Australia’s bank regulator is urging reverse mortgage lenders to set aside additional capital to cover their exposure to the loans, which is feels are some of the highest risk says Business Day.
The recommendation that banks hold more capital is likely to further pressure the fledgling $2.7 billion reverse-mortgage market, which was caught out last month when the Royal Bank of Scotland decided to shut down its Australian reverse-mortgage business.
While reverse mortgages became more popular in the 1990s, they have accounted for less than 3 per cent per cent of outstanding housing loans.
A recent study by accountants Deloitte found the Australian reverse-mortgage market consisted of nearly 39,000 loans worth a total of $2.7 billion at the end of last year, a growth of 9 per cent over the year. This compares with a 22 per cent growth in 2008 and 33 per cent in 2007.
In a letter to bank executives, Australian Prudential Regulation Authority general manager Charles Littrell said reverse mortgages were among the most risky loans even though they were secured by properties.
”The management of a reverse-mortgage portfolio can present challenges due to the long and uncertain maturity profile of the assets,” Mr Littrell said in the letter. ”There are also a number of unique operational, legal and reputational risks associated with reverse mortgages.”