Reverse mortgage rate risk risk (Not a Stutter)
Quote:
Originally Posted by
Snoopy
I don't see a significant cannibalisation threat from Household Capital Pty Ltd to Heartland's Seniors Australian business. These two are the only two active players of any size in the Australian REL market today. I see room for both brands to grow.
The concept of a bank organising their loan portfolio to take into account Reserve Bank mandated risk weightings is nothing new. Depending on how risky a class of loans is seen to be, the Reserve Bank can tailor the required capital to be held by a loaning bank to suit. Home mortgage lending has for a long time been regarded as the least risky form of lending, with the caveat that as the loan value to asset value ratio rises the risk of a home loan does go up. The Reserve Bank accounts for this by demanding a loaning bank has a greater amount of equity capital set aside for a more highly geared mortgage. Why is this of interest to HGH shareholders?
HGH shareholders supply the equity capital for Heartland. Thus if the Reserve Bank changes its asset class loan rating for a category of loans that means the bank must hold more capital for a given loan portfolio size. That extra capital must come from shareholders, either by reducing dividends paid to them or asking shareholders directly for more cash in a capital raising. Both these courses of action have negative implications for the HGH share price.
p19 of the recently released Forsyth Barr report on Heartland highlights just such a risk that I wasn't aware of:
"A significant risk for Heartland's reverse mortgage business is a potential change to the reverse mortgage weight risk used to calculate credit risk of risk weighted assets. Currently Heartlands reverse mortgage weight risks are ~52%"
APRA (the Australian Prudential Regulatory Authority ) had proposed that The RWA value for Reverse Mortgages be increased to 100% (effectively doubling the amount of capital that Heartland would have to hold against them). But after industry consultation, they decided to retain the current RWA ratings in 2019, provided the LVR ratio of the mortgage remained below 60%. In the case of Reverse Mortgages operated by HGH this is almost always the case (contracted LVAR 15% to 40%, so 60% indicates a borrower living until 100 or more, or a property market collapse). ForBarr considers the NZ reverse mortgage market has a similar unresolved risk.
I do not understand why APRA (or RBNZ) would even consider increasing the risk weighting on reverse mortgages. The underlying asset is exactly the same as an ordinary residential mortgage, except if anything the gearing tends to be lower. So if anything it would make more sense to reduce the risk rating for reverse mortgages, not increase it. Ordinary residential mortgages can have an RWA factor as low as 35% (p11 Forbarr report). I do see this as an overblown risk from a Forbarr perspective and this is an important reason why I am more bullish on HGH's prospects than they are.
SNOOPY