Innovations in Housing FinanceReverse Mortgages and More

Agenda

• Historical context of Australian mortgage market

• Equity release market

+ Reverse Mortgages

+ Home Reversion Schemes

+ Shared Appreciation Mortgages

Historical context of Australian mortgage market

• Historically a commodity product offering

• Banking deregulation did little to change this until 1997

• Introduction of non-conforming / sub-prime markets altered the traditional landscape of the market

• Mainstream lenders identified Low Doc as an sector that they could service which now forms approximately 20% of total market

Equity Release Products

• Early development stages of product life

• Initially driven by shortfall in the incomes of seniors

• Expectations that products will become mainstream – but in the context of the overall mortgage market

• Market will develop beyond the funding requirements of the current seniors generation

Reverse Mortgages

• Product specifications + Amount based on borrower age / property valuation+ No regular repayments (bullet repayment)+ A number of draw down and interest rate options + No negative equity guarantee

• Targeted at seniors market

• Growing market acceptance and understanding of the product

• Borrower risks+ Inheritance passed on to beneficiaries+ Capacity for provider to fulfil obligations for annuity payments+ Potential to lose flexibility in age care funding

Reverse Mortgages

• Funder risks+ No negative equity guarantee+ Cash flow+ Long term funding capability

• Specific issues + No negative equity guarantee+ Cash flow + Long term appetite for securitisation+ Repayment speeds+ Future reputation impact

Home Reversion Schemes

• Product targeted at seniors market

• Product specifications+ A percentage of the security property is sold to a provider at a

discount rate in return for receiving a loan amount (lump sum or annuity) and life tenancy

+ No regular repayments (bullet repayment)+ As an example 50% of value is sold with an amount between 35% and

60% received by the borrower+ Sale & mortgage / sale & lease back

• Borrower risks+ Availability of product dependent upon geographic location+ Capacity for provider to fulfil obligations for annuity payments+ Incur 100% of maintenance cost while holding less than 100% of

security property value+ Property appreciation shared with provider that could be beyond a

debt capital cost

Home Reversion Schemes

• Reluctance to offer product by originators driven by product complexity, the UK experience and the failure of a local product provider

Shared Appreciation Mortgages

• Broader market appeal – first home owner application

• Recent product release – Rismark / Adelaide Bank, Greenway Capital

• Product also being offered by some government agencies to assist low income earners into home ownership

• Product specifications+ Introduces a second equity holder via an agreement between the home

owner and the provider to share in a percentage in the appreciating value of the property

+ Improves affordability by reducing the debt component required to fund a property

+ Repayment (usually) involves some level of leverage+ Variable structures that share the risks / returns between the parties+ As with equity, no ongoing repayments. Private providers apply a term

with a bullet repayment due

Shared Appreciation Mortgages

• Borrower risks+ Availability of product dependent upon geographic location+ Loan term may drive repayment that is inconsistent with the time

frame of the owner+ Product may not improve the owner’s ‘position in the market’+ Leveraged repayment amount reduces product attractiveness

• Funder risks+ Security structure likely to hold 2nd mortgage position behind any debt

component+ True characteristics of equity does not provide cash flow for

operations+ Access to capital that has a long term maturity profile+ Reputation impacts from leverage structure

Shared Appreciation Mortgages

• Specific issues+ Market acceptance of a product that has a high level of complexity+ Limitations on product offering+ Product structure being watered down by similar offering from

government agencies+ Product attractiveness / funding attractiveness matrix+ Share on improvements – how is this commercially determined + Reputation – term repayment, leverage, limitations

In Summary

• Equity release market will grow but likely to remain the territory of niche providers in the short to medium term+ Products don’t suit the commodity type processes employed by the

majors+ Potential reputation risks imbedded in these products is a barrier

• Education of the market and the level of understanding by the market will drive take-up

• Expectation that capital markets will respond to the needs of the retail market+ Develop the product, develop capital market funding+ Debt market is looking for yield and different asset classes