Reverse Residential Mortgage Risk
Quote:
Originally Posted by
iceman
So I think these loans are very low risk at the moment but certainly something to watch out for and HBL should probably be providing us with more information in this regard in their reports.
I have always found Heartland's disclosure compares favourably with what is disclosed by other banks.
If you look in the Financial Report 2017, note 26 (Capital Adequacy), you will find the requirements of the Basel 3 standards that must be complied with, including what happens in times of 'economic stress'.
In note 26c, the relative risks of the entire loan book, as estimated by 'relative risk rating' is there. I will reproduce some of that information below in a comparison chart that I have done to compare the relative risk of a Heartland 'Property Investment Mortgage' with a Heartland 'Reverse Residential Mortgage'. These risks vary according to the loan to value ratio (LVR) of each type of loan.
Average Risk Weighting |
Loan to Value Ratio |
Property Investment Mortgage |
Reverse Residential Mortgage |
>100% |
100% |
Not Allowed |
100%> and >90% |
90% |
|
90%> and >80% |
70% |
|
>80% |
|
100% |
80%> |
40% |
|
80%> and >60% |
|
80% |
60%> |
|
50% |
The total property investment mortgage book comes to $46.609m, much smaller than the residential reverse mortgage book of $922.748m. Heartland isn't known for conventional property loans. So this property investment could be the tail of when Heartland's ancestors did do residential conventional mortgages from the old building society days?
Looking at the same table we can see that the reverse mortgages with an LVR <60% total $885.278m.
So $885.278m/$922.748m = 96% of all the reverse mortgages on the books.
That means that if every properties` underlying backing value dropped by 40%, then Heartland would still recover in full 96% of their reverse mortgage loans. Only the remaining 4% of loans would be wiped out (total $37.470m). With shareholder capital of $565.595m on the balance sheet, I don't think such a loss (a fairly extreme stressed scenario) would 'break the bank'.
SNOOPY