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  1. #11991
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    Quote Originally Posted by iceman View Post
    I recently assisted friends parents getting a REL from Heartland. I believe they are typical REL borrowers, mid-late 70s and needed money for small renovations and a new car.
    Heartland sent out very good documentation to explain the risks and details of the loans.
    In their case, if house prices do not rise at all over the next 20 years, interest rates stay at 7.5% and both of this old couple live beyond 104 years old, Heartland will suffer as the equity would be gone in the house. However, if house prices average 2.5% increase over that time, the equity would pretty much stay unchanged (slightly deteriorate).

    The average age of a Heartland's new REL customer is 73 on last numbers I saw, average new loan size is $45k and the medium loan term to date is just over 8 years.

    Below are Heartland's rules for LVR
    Age of youngest borrower Maximum % of home loan's value available
    65 20%
    70 25%
    75 30%
    80 35%
    85 40%

    I remain steadfast in my view that these loans are low risk for HGH.
    Quote Originally Posted by Balance View Post
    My take is that there could be a real risk that these reverse mortgages could be problematic in years to come - combination of property prices falling over the next 5 years even while HGH's loans levels keep increasing with the compounding interest payments.

    * Property prices in Sydney & Melbourne have gone up 80% since 2011. The factors which led to the explosive price increases are either static (interest rates, wages growth) or declining (housing affordability, investors' appetite, banks' appetite to lend, speculative fund flows from Asia etc). I know of one recent sale in Sydney where the sale of a unit went through at 15.6% below CV - scary! In Auckland, I have been offered properties by desperate real estate agents at 15% below CV already in recent months.
    Divergent views of the risk of reverse mortgages from Iceman and Balance.

    Time to run through a few scenarios to allow Balance to maintain hiser cool?

    Example 1: 85 year old couple take out a 40% REL loan at an 8% interest rate for ten years. House price falls 20% over first five years of loan then flatlines for the next 5 years. We will say the house is worth $1m at the start of this process to keep the numbers easier.

    1/ Value of property at the end of the loan period is $800,000.
    2/ Loan taken out $400,000.
    3/ Interest accrued over first year: 0.08 x $400,000 = $32,000. The interest accrued over a ten year period is listed below:

    Cumulative Loan Capital at Start of Year Interest Accrued over Year
    Year 1 $400,000 $32,000
    Year 2 $432,000 $34,560
    Year 3 $466,560 $37,245
    Year 4 $503,805 $40,304
    Year 5 $544,109 $43,529
    Year 6 $587,638 $47,011
    Year 7 $634,649 $50,772
    Year 8 $685,421 $54,834
    Year 9 $740,255 $59,220
    Year 10 $799,475 $63,958
    Year 11 $863,433

    Loss for Heartland over loan period: $800,000 - $863,433 = $63,433

    Example 2: 65 year old couple take out a 30 year 20% REL loan at an 8% interest rate for the next ten years and a 6% interest rate for the ensuing 20 years. House price falls 20% over first five years of loan then flatlines for the next 5 years, then increase by 1% per year over the subsequent 20 years. We will say the house is worth $1m at the start of this process to keep the numbers easier.

    1/ Value of property at the end of the loan period is:

    $800,000 x (1.01)^20 = $976,152

    2/ Loan taken out $200,000.
    3/ Interest accrued over first year: 0.08 x $200,000 = $16,000. The interest accrued over a thirty year period is listed below:

    Cumulative Loan Capital at Start of Year Interest Accrued over Year
    Year 1 $200,000 $16,000
    Year 2 $216,000 $17,280
    Year 3 $233,280 $18,662
    Year 4 $251,942 $20,155
    Year 5 $272,097 $21,768
    Year 6 $293.865 $23,509
    Year 7 $317,374 $25,390
    Year 8 $342,764 $27,421
    Year 9 $370,185 $29,615
    Year 10 $399,800 $31,984
    Year 11 $431,784 $25,907
    Year 12 $457,691 $27,461
    Year 13 $485,153 $29,109
    Year 14 $514.262 $30,856
    Year 15 $545,118 $32.707
    Year 16 $577,825 $34,670
    Year 17 $612,495 $36,750
    Year 18 $649,245 $38,955
    Year 19 $688,200 $41,292
    Year 20 $729,492 $43,770
    Year 21 $773,262 $46,396
    Year 22 $819,658 $49,180
    Year 23 $868,838 $52,130
    Year 24 $920,968 $55,258
    Year 25 $976,226 $58,573
    Year 26 $1,034,800 $62,088
    Year 27 $1,096,888 $65,813
    Year 28 $1,162,701 $69,762
    Year 29 $1,232,463 $73,948
    Year 30 $1,306,411 $78,385
    Year 31 $1,384,756

    Loss for Heartland over loan period: $976,152 - $1,384,756 = $408,604


    SNOOPY
    Last edited by Snoopy; 16-02-2019 at 09:31 AM.
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  2. #11992
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    Quote Originally Posted by winner69 View Post
    Jeez ...we need to go back to July 2016 to have a share price this low ....thats some time sgo
    With the benefit of hindsight, I think that HGH's restructuring to spin the Reverse Mortgage (A$640m) out of HBL may have contributed to the sharper focus on this perceived higher risk business in the face of Aussie falling house prices?

    Would have been better to bite the bullet last year and just do the capital raise then.

    All we need now is for the RBA to require more capital into the Reverse Mortgage business and it's going to be double ouch?

    Not a happy holder but happy to support a pro-rata capital raise.

  3. #11993
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    Quote Originally Posted by Snoopy View Post
    Divergent views of the risk of reverse mortgages from Iceman and Balance.

    Time to run through a few scenarios to allow Balance to maintain hiser cool?

    Example: 85 year old couple take out a 40% REL loan at an 8% interest rate for ten years. House price falls 20% over first five years of loan then flatlines for the next 5 years. We will say the house is worth $1m at the start of this process to keep the numbers easier.

    1/ Value of property at the end of the loan period is $800,000.
    2/ Loan taken out $400,000.
    3/ Interest accrued over first year: 0.08 x $400,000 = $32,000. The interest accrued over a ten year period is listed below:

    Cumulative Loan Capital at Start of Year Interest Accrued over Year
    Year 1 $400,000 $32,000
    Year 2 $432,000 $34,560
    Year 3 $466,560 $37,245
    Year 4 $503,805 $40,304

    SNOOPY
    I get around $800,000 at the end of 10 years in cumulative loan value.

    So if house prices do nothing but flat line, HGH is going to have to do capital raising to top up its capital base to support this business - on top of raising more funds to keep feeding the reverse mortgagors.

    If house prices drop by more than 20% over the 10 years, HGH is under water.

    Now you have me worried!

  4. #11994
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    Quote Originally Posted by Balance View Post
    With the benefit of hindsight, I think that HGH's restructuring to spin the Reverse Mortgage (A$640m) out of HBL may have contributed to the sharper focus on this perceived higher risk business in the face of Aussie falling house prices?

    Would have been better to bite the bullet last year and just do the capital raise then.

    All we need now is for the RBA to require more capital into the Reverse Mortgage business and it's going to be double ouch?

    Not a happy holder but happy to support a pro-rata capital raise.

    I think you are right there Balance


    The new Group structure makes Heartland more 'risky' as not seen as a bank to the same extent. (the cahade of being a bank served its purpose early on)


    Maybe the market per now sees them more a 'finance company' and is rating them accordingly (hopefully not to the same extent as the likes of Flexigroup ....just joking)
    “ At the top of every bubble, everyone is convinced it's not yet a bubble.”

  5. #11995
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    Quote Originally Posted by Balance View Post
    I get around $800,000 at the end of 10 years in cumulative loan value.

    So if house prices do nothing but flat line, HGH is going to have to do capital raising to top up its capital base to support this business - on top of raising more funds to keep feeding the reverse mortgagors.

    If house prices drop by more than 20% over the 10 years, HGH is under water.

    Now you have me worried!
    Balance, the two examples I have quoted are extreme examples of REL holders taking up the maximum loans. Yet the average loan period is just 8 years. After 8 years in Example 1, Heartland can keep all their profits:

    $800,000 - $740,455m = $59.545m

    That figure is more indicative of the risk than the extreme I quoted. I have also assumed that our REL holders take out the maximum loan they are allowed. This is not what happens in practice. Personally I don't have an issue with how these REL loans are set up. from an overall perspective.

    You have also said that Heartland may need to raise capital as a provision to take into account these future risks. Yet Heartland have already done this. That change came in the change in accounting standards last year where Heartland was required to provision for statistically predicted losses at the start of the loan period and not wait until a loan is actually impaired to account for the problem. Heartland think such provisioning is ridiculous and that when these REL loans mature they will have to write these provisions back. I am not so sure. But the point is, the provision for bad debts attached to these REL loans is on the Heartland books right now.

    SNOOPY
    Last edited by Snoopy; 16-02-2019 at 08:33 PM.
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  6. #11996
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    65 20%
    70 25%
    75 30%
    80 35%
    85 40%

    makes sense to me. I don’t think people draw the whole amount it is used for a few luxuries.
    Looks less risky that a table mortgage for the bank
    Last edited by alex f; 16-02-2019 at 12:09 PM.

  7. #11997
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    Thanks, Snoopy.

  8. #11998
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    Quote Originally Posted by alex f View Post
    Do they lend as high as 40%?. I thought most were 10-15%
    From memory their reverse mortgage calculator will allow you to borrow 50% but that’s when you reach 99 years of age.

    I think it would be fair to say that Heartland do not take undue risks.
    Last edited by Brain; 16-02-2019 at 04:23 PM.

  9. #11999
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    Quote Originally Posted by Brain View Post
    From memory their reverse mortgage calculator will allow you to borrow 50% but that’s when you reach 99 years of age.

    I think it would be fair to say that Heartland do not take undue risks.
    Jiroemon Kimura of Kyoto in Japan died in June 2013 aged 116. He was still living in his own home at the time. I predict significant problems for Heartland should they expand their REL business into the Japanese market.

    SNOOPY
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    Quote Originally Posted by Snoopy View Post
    Jiroemon Kimura of Kyoto in Japan died in June 2013 aged 116. He was still living in his own home at the time. I predict significant problems for Heartland should they expand their REL business into the Japanese market.

    SNOOPY
    Yes but interest rates for home loans in Japan are around 1%. Heartland could still have charged Mr Kimura an exorbitant 4% compounding for 17 years and still get the money back.

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