UK’s Asset-Rich, Cash-Poor Retirees Revive Niche Debt Product

(Bloomberg) — A rare type of asset-backed security is making a comeback as Britain’s retirees seek to unlock some of the value they’ve built up in their homes during a period of exponential house-price growth.

Four deals bundling equity-release mortgages have hit the credit market in the past 12 months, with market participants expecting to see more sales in the UK and Europe next year. The securities package together this type of loan, which allows older homeowners to borrow a lump sum against the value of their property while continuing to live in it.

After only a handful of deals in the prior decade, a new spate of sales kicked off last year with a vehicle that included more than 5,000 equity release mortgages originated by UK insurer Aviva Plc. Three others followed this year, packaging loans from Lloyds Banking Group Plc as well as specialist lenders More2Life and OneFamily, driven by the rising popularity of equity release among retirees and interest in the ABS from the life insurance industry.

“The main primary driver of the mortgages is an older population that has quite a lot of home equity,” said Michele Bisceglia, co-founder of securitization services firm Five Sigma Finance.

That’s come after a 70% surge in UK house prices over the past fifteen years. Coupled with a period of high inflation and a cost of living crisis, it’s not surprising that equity release — known as a reverse mortgage elsewhere — has become an increasingly mainstream way to supplement retirement.

Borrowers taking the loans accrue interest, which can be repaid in regular installments, though is often paid back when the property is sold — usually after the death of the property owner or if they enter into long-term care.

Lending Volumes

The volume of equity release mortgage lending in the UK reached a peak of £6.2 billion ($8.3 billion) in 2022, according to industry body Equity Release Council. Since then, the mortgage-market blowup caused by former Prime Minister Liz Truss’s mini budget, as well as a period of high interest rates, have subdued the market.

Still, several years of healthy volumes have provided a broad pool of loans ripe for repackaging into ABS. They’ve been finding a ready pool of buyers in the life insurance industry. The underlying assets are long-dated in nature, which, when structured, helps insurers meet Solvency II rules requiring them to have long-dated cash flows to match their liabilities such as life insurance claims.

“While the deals are complex to structure, the matching adjustment technology for insurers is now well known and understood and we have started to see regular public format issuance,” said Adam Craig, a securitization partner at law firm Clifford Chance LLP.

The main challenge of this type of securitization is that cash flows can be unpredictable, according to Moody’s Investor Service analyst Barbara Rismondo. “The underlying collateral is not a standard mortgage with regular principal repayments,” she said, noting that high prepayments by borrowers could complicate the equation, while declining house prices could result in losses for the lender if the amount due exceeds the house price.

The rejuvenated market is already beginning to factor in some of these risks, with one ABS deal this summer introducing features including a reserve fund linked to the house price index and another linked to the speed of the pool’s redemption.

Despite their complex nature, this type of ABS is expected to keep growing, driven by the growth of the underlying equity release market.

“On average people in the UK hold more housing wealth than pensions wealth, highlighting a major mismatch between resources and retirement funding strategies,” according to Jim Boyd, Chief Executive of the Equity Release Council.

ABS Pipeline

There are at least two more ABS deals in the pipeline and the product is seen gaining traction beyond the UK, according to people familiar with the market.

“Equity release mortgages can serve as a good mechanism to help release cash for the stereotypical idea of ‘asset rich, cash poor’ retirees,” said Ashley Thomas, head of structured finance in the UK at ARC Ratings, whose firm rates the securities.

“The UK is leading the way on this, but all of the societies in Europe face the same demographic considerations.”

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