Page 401 - 2019 6th AFIS & ASMMA

was a pretty salient point. So we have about seven minutes left to have » Panelist | Tyler T. Yang
a conversation, and I want to talk about complexity from two angles. I want to refer to the UK shared appreciation mortgage system. It's a
The first is from the consumer side and it gets to a point Tyler would program they offer to senior citizens, just like a reverse mortgage. The
have made in his slides, had he gotten to them, and a point that Jun program goes with the lender, who will give you 25% of your house value
Han made, which is about thinking about using shared appreciation as a loan, and there will be no interest recharged over the throughout the
mortgages. And this is something economists really like as an idea. So the life, and they will take over the property and try to sell it to recover. On
idea is, you, homeowner can reduce the cost of owning a home on a cash the settlement day, the lender will collect the original loan amount plus
flow basis, in exchange for giving up some of the upside, if you sell your 75% of the appreciation rate, so there's a three to one ratio there. So that's
house with appreciation. 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
And when I hear that, I think of a conference I was at in 2008. It was percent in three years, and in that situation where the borrowers are very
just before things went completely to hell. And if I remember who it happy my house were appreciated, but then they find out because of this
was, I think it was a Harvard Law professor, who was a senator from mortgage most of your capital gain belongs to the lender. So they filed a
Massachusetts and running for president of the United States, asked the discrimination or fraudulent lending procedure against the lenders. That
audience, which was made up of Harvard, Yale, and MIT professors, and legal fight basically terminated the UK system. Session III
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 » Moderator | Richard K. Green
what the foundational interest rate is that determines your interest rate? Yes, the Guardian wrote about it and the BBC reported it and they made it
Is it the Treasuries or LIBOR? If you know the answer, then keep your out the lenders to be the bad guy. And I remember the chairman of the Royal
hand raised.” About half the people put their hands down and then she Bank of Scotland said they would not do anything like that again. Because
said, “If you could tell me how much your margin is above that rate, raise even though that was apparently transparent-to me it seemed like a very
your hand.” About another half put their hands down. Finally, she asked, “If transparent contract, but that's the point. Is there any hope for doing any kind
you know what the maximum interest rate that you can pay on your loan is, of loan product? Maybe there's two parts to it; one is that it's complicated,
keep your hand up.” At that point, there was only one in the room who held and two is that the borrower can wind up disappointed with the result, which
his hand up. And the person sitting next to me said, "Oh, I know that guy. He is inevitably going to happen with a fairly priced product. So that's one part
would never admit in public that he didn't know something." 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
I thought that was a pretty good story. Anyway the point is, here's a out what they're going to cost you. You need to think about people’s life
group of Harvard, MIT professors, and they couldn't understand the expectancy, you need to think about interest rates, and you need think about
fundamentals of a pretty simple loan product. So when we talk about house prices. It's an instrument that lasts as many as 40,50 years. Is there any
reverse mortgages or when we talk about shared appreciation mortgages, way we can make a model that will really tell us how to price these things and
which in principle have certain benefits to them, is there a way that it how to minimize the downside risk of these things? I'm curious. So this is
could be packaged so that consumers could actually understand what almost an epistemological question. And I know Tyler has done a lot of really
they're getting into? Just curious if there are any opinions on that. great work trying to model these things. Tyler, what do you think, can we
really know what's going on?

402 2019 6th AFIS & ASMMA Annual Meeting 403