Innovations in Housing Finance Reverse Mortgages and More

Agenda Historical context of Australian mortgage market Equity release market +Reverse Mortgages +Home Reversion Schemes +Shared Appreciation Mortgages

Historical context of Australian mortgage market Historically a commodity product offering Banking deregulation did little to change this until 1997 Introduction of non-conforming / sub-prime markets altered the traditional landscape of the market Mainstream lenders identified Low Doc as an sector that they could service which now forms approximately 20% of total market

Equity Release Products Early development stages of product life Initially driven by shortfall in the incomes of seniors Expectations that products will become mainstream – but in the context of the overall mortgage market Market will develop beyond the funding requirements of the current seniors generation

Reverse Mortgages Product specifications +Amount based on borrower age / property valuation +No regular repayments (bullet repayment) +A number of draw down and interest rate options +No negative equity guarantee Targeted at seniors market Growing market acceptance and understanding of the product Borrower risks +Inheritance passed on to beneficiaries +Capacity for provider to fulfil obligations for annuity payments +Potential to lose flexibility in age care funding

Reverse Mortgages Funder risks +No negative equity guarantee +Cash flow +Long term funding capability Specific issues +No negative equity guarantee +Cash flow +Long term appetite for securitisation +Repayment speeds +Future reputation impact

Home Reversion Schemes Product targeted at seniors market Product specifications +A percentage of the security property is sold to a provider at a discount rate in return for receiving a loan amount (lump sum or annuity) and life tenancy +No regular repayments (bullet repayment) +As an example 50% of value is sold with an amount between 35% and 60% received by the borrower +Sale & mortgage / sale & lease back Borrower risks +Availability of product dependent upon geographic location +Capacity for provider to fulfil obligations for annuity payments +Incur 100% of maintenance cost while holding less than 100% of security property value +Property appreciation shared with provider that could be beyond a debt capital cost

Home Reversion Schemes Reluctance to offer product by originators driven by product complexity, the UK experience and the failure of a local product provider

Shared Appreciation Mortgages Broader market appeal – first home owner application Recent product release – Rismark / Adelaide Bank, Greenway Capital Product also being offered by some government agencies to assist low income earners into home ownership Product specifications +Introduces a second equity holder via an agreement between the home owner and the provider to share in a percentage in the appreciating value of the property +Improves affordability by reducing the debt component required to fund a property +Repayment (usually) involves some level of leverage +Variable structures that share the risks / returns between the parties +As with equity, no ongoing repayments. Private providers apply a term with a bullet repayment due

Shared Appreciation Mortgages Borrower risks +Availability of product dependent upon geographic location +Loan term may drive repayment that is inconsistent with the time frame of the owner +Product may not improve the owners position in the market +Leveraged repayment amount reduces product attractiveness Funder risks +Security structure likely to hold 2 nd mortgage position behind any debt component +True characteristics of equity does not provide cash flow for operations +Access to capital that has a long term maturity profile +Reputation impacts from leverage structure

Shared Appreciation Mortgages Specific issues +Market acceptance of a product that has a high level of complexity +Limitations on product offering +Product structure being watered down by similar offering from government agencies +Product attractiveness / funding attractiveness matrix +Share on improvements – how is this commercially determined +Reputation – term repayment, leverage, limitations

In Summary Equity release market will grow but likely to remain the territory of niche providers in the short to medium term +Products dont suit the commodity type processes employed by the majors +Potential reputation risks imbedded in these products is a barrier Education of the market and the level of understanding by the market will drive take-up Expectation that capital markets will respond to the needs of the retail market +Develop the product, develop capital market funding +Debt market is looking for yield and different asset classes