Morningstar DBRS' Takeaways From Global ABS 2025: Lending to Europe's Ageing Population

As part of its takeaway series, Morningstar DBRS is publishing several write-ups about pertinent topics discussed at Global ABS, one of the largest annual structured finance events, hosted in Barcelona. On Wednesday 11 June, Lorenzo Coccioli, Vice President of European RMBS & Covered Bond Ratings at Morningstar DBRS, spoke on a panel of industry experts exploring the intricacies of equity release mortgages (ERMs) in residential mortgage-backed securities (RMBS).

As people live longer, many face affordability issues that governments have not yet been able to address effectively. Later-life lending products, such as ERMs, allow older borrowers to free up equity for healthcare costs or day-to-day expenses. These products have been gaining traction in the markets, but it is a complex area with many analytical considerations.

The panel discussed that, while analysts still need to account for traditional secured-lending drivers such as property value, mortality and morbidity rates also play a significant role in assessing transaction risk. "When we model cash flows in equity release, we have four scenarios", Coccioli said. "Either the borrower dies in the period; they survive and stay in the property; they survive and move into long-term care, what we refer to as morbidity; and the most difficult to predict, prepayment". Each of these scenarios requires thorough analysis. For example, when considering mortality rates, Coccioli asserted that changes in mortality trends in a population are usually slow and gradual but cannot be ignored altogether in the analysis of ERM cashflows. "An example is weight control pills, which might be a revolution in treating obesity in certain parts of the population and may, if they work, lead to lower mortality", he explained. "When we assess a product that is going to be out there for 15 or 20 years, these are scenarios that we need to contemplate".

Coccioli delved further into the adjustments that analysts need to make when assessing mortality risk within an ERM portfolio, as the borrowers in an equity release loan portfolio are often not reflective of the population as a whole. "In our approach, we do something called age adjustment, where we assume the borrower is a bit older or a bit younger than they actually are because we think they might live longer or shorter than the average population", he said. In the UK, for example, there is evidence that equity release borrowers live longer than the average population, which delays cash flows; in other jurisdictions where the product could be targeted to elderly borrowers below the poverty line, this is not necessarily the case. "Every time we look at a portfolio, we have to think long and hard about these aspects because population mortality rates could prove a flawed predictor for the specific cohort of borrowers we are assessing", said Coccioli.

The panel also discussed the "no negative equity" guarantee that usually comes with ERMs, meaning that borrowers and their heirs are never required to repay more than the sale proceeds of the home, even if the outstanding loan eventually exceeds the property's value. When interest rates rise, the possibility that the borrower's debt will increase beyond the value of the property is higher, which could have a negative credit impact on an ERM portfolio. However, in the current economic environment, Coccioli sees rising rates as more of an origination-level problem as they restrict the loan-to-value ratio and the age that can be lent to. He stated that "the likelihood of having to strike the no negative equity guarantee increases with the rate hikes" but pointed out that Morningstar DBRS incorporates such stresses into its analysis. "We are no more concerned [about the no negative equity guarantee] than we were before the rate hikes from a methodology perspective".

Written by Ella Rigby

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