Equity (March '09)

 

 

 

 

 

 

It is tempting, after a long working life to be able to enjoy a few of life's luxuries,
that ‘gap' year you never had maybe or a higher standard of living than your
pension can fund?

Home equity release plans are very well marketed these days. It is hard to pick up a newspaper or watch television without seeing an advertisement for a home equity release product. They are aimed at elderly home owners who are asset rich (the asset being their mortgage free property) but cash poor. The plan works by the financial organisation ‘purchasing' a property from you, or at least a great deal of the equity in your property. You in return receive a tax free lump sum together with an agreement to live in the property rent free. So far so good.

However the ‘catch' is that when the home owner dies the property belongs to the organisation and does not form part of your estate. In other words your children will not be able to inherit your property. Worse still, under some equity release schemes, if the borrowing reaches a certain level of equity in the property, (in percentage terms) this would trigger a forced sale. There is no real potential for this event occurring, unless interest rates rise and property prices fall and there is not much chance of that…. Or is there? The housing market, at the time of writing, has yet to ‘bottom out' and Mervyn King, the Governor of The Bank of England has warned that interest are unlikely to go any lower. The only way is up?

These equity release organisations sell their products heavily, often using well known and trusted celebrities to front their campaigns. However this is not the first time that home equity release plans have been marketed like this. In the early 1990's, an independent financial adviser, Fisher Prew- Smith sold the product in the national press. The products were marketed as Home Income Plans (HIPs) The HIPs were targeted at retired people owning residential properties.

The investor was persuaded to mortgage or re-mortgage their property to secure a loan of up to 50% of its value. No interest instalments were to be paid under the mortgage and they were rolled up and added to the sum secured. The mortgages were provided by the West Bromwich Building Society which, with a new Chief Executive at the helm, was keen to increase its portfolio of non traditional, non-status lending. This was in effect pre-empting the sub-prime lending of today.

The plans were sold by a sales force with no formal training and there was little effective supervision informing investors were things might go wrong. The advertising was seductive- “You don't have to move to live on the sunny side of the street”. The way the plans were advertised was to be significant when it came to future legal action. The HIPs had a trigger point which meant that once the total debt exceeded two thirds of the value of the property, the building society could repossess the properties. In practise, at a time when interest rates were rising and property prices falling, the trigger points were reached quite quickly.

The majority of the investors were compensated by the Investors Compensation Scheme Limited (ICS). They, in return for compensating the investors, took an assignment of their claims for compensation. The ICS could clearly, on the surface, bring a claim against Fisher Prew-Smith for the sales. However they were far more interested in the deeper pockets of the West Bromwich. But how could the ICS (on the behalf of the investors) pin the blame on the building society, when they had merely provided the funding?

The High Court Judge hearing the case, Mr Justice Evans- Lombe used a novel approach. He held that the marketing of the HIPs had been a joint venture and as such both parties were liable. He stated: “[Fisher Prew-Smith] material plainly represents that [their] HIPs will be safe and secure investment for the remainder of the life of the borrowers… during which they would enjoy the benefits of the plan.” This didn't happen.

In the current climate there are certain similarities in the home equity release plans now compared to those being marketed 15 years ago. Let us hope that it doesn't get to serious. However, if interest rate rise, as surely the must, and if house prices continue to fall then these things might just be possible. In those circumstances we might again see consumers looking for compensation.