The Adam Smith institute report written by Kevin Dowd suggested that a number of lifetime mortgage lenders could be exposed due to the no negative equity guarantees in place.
Key's Dean Mirfin (pictured) has questioned today’s report claiming the equity release industry is a ‘ticking-time bomb’ owing to properties being undervalued.
The Adam Smith institute report written by Kevin Dowd, professor of finance and economics at Durham University, suggested that a number of lifetime mortgage lenders could be exposed due to the no negative equity guarantees in place.
No negative equity guarantees mean a borrower's debtcan’t exceed the value of their mortgaged property when they sell and repay the loan.
Dean Mirfin, technical director of Key, said: “Why be so gung ho? He [Kevin Dowd] is coming out with a lot of calculations and formulas to say lenders are getting it wrong.
“But we don’t have sight of what lenders do and neither will he.
“Is it scaremongering or speculation? It is in no financial institution’s interest to unnecessarily undertake too much risk on the no negative equity guarantee.
“And it’s the PRA and Solvency II’s responsibility to make sure that doesn’t happen.”
The report said the PRA stress tests in 2017 indicated that a 30% house price fall would lead to losses between £2bn and £3bn.
But Mirfin added: “If there was such a catastrophic house price event is it the equity release sector or mainstream that’s going to have a problem?
“If you’ve got a portfolio of loans that are maturing over many years who knows where property values will be at any given date?
“It isn’t as straightforward.
“The only way to 100% mitigate risk is to not lend at all.”
Fundamentally however he conceded that he couldn’t confirm or deny findings in the report because he isn’t party to how equity release providers value properties.
Despite the extreme conclusions made in the report Mirfin was pleased it raised the issue of the no negative equity guarantee and how the industry would cope with a catastrophic housing market event where house prices fell.
Lenders are currently consulting with the Prudential Regulation Authority on how these risks are being mitigated – so perhaps the report has been released to put these issues at the forefront.
The report also accused the PRA of failing to address this under-valuation problem.
Meanwhile the Treasury Committee was said to have botched its scrutiny of the impact of Solvency II capital requirements on insurance companies.
Following on from the report, at 8pm today BBC Radio 4 will broadcast a programme called The Equity Release Trap with BBC journalist Howard Mustoe.
The synopsis on the programme is as follows: “In recent years equity release has become the fastest-growing way for older homeowners to fund their retirement.
“And it's easy to see why. Customers can borrow tens or hundreds of thousands of pounds secured against their home, with a guarantee they will never owe more than its value.
“This means they can never go into negative equity, no matter how long they live or what happens to house prices. But while the equity release industry has made sure that the customer is shielded from financial risk, it leaves the lenders exposed.
“In the Equity Release Trap, Howard Mustoe investigates whether equity release providers are properly accounting for the guarantees they offer borrowers, and looks into concerns that the industry is making over-optimistic bets on the housing market.
"Plus, Howard speaks to a whistleblower from the regulator at the Bank of England, about accounting rules that could be making insurance companies look healthier than they actually are.”
