Reverse Mortgages and Linked Securities: The Complete Guide to Risk, Pricing, and Regulation

CHAPTER 8

Criteria for Rating U.K. Reverse Mortgage-Backed Securities

Victoria Johnstone, Karen Naylor, Apea Koranteng, Kai Gilkes & Andrea Quirk Analysts, Standard & Poor’s

 

 

 

 

Bond issuance based on the future cash flows generated by reverse mortgage loans is a recent innovation in the U.K. mortgage-backed securities market. Nevertheless, as homeownership and the elderly population steadily expand in the U.K., there is significant scope for growth in the demand for reverse mortgage-type products.

There are more than 10.8 million people in the U.K. over pensionable age, a number forecast to increase dramatically as life expectancy increases and birth rates fall. This projected growth, coupled with overall house price increases, has resulted in a substantial number of elderly borrowers with a significant amount of available equity in their homes. In fact, the Council of Mortgage Lenders recently reported that older homeowners utilize only approximately 1 percent of the £400 billion of equity in their homes. Not surprisingly, market participants expect a significant increase in activity in this asset class, given the extent of untapped home equity among these homeowners.

This chapter sets out Standard & Poor’s approach to rating securitizations of the reverse mortgage asset class.

OVERVIEW OF REVERSE (EQUITY RELEASE) MORTGAGES

A reverse (or equity release) mortgage is a product designed for older homeowners who wish to release a portion of the equity in their property without ...