A Review of Reverse Mortgages
Quote:
Originally Posted by
fish
The capital raising as I understand it is to enable more money to be lent so that real profits can grow.
Reverse mortgages by their very nature requires capital to be raised so it can be lent against the family home.
Only a small percentage of the value of the family home can be lent so the repayment should never be in doubt.The uncertainty is when that repayment will be made.Until this starts to happen and if they want to grow this they will need money.
Therein lies the risk-but the possible returns on the margin they make is massive.
I have been looking at last years presentation to investors just before the rights issue (presentation dated 9th November) and the FY2017 Annual Review. I have pulled the following information from these sources.
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Q/ What is a Reverse Mortgage?
A/ A reverse mortgage allows home owners over 60 to access a portion of equity in their home. What sets it apart from the usual home loan is that no regular repayments are required because the debt is repaid from the future sale of the property. And importantly, the homeowner continues to own the home. The funds are able to be used for a range of purposes including home improvements, travel, medical insurance and aged care or for extra cashflow in retirement.
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Although the loan is designed to last for as long as you are able to remain in your home, you may repay all or part of it at any time without penalty providing you with flexibility. The amount borrowed plus any interest and fees is repaid when you move permanently from your home.
Reverse Mortgages EOFY2017 |
Australia |
New Zealand |
Finance Receivables |
$516m |
$405m |
Average Loan Size |
$112k |
$97k |
YOY Growth (Finance Receivables) |
19% |
12% |
Notes
1/ Broker distribution network expanding significantly in Australia.
2/ The banking group has an Australian bank facility totalling $600m, drawn to $440m secured over the shares in Australian Seniors Finance (Heartland's Australian reverse mortgage operation).
3/ Total Concentration of credit risk in Australia: $522m. This means that just $6m of receivables in Australia are not reverse mortgages.
4/ Overall finance receivables growth over FY2017 for the whole Heartland business is +14.4%. Australian Reverse Mortgage growth is substantially above this. New Zealand slightly below.
Scale of Mortgages to Property Valuation |
Reverse Mortgage <= 60% LVR |
$885.278m |
Reverse Mortgage 60% <= 80% LVR |
$32.829m |
Reverse Mortgage 80% <= LVR |
$4.641m |
The problem that I have with the Reverse Mortgage Business is that it is highly cashflow negative until the maturing mortgages start to equal the new ones being taken out each year, So eventually this cashflow 'problem' should fix itself. Having new mortgages coming on matched by old mortgages will do it. But if new mortgages coming on exactly equal old mortgages coming off, then that means the business is not growing. Yet Heartland is priced on a 'growth multiple'. So if the business is not growing, the PE ratio should reduce and the share price should fall accordingly.
The way I see it:
1/ If Heartland is priced for growth AND
2/ There is a push to increase reverse the mortgage business to meet shareholder growth expectations THEN
3/ The number/value of new reverse mortgages coming on will always exceed the number/value of old reverse mortgages coming off.
This means the Reverse Mortgage business is set to be perpetually cashflow negative.
SNOOPY
PS I wouldn't feel that 60% of any home value would be classified as a 'small proportion'.