HomeEquity Bank has announced that it has sold about $75 million of reverse mortgages to another Schedule 1 Canadian bank. This is the first-ever sale of reverse mortgages by HomeEquity Bank and the first such transaction in Canada involving reverse mortgages.
One of the reasons it hasn’t been done before is because it was never in their game plan, said HomeEquity Bank president and CEO Steven Ranson. When he and other members of the executive team started to look more closely at comparisons between the Canadian and UK reverse mortgage markets, however, they discovered that the market there for selling these products between originators, funders, life companies and pension funds was a “pretty active” one. If it worked in the UK, they thought, why couldn’t it work here?
“The thing we liked about it was that it was a third source of funding for us. Being a bank, we have access to the GIC market, we have a small, wholesale-oriented funding program where we sell debt to various institutions, and we just felt . . . that this would be an interesting opportunity for us to reduce the risk for our business,” Ranson said. “Also, there might potentially be a customer benefit; If we could fund loans on a capital-efficient basis, we’re looking at whether there’s an impact on customers because, possibly, we could lower rates.”
There are similarities between the Canadian reverse mortgage product and the “equity release loans” as they’re known in the UK, but there are some differences as well, such as the fact that equity release loans have interest rates that are fixed for the life of the loan as opposed to resetting periodically. With the right buyers, Ranson said, there could be an opportunity to explore an interest rate for life in Canada, “which we think customers would be really interested in at this point in the interest rate cycle.”
"This transformative deal paves the way for creating a new market for originating and selling reverse mortgages in Canada, similar to opportunities available to U.S. and U.K. investors," said HomeEquity Bank EVP and Chief Financial Officer Atul Chandra. "It creates a new source of liquidity to support our continuing growth, in addition to further enhancing the profitability of our business."
The sale also creates the opportunity for similar transactions with other potential investors, who Ranson said have an appreciation for what HomeEquity does, how the product works, the nature of their customers, and the nature of their risks.
HomeEquity Bank is a Schedule 1 Canadian Bank and the leader in the reverse mortgage space with around $4 billion in mortgage outstanding. Their size was a significant factor in the decision to sell portfolio loans, because Ranson says that a company would really have to have about $100 million to make it worthwhile. And even though $75 million on $4 billion in mortgages is relatively small, they didn’t want to do too big of a deal upfront.
“It was good to get the first deal done. It sets the precedent for the legal structure, it helps our back office people get comfortable with servicing mortgages, which we’ve never done before,” Ranson said. There’s a lot of moving pieces that go into selling a portfolio, and “starting small is better than going large.”
He adds that HomeEquity would like to do a larger transaction in the $100 million range in the first part of 2020. The expect to originate somewhere in the $900 million range, and they think that selling between 10-20% of that volume would provide a “nice, viable, third liquidity source that we wouldn’t be overly dependent on, but that would have an impact for us.”
HomeEquity was founded over 30 years ago as an annuity-based solution addressing the financial needs of Canadians who want to access the equity of their top asset – their home. HomeEquity Bank is recommended by The Canadian Association of Retired Persons (CARP) and The Royal Canadian Legion.