Equity Release mortgage securitisations carry a range of benefits for institutional investors when compared to standard residential mortgage-backed securities (RMBS).
Reverse mortgage securitisations involve deferred payment of interest and principal along with low loan-to-value security risk, often offering higher risk-adjusted yields compared to standard RMBS. Since reverse mortgages are typically not repaid until the borrower sells the home, moves out permanently, or passes away, the risk of early repayment (which can affect returns in RMBS) is generally lower, making cash flow more predictable. Another is that reverse mortgages usually have longer durations because they are not amortising monthly like typical mortgages, which can be appealing for investors seeking longer-term investments with predictable cash flows.
Despite these features and benefits of reverse mortgage securitisations, however, institutional investors seeking exposure to this market have largely only been able to play in the US market, because there has been so little securitisation issuance in other markets. (The UK equity release market is funded by life insurers and pensions that hold the loans to maturity.)
A new door has recently opened – or, rather, re-opened – in Australia, however.
At the end of July, Melbourne-based non-bank equity release mortgage originator Household Capital announced that it had completed its first rated reverse mortgage securitisation transaction. The firm’s HHC 2024-1 RMBS Trust is a AU$263m mortgage pool rated by Moody’s; it is the firm’s inaugural rated securitisation since it began originating loans back in 2019.
Joshua Funder, CEO & Managing Director at Household Capital, says that a wide range of international investors bought the rated notes.
“The portfolio was able to fit the mandates of different types of investors. Four groups conducted due diligence on the deal – life insurers, banks, credit funds, and Australian superannuation funds – and the investors came from both home and abroad,” he said.
The reverse mortgage securitisation market in Australia has been moribund for a while. The first transaction was back in 2006 when Fitch rated the Emerald Reverse Mortgage Series 2006-1 Trust from Bluestone but then the Global Financial Crisis put the securitisation market on hold.
Since then, several major developments have supported the regrowth of Australian reverse mortgages as an equity release retirement funding sector distinct from the “last resort” reverse mortgage sector up to the GFC.
First was the passing of the Consumer Credit Legislation Amendment (Enhancements) Bill 2012 by the country’s lawmakers. The bill provided a swath of consumer protections which meant Australia has among the lowest LTVs in the world as well as, protecting both customers and term investors from negative equity risk. These protections were in addition to standard non-recourse lending, guaranteed occupancy and a No Negative Equity Risk Guarantee (NNEG).
Second, the Australian government held a Royal Commission into the Banking, Finance and Superannuation sectors which found no issue with the performance of the heavily regulated reverse mortgage credit product, in sharp contrast to most other financial and credit products on the market at the time.
Finally, the Australian Securities and Investments Commission (ASIC) issued a review of reverse mortgage lending in August 2018 which found no material breach of the applicable consumer credit law for reverse mortgages.
Meanwhile, the big bank providers in Australia withdrew from originating reverse mortgages by 2019.
“Banks in Australia have generally pulled out of what they see as non-core areas in recent years,” said Funder. “They found it difficult to scale the responsible origination of reverse mortgages so it’s not a priority for them at the moment.”
So, most of the origination in the primary market in the past few years has been provided by non-bank lenders. And the good news for those watching the market is that activity has returned; research published by IBIS World in October 2023 suggests that there has been an upswing in revenue in the past five years, growing at a CAGR of 4.6% to reach an estimated AU$442.5m last year. It expects revenue to jump a massive 18.5% this year, “as demand races ahead with seniors looking to access their home equity to push through intense inflationary pressures.”
Good news for investors indeed – the bigger the primary market, the more potential securitisations in future, and therefore more investable options outside of the US market.
But it is those consumer protections enacted in 2012 that continue to underpin the re-emergence of the securitisation market.
First, the loan to value starting point is just 20% for a 60-year-old, which lowers security risk (the risk that the value of the home becomes less than the size of the outstanding mortgage). Second, the variable rate model means that the Australian homeowner retiree won’t get locked into an unaffordable higher fixed rate product, which reputational risk and security risk. Third, there is a lower average weighted life of the product which means variable rate equity release mortgages provide a flexible medium-term funding and housing solution with almost all discharge being voluntary.
“There are significantly reduced security and customer risks in the portfolio we originate, which is just beginning to be understood both at home and outside Australia,” said Funder.
“The way Australian retirees access the wealth in their homes using a Household Loan is different from similar approaches elsewhere. Our portfolio reflects a series of key differentiators of Australian equity release mortgages: higher voluntary discharge, shorter duration, lower negative equity risk and higher cashflows. These features of our market enable us to provide investors with securitisation offerings that can be rated strongly, which is critical to the growth of this market.”
A common barrier to growth in equity release mortgage markets is that awareness – or lack of it. The 2023 Global Equity Release Survey, published in January this year by EY and the European Pensions and Property Asset Release Group, cited this as the second biggest barrier to growth, behind funding levels.
Funder says it’s the same situation in Australia, and solving for this would be something of a silver bullet, which in turn would continue to provide global investors with a consistent supply of securitisation products.
“Awareness of wealth in the home and access to wealth in the home for long term retirement needs is the major barrier to growth in our market,” he said.
“Our model – the regulations and customer protections – is what is providing the opportunity for firms like ours to structure attractive products for investors. It’s a point of differentiation for us and we think that the equity release mortgage securitisation market in Australia is finally at a place where it can truly take off.”