of exposure.

Most ER is done by specialised lenders wholl take out some hedge.

Again, id doubt any ER os systematically ridky or importznt. If they get tgeur numbers wrong then they are toast. 

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8 hours ago, nightowl said:

I would have thought the the equity release lenders have to make a estimate of how long people might live for and this metric is more important than the house value.

I understand that equity release loans only have loan-to-value ratios that are quite low 20-25% from memory of someone who did take one out.  The interest on this loan can be paid monthly or simply compounded until the house is sold (usually due to death) and in the latter case the lender has no monthly cashflow from that loan (although there equity stake in the house is growing due to compounding interest well within 100%).

Maybe it surviving this no cash flow period is their real problem?

Theres a hedge with ER.

These wont be uncovered positions by the ER company.

ER has been pretty safe (their side) scammy ER policy holder.

The chances of an ER compsny making a loss seems low - they are pretty tight on valuing and percentage theyll lend.

I would guess most 70+ IO mortgage holders will be required to pay for the interest bit of the loan whilst the ER takes on the mortgage. These are not banks, ER will have to put up the entire loan. Id guess the bank who created the io mortgage will be forced by boe to sell it at 80p in pound.

So, Io mortgage of 100k.

Mortgagee has to pay funding cost - say BoE plus 4%. - for as long as they stay in house. So, 5k year. House repod if theybe not the income.

ER buys debt for 80k.

Mortgage co. licks its hole in capital, resolving Never again.....

The people wholl take hit with be theoriginating bank and mortgagee.

Tax payer wil not be touched.

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2 hours ago, spyguy said:

 

The people wholl take hit with be theoriginating bank and mortgagee.

 

Except both are being propped up by extraordinary central Bank policies, so Joe normal taxpayer still pays for it

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17 hours ago, spyguy said:

I would guess most 70+ IO mortgage holders will be required to pay for the interest bit of the loan whilst the ER takes on the mortgage.

Apparently this is optional depending on the scheme the lender offers, plus many have a negative equity clause where should the debt exceed the properties value the lender takes the hit.

Another potential risk is ER becomes the next PPI or Endowment scandal where the borrower wasn't made fully aware that even at 4~5% interest, unpaid compounding will double the debt every 12 or so years and the mis-selling only becomes apparent after the borrower has died.....the lending industry has previous form for this kind of behavior.

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16 hours ago, Si1 said:

Except both are being propped up by extraordinary central Bank policies, so Joe normal taxpayer still pays for it

No.

ER company are outside of the state backing.

Its only deposit taking, regulated banks that are backstopped by the BoE.

 

The way I reckon New ER Inc will go is that they issue bonds/debt to cover the cost of buying the house - at a suitably steep discount.

The debt gets bundled up with others. ER customers pay the IR, which goes into a pool. Each time an ERcustomer dies, the money gets shoved into some low risk bond.

 

 

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1 hour ago, nightowl said:

Apparently this is optional depending on the scheme the lender offers, plus many have a negative equity clause where should the debt exceed the properties value the lender takes the hit.

Another potential risk is ER becomes the next PPI or Endowment scandal where the borrower wasn't made fully aware that even at 4~5% interest, unpaid compounding will double the debt every 12 or so years and the mis-selling only becomes apparent after the borrower has died.....the lending industry has previous form for this kind of behavior.

Well.

ER is simple.

You sign the house away and the ER give you money then and there.

There's no misunderstanding to it.

There's no comeback - if the ER compnay gets it wrong then they dont come back for more.

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13 minutes ago, spyguy said:

Well.

ER is simple.

You sign the house away and the ER give you money then and there.

There's no misunderstanding to it.

There's no comeback - if the ER compnay gets it wrong then they dont come back for more.

Spot on. Mum and Dad got a very small ER loan. The interest rolled up so £18k became £30k when we sold the house 11 years later it was a small percentage of the sale price., as a way of them enjoying a few treats without recourse to us was alright. I think if you examined an ER portfolio many would be like that, a few in the middle and a few who max out and nothing left in the house when sold ,but you would have to live in the house for a long term because the amount you can borrow as a percentage is low.

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1 hour ago, spyguy said:

No.

ER company are outside of the state backing.

Its only deposit taking, regulated banks that are backstopped by the BoE.

 

 

 

I meant indirectly. Any agency involved in finance still benefitted from zirp QE etc

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My Nan took out one of these (unknown to the rest of the family) amount taken out was under a hundred and now she's gone into a home the outstanding balance is over 300k, the interest rate charged on it is over 7% which compared to the base rate is completely unacceptable in my opinion.

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3 hours ago, untakenname said:

My Nan took out one of these (unknown to the rest of the family) amount taken out was under a hundred and now she's gone into a home the outstanding balance is over 300k, the interest rate charged on it is over 7% which compared to the base rate is completely unacceptable in my opinion.

No.

How much do you charge for a loan, which offers not yield and will only be paid some  unknown time in future?

7% is cheap.

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27 minutes ago, spyguy said:

No.

How much do you charge for a loan, which offers not yield and will only be paid some  unknown time in future? 

7% is cheap. 

Just for the semi-financially literate like me, I take it you mean a loan which isn't going towards something that is supposed to be profit making (i.e. a business) and has no repayment deadline.

Also how did it get to 300k is that compound interest charged?

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9 minutes ago, Arpeggio said:

Just for the semi-financially literate like me, I take it you mean a loan which isn't going towards something that is supposed to be profit making (i.e. a business) and has no repayment deadline.

Also how did it get to 300k is that compound interest charged?

Yep.

How much would you charge a stranger  for 100k, secured against a house, with a single payout sometime in the future?

Big asymmetry here. Cusyomer knows if theyve got a life limiting condition, LI does not.

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1 minute ago, spyguy said:

Yep.

How much would you charge a stranger  for 100k, secured against a house, with a single payout sometime in the future? 

Got it, and with rates rising and equity going down not looking so good. It seems in many cases the lenders will end up owning the house 100%.

young-woman-scooping-up-large-pile-of-po

 

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  • 146 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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