Banks that Offer Reverse Mortgage LoansInstitutions offering reverse mortgage loans
Mortgage as a way of living
No wonder then that the technologies and utilities for designing, pricing and managing lifetime assets can also be used on mortgage portfolio investments. This therefore raises the question: why are more actuaries not active in the mortgage and, more generally, in the broader bank world? There may be different ways in which banks and insurers conduct their business.
Acctuaries usually look at the management of insurance policies on a long-term basis and use a cash-flow statement as the primary instrument. Whereas banks also have cash flow projections, these are usually at a high stage (e.g. asset level) so that such large-scale modeling is less workable. As an example, banks are less familiar with analysing at client or even retail levels.
In addition, banks are more focused on the effect of decision making on this year' earnings than on the effect on life value. There are two kinds of family in a particular country: the "fighters" and the "riches". Fighters are from the working classes and earn just enough cash to cover their salaries and mortgage payments.
Wealthy people are better off, living in more generous homes with just as large mortgage loans, and earning a reasonable, safe living. Historically, banks have considered the Richard's to be ideals. Finally, the net interest rate spread (and thus the profit) it gets from the rich is much higher than from the fighters, due to the higher mortgage balance of the rich.
Gradually, the Richard's make joint effort to repay their loans faster than necessary and make periodic payments on their mortgage portfolios. At the other side, the fighters are on the long run. Ultimately, over the entire duration of the agreement, the banks can achieve a higher yield from the wealth, but get a significantly higher rate of investment from the fighters.
From the point of view of ROI, it is therefore better for the banks to woo the fighters rather than the rich. Now banks are aligning with this mindset, providing an option for actuarial staff to help manage mortgage collections and other financial services assets. In this example, actuators can use generalized GLM to analyze the client loyalty properties of the mortgage book.
Equity-release mortgage loans (known in Australia as reverse mortgages) are one of the newer types of financing product on the Aussie mortgage lending markets. You offer the client a credit at a predetermined Loan-to-Value (LTV) rate, ranging from 15% of the value of the property for a 60 year old to 40% for the elderly. Therefore, the most important pecuniary exposure for the institution is that the value of the real estate will be less than the credit balance plus accrued interest.
There are three main determinants of this risk: interest rate, housing price and longevity. Equity-release mortgage loans are geared to the retirement markets and seek to tackle two low interest rate effects: non-attractive bond yields and high home values. A mortgage allows the pensioner to access part of his assets from home.
In contrast to conventional mortgage loans, the structuring and price of equity-release mortgage loans are areas in which actuarial staff have been implicated due to their actuarial capabilities in the area of death. In these early phases of the mortgage equity-release process, however, only relatively low LTV rates are available to clients and the mortgage equities markets are relatively non-competitive.
Consequently, the modeling capabilities of the actuators are not fully exploited. An elaborate price and riskmanagement processes should include, for example, random modeling of interest rate and home price data. Simulation can be used to estimate the likelihood of the borrower incurring a financial penalty, enabling more complicated price structure and design of products to be developed (e.g. interest rate on the loans can be adjusted using the LTV ratio).
Whilst the share-approval mortgage markets remain non-competitive and banks remain cautious, there is little great need for such advanced modeling technologies. However, when it is necessary to better quantify these contingencies, actuators are ideal positioned to help. In addition, there are non-financial exposures associated with capital relief subprime loans (e.g. reputation and mis-selling risks), and the actuarial's ability to manage these exposures can also be used sensibly.
Above are just a few example of the possibilities open to actuators in the financial world. All we have to do now is persuade the banks.