Page 400 - 2019 6th AFIS & ASMMA

was a pretty salient point. So we have about seven minutes left to have
a conversation, and I want to talk about complexity from two angles.
The first is from the consumer side and it gets to a point Tyler would
have made in his slides, had he gotten to them, and a point that Jun
Han made, which is about thinking about using shared appreciation
mortgages. And this is something economists really like as an idea. So the
idea is, you, homeowner can reduce the cost of owning a home on a cash
flow basis, in exchange for giving up some of the upside, if you sell your
house with appreciation.
And when I hear that, I think of a conference I was at in 2008. It was
just before things went completely to hell. And if I remember who it
was, I think it was a Harvard Law professor, who was a senator from
Massachusetts and running for president of the United States, asked the
audience, which was made up of Harvard, Yale, and MIT professors, and
it was a conference at Harvard Business School. “How many of you have
an adjustable rate mortgage?” And about half the people in the room
raised their hand. And then she said, “How many of you know whether
what the foundational interest rate is that determines your interest rate?
Is it the Treasuries or LIBOR? If you know the answer, then keep your
hand raised.” About half the people put their hands down and then she
said, “If you could tell me how much your margin is above that rate, raise
your hand.” About another half put their hands down. Finally, she asked, “If
you know what the maximum interest rate that you can pay on your loan is,
keep your hand up.” At that point, there was only one in the room who held
his hand up. And the person sitting next to me said, "Oh, I know that guy. He
would never admit in public that he didn't know something."
I thought that was a pretty good story. Anyway the point is, here's a
group of Harvard, MIT professors, and they couldn't understand the
fundamentals of a pretty simple loan product. So when we talk about
reverse mortgages or when we talk about shared appreciation mortgages,
which in principle have certain benefits to them, is there a way that it
could be packaged so that consumers could actually understand what
they're getting into? Just curious if there are any opinions on that.
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» Panelist | Tyler T. Yang
I want to refer to the UK shared appreciation mortgage system. It's a
program they offer to senior citizens, just like a reverse mortgage. The
program goes with the lender, who will give you 25% of your house value
as a loan, and there will be no interest recharged over the throughout the
life, and they will take over the property and try to sell it to recover. On
the settlement day, the lender will collect the original loan amount plus
75% of the appreciation rate, so there's a three to one ratio there. So that's
the program. It has operated a few years without much problem, until at
a point where things go too well. The UK housing market grows by 200
percent in three years, and in that situation where the borrowers are very
happy my house were appreciated, but then they find out because of this
mortgage most of your capital gain belongs to the lender. So they filed a
discrimination or fraudulent lending procedure against the lenders. That
legal fight basically terminated the UK system. Session III
» Moderator | Richard K. Green
Yes, the Guardian wrote about it and the BBC reported it and they made it
out the lenders to be the bad guy. And I remember the chairman of the Royal
Bank of Scotland said they would not do anything like that again. Because
even though that was apparently transparent-to me it seemed like a very
transparent contract, but that's the point. Is there any hope for doing any kind
of loan product? Maybe there's two parts to it; one is that it's complicated,
and two is that the borrower can wind up disappointed with the result, which
is inevitably going to happen with a fairly priced product. So that's one part
of the complexity and the other thing is just the thing about something like
a reverse mortgage. You basically have to think about three things in figuring
out what they're going to cost you. You need to think about people’s life
expectancy, you need to think about interest rates, and you need think about
house prices. It's an instrument that lasts as many as 40,50 years. Is there any
way we can make a model that will really tell us how to price these things and
how to minimize the downside risk of these things? I'm curious. So this is
almost an epistemological question. And I know Tyler has done a lot of really
great work trying to model these things. Tyler, what do you think, can we
really know what's going on?
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