The global equity release/reverse mortgage market could be worth $56bn by 2035, according to a new report from EY and industry body the European Pensions and Property Asset Release Group. The Global Equity Release Survey Report, now in its third edition, analyses data received from market leaders across 13 countries internationally across Europe, North America and Australia with established or developing equity release markets and explores their growth potential.
Good news for capital markets investors such as life insurers, who want long-dated assets for their liability matching portfolios; currently, the mortgage market is one of only a few that ticks this box.
And some insurers in the UK and US – the two largest equity release/reverse mortgage markets – have plenty of money to put to work thanks to ever-increasing premium receipts from the booming bulk purchase annuity market.
Whether the predictions in the report come true depends on a variety of factors. The US is predicted to grow to $14.2bn from the current $5.5bn, an almost threefold increase. But structural roadblocks currently exist; a common complaint among market participants being that the mortgage insurance premium paid at closing is prohibitive and therefore dampens demand, for example.
That does not mean that the forecast is unachievable, however.
“To achieve strong growth in the US market the reverse mortgage industry needs three things: first, the FHA must lower the initial Mortgage Insurance Premium for the US government insured HECM, which can cost over $24,000. The government guaranteed program will not grow without this change. Next, there needs to be continued product innovation in the non-agency/proprietary market. New production in this market probably exceeds the agency/HECM market in dollar volume, if not units and with each new securitization, the non-agency market is gaining new investors and improving liquidity. Lastly, macroeconomic conditions must continue to cooperate; a significant rise in interest rates or decrease in home prices would derail the industry’s progress,” said Joe Kelly, Partner at New View Advisors.
Interest rates are indeed something of a sword of Damocles hanging over this whole market; more specifically, the 10-year US treasury rate. Michael McCully, Partner at New View Advisors, told Life Risk News last October that, “Agency volume is highly correlated to the 10-year CMT [Constant Maturity Treasury] index because that is what is used to calculate the Expected Rate – the interest rate used to determine borrower proceeds.”
Since rates began rising in 2022, the US has seen reverse mortgage volumes plummet as higher costs put homeowners off from entertaining this option. Indeed, the US Department of Housing and Urban Development’s (HUD) financial year runs from 1st October to 30th September, and it publishes a list of Home Equity Conversion Mortgage (HECM) endorsements on its website; the data for fiscal year 2023-24 makes for rough reading, with only 26,521 endorsements, the lowest observed since 2003, according to data on industry group the National Reverse Mortgage Lenders Association’s website.
And despite the reductions in the US Federal Funds Rate in September, November and December last year, the 10-year CMT has remained fairly flat, which has not helped the market stateside. Which means that origination is not looking much better this year, either; at the end of May, just 19,290 HECM’s had been endorsed in the US, with only four months of the calendar year to go.
Good news may be on the horizon. The US market is waiting for news on when the needle-moving HMBS 2.0 program comes into force; the initiative’s main benefit is the increase of Ginnie Mae’s required buyout percentage to 150% from the current 98%, reducing liquidity concerns. The new program if implemented will provide a tailwind for the primary market as well, and if the stars align in the next decade, the forecast in the report does not sound so wild.
“HMBS 2.0 benefits the primary market because it would give HMBS issuers more assurance they have efficient and reliable financing at the end of the life cycle of each HECM loan. All else equal, this should enable a stronger bid in the primary market,” said Kelly.
“A tripling in the size of the US market is very possible with the changes I mentioned previously, and also because the increase would be from a very small base of approximately 50,000 loans per annum in the entire USA,” he added.
Things seem to be on the up and up in the UK, however. Industry group the Equity Release Council published data in April suggesting that total lending in the UK was up 32% on an annual basis in Q1 to £665m, the fourth successive quarter of growth in that market.
That is not all. Issuance volume set to grow amid rising prepayment risk, a recent report from Moody’s Ratings from early June, suggested that the UK’s new Solvency regime, which now permits “highly predictable” rather than the fixed cash flows that its predecessor Solvency II required, might mean that “the level of structuring required to make equity release mortgages satisfy matching adjustment eligibility criteria may decline, increasing the capital efficiency of equity release mortgage investments.”
Whilst the report raises concerns about the potential for heightened pre-payment risk – a perennial concern for mortgage-backed securities investors – any increase in ERM securitisations could provide a benefit to the UK market as capital can be freed up to deploy into originating more ERMs.
Other countries are also set to contribute significantly to the expected growth of the global ERM market. Canada and Australia both have small, but established markets already, and rank third and fourth respectively in the current league table in terms of size in US dollars; both markets also see securitisation activity, which restarted in Australia in the summer of 2024.
But Spain and Italy are set to go stratospheric. Current volumes are only $0.3bn and $0.1bn, respectively, but these could reach $8.3bn and $5.7bn if the survey respondents are correct. Whether the lofty numbers in the report reflect a realistic level or not, everything is in place for these markets to take off – they just need the capital.
“Spain and Italy may currently be smaller markets, but they already have the regulatory infrastructure and the potential participating firms in place,” said Ben Grainger, Partner at EY.
“However, the main thing lacking from these markets is funding.”
If the headline prediction in the report – that the global equity release market will be worth $56bn by 2035 – comes true, that will mean that it will be three times what it is today. And, while every market will need to grow to contribute, the biggest short-term opportunity, in terms of percentage growth, is in the EU.
“The structural challenges facing ageing homeowners are similar in most western European countries; they are often asset rich yet cash poor. This means that there is a substantial amount of home equity that can be unlocked, however, activity is at very low levels at the moment,” said Grainger.
“In many European countries, the challenge is that without an institutional equity release product, it’s difficult to secure the funding, and without funding, it’s difficult to invest in the marketing and product development. However, if the right funding is in place, there is significant potential for growth across the European equity release market.”