I mentioned yesterday that people might now be looking at the creditworthiness of countries rather than the banks themselves.  This is after recent moves to bail out banks by several nations – most notably Ireland.  You see the funny thing is that in some cases the banks are now bigger than the gross domestic product (GDP) of their nations.  Here are a few examples:

Kaupthing Edge has total assets of €53bn – that’s 623% of Iceland’s GDP.

Landsbanki (IceSave) has €32bn – 374% of Iceland’s GDP.

They’re not the only banks in Iceland but between them represent around 1,000% of Iceland’s GDP.  With Glitnir having recently drained the Icelandic government’s coffers, would there be anything left to support other banks?  Of course it’s not quite that simple – if a bank goes bust all of it’s cash deposits don’t suddenly disappear.  On the other hand, this market is all about confidence – or rather a lack of it.

How about Ireland’s bank guarantee?

Bank of Ireland – €183bn – 102% of Ireland’s GDP.

Anglo Irish – €97bn – 54% of Ireland’s GDP.

Just two of the guaranteed banks have assets worth around 150% of GDP.  And let’s not forget that Ireland’s economy has been rather bloated recently due to an astonishing property boom that has now become a property crash.  The guarantee was a very shrewd move but essentially backed by thin air.

Now we turn to another bank popular with savers, ING.  It has assets of around €1,370bn which equated to 290% of the Netherlands GDP.

The UK has a number of huge banks.  RBS, HSBC, Barclays, HBOS, Lloyds TSB, Standard Chartered, Alliance & Leicester, Bradford & Bingley between them have assets of €6,900bn which represents 420% of GDP.

There is a nice list of these figures on the FT website here.

Banks declare each other likely to default due to their excessive leveraging then countries take on their bad debts to support them.  We are simply transferring all the bad debt to the countries instead.  Would I loan money to Iceland or Ireland?  Nope.

Last time on equity release I came to the double conclusion that (a) equity release is expensive so people think its unfair and (b) most of the issues around equity release actually arise from mis-selling practices rather than the product itself.

Today I can’t resist a peek at what’s going on in the US. Not ten years ago either but current practices.

Investor warning issued

In March this year the Financial Industry Regulatory Authority (FINRA) – they describe themselves as the largest non-governmental regulator for all securities firms doing business in the United States – issued an investor warning regarding Reverse Mortgages (US term for equity release).

FINRA says:

Holiday today, poverty tomorrow!

“Reverse mortgages were originally designed as a tool for allowing ageing, low-income homeowners to keep their homes by providing a source of additional monthly income to meet expenses. Now, as lenders are realizing that more and more Americans are retiring and sitting on large pools of home equity, they are beginning to aggressively market reverse mortgages to younger retirees as a way to finance a more extravagant retirement lifestyle than they could otherwise afford. The trouble is, those same homeowners may need their home equity some day for something far more pressing than a vacation, only to find that it has already been spent.”

In the US the minimum age for equity release is usually 62 with some lenders starting at 60. In the UK some start as low as 55 years. And in my last post on this topic we saw Norwich Union advertising equity release as a way to fund a holiday. It’s at times like this that I’m embarrassed to be in marketing. Who sat down one day and said “I know, we’ll encourage old people to fritter away their only real asset!”? Did nobody stop to think how they would feel if somebody did that to their grandparents? By the way, I have nothing against retired people enjoying life. I do have a problem with marketing an expensive last-resort product to people as a casual purchase to fund something frivolous like a holiday.

Forget the holiday, this is a purse snatch

“Be sceptical of Reverse Mortgages as Part of an Investment Strategy,” says FINRA. “If someone urges you to obtain a reverse mortgage to make an investment or purchase an insurance product or a security, such as a deferred annuity, be very sceptical, particularly if they are promising high returns. In essence, they are encouraging you to speculate with your home equity, which you may need for more critical purposes down the road.”

Oh dear, it gets worse. Now we’ve gone beyond advertising equity release for a dream holiday. Now we’re telling people to release their equity in order to buy another (high risk) product that locks away their money so they can’t access it if they need it in a hurry. This predatory practice is known as equity stripping.

Excerpt from a press release, 13 Dec 2007:

“Senate’s concern was raised by lawsuits against Financial Freedom filed in San Diego, California. Such as the one filed on behalf of Ernestine Boach who was allegedly conned into purchasing a reverse mortgage with exceptionally high fees and then sold several insurance and annuity products with the proceeds. The case, Ernestine Boach v. Financial Freedom Senior Funding Corporation was filed in San Diego Superior Court on January 11, 2007 and alleges that the Boach was advised to take out a reverse mortgage from Defendant Financial Freedom Senior Funding Corporation for $171,000 on the home she owned. The proceeds of which were to be used to purchase insurance products, including, a Fidelity and Guaranty deferred annuity with enormous surrender charges for $80,000, and a $44,350 immediate annuity to fund payments on a $250,000 flexible premium life insurance policy (also containing surrender charges).”

An isolated incident? A survey released last year by AARP, formerly known as the American Association of Retired Persons, of more than 1,500 reverse mortgage borrowers found that almost one in 10 were urged to buy other financial products, like annuities.

So it seems all is not well in the world of American equity release. Next time, some investigation a little closer to home.