Professor of finance and economics at the University of Durham, Kevin Dowd, takes a critical look at the Equity Release Mortgage sector and finds something really quite worrying:
- There is a scandal brewing in the Equity Release Mortgage sector. This scandal is similar in nature to the Equitable Life scandal of nearly two decades ago – it involves the underestimation of opaque long-term guarantees – but on a larger scale.
- The guarantees at the heart of this problem are the No-Negative Equity Guarantees issued by lenders in the Equity Release market. These guarantee that the maximum repayment on Equity Release loans can be no greater than the property price at the time of repayment.
- This under-valuation problem is a ticking time bomb that could do serious damage to the financial health of the Equity Release sector.
- The regulator, the Prudential Regulation Authority, has made half-hearted efforts to address this under-valuation problem, but has for years failed to rein in firms that used inadequate valuation methods for their No Negative Equity Guarantees.
- A recent Treasury Committee investigation into the UK life industry missed these problems and unwisely set up the Equity Release sector as a poster child to be promoted.
- This Equity Release guarantee scandal raises far-reaching questions not just about the Equity Release sector, but also about the PRA’s supervision of it.