Reverse mortgage-style products poised to expand in Europe

KBRA report notes that UK equity release mortgages are performing strongly, which could lead to expansion across Europe

Reverse mortgage-style products in the United Kingdom – known as “equity release mortgages” (ERM) – are performing strongly and are poised to expand further across Europe, according to a report and announcement from the UK division of KBRA, an international credit rating agency.

“[Aging] populations have resulted in an increasing number of retirees with meaningful value within their homes turning to ERMs for a variety of purposes, including leveraging the product to age in place,” the announcement states. “KBRA has received an increasing number of inquiries about ratings for [securitization] transactions containing ERM collateral from both originators and investors.”

The agency expects ERM-backed securities to continue rising in the UK, with room for expansion. Growth for the ERM market is tied to favorable demographic trends, as senior homeowners across the globe saw from historic levels of home price appreciation during the pandemic.

“House price appreciation in the UK has provided a large store of wealth available as collateral for ERM lending,” the report states.

Maturation of ERM products is factor contributing to the acceleration of product securitization, which has led to the establishment of a European trade association dedicated to developing the market.

ERM performance across the UK has also been consistent, according to the report.

“The performance of recent UK transactions has generally been within expectations,” the report states. “Cumulative losses in recent transactions have tended to be very low to nonexistent, while credit enhancement has remained relatively stable or grown over time.”

Late last year, the UK’s reverse mortgage-equivalent trade association, the Equity Release Council (ERC), found that between July and September 2022, a record 13,452 new equity release plans were taken out by homeowners ages 55 and older.

That represents an 8% increase in the total number of equity release plans — also known as “lifetime mortgages” or “retirement mortgages” — which also surpassed the previous record of 12,891 set in Q4 2018.

Canada has also been a source of reverse mortgage growth in North America. Canadian industry leader HomeEquity Bank announced in January that its total reverse mortgage portfolio surpassed $6 billion CAD (roughly $4.4 billion USD) in 2022, largely due to origination volume growth surpassing $1 billion CAD (approximately $745 million USD) for the second consecutive year.

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