Endowment mortgages: Legacy of a scandal

By Kevin Peachey Personal finance reporter, BBC News
4 January 2013 Last updated at 00:01 GMT

Nearly 25 years ago, Christine Taylor took the plunge and bought the first and only house she has ever owned.

Now, more than two decades on, she admits that paying off the resulting debt has been a constant worry.

That is because she was sold an endowment mortgage - a monthly savings plan, usually invested in shares and property, which was designed to pay off the home loan at the end of the term.

Like millions of other home buyers, she was also told that the policy might bring her a nice lump sum when the endowment matured after 25 years. In her case, the surplus was expected to be at least £10,000 in August 2013.

"I hadn't any fancy ideas about going on a spending spree," says the 55-year-old.

"I just thought I would be comfortable, with the mortgage paid off."

As it is, Mrs Taylor is among the hundreds of thousands of people who will receive final confirmation this year of a shortfall in the expected payout of the endowment.

"I've been struggling to get my mortgage down, but I'm glad we chipped away at it," she says.

"There will be people in a lot worse situation than I am."

'Optimistic' expectations

The rise and fall of endowment mortgages has been a feature of one of the most notorious mis-selling scandals in the last few decades.

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The industry grew as a result of tax breaks, and hit its peak towards the end of the 1980s when it became the fashionable home loan for those getting on the property ladder. The estimated peak was more than a million policies sold in a single year.

The extent of the subsequent decline is clear from the fact that only 27 sales of this product were completed in 2011-12, according to the City watchdog, the Financial Services Authority (FSA)

At the end of the 1980s, there was a boom in both the housing market and stock market, prompting those selling these products to make very high predictions of investment growth in endowment savings plans.

By the middle of the 1990s, it became obvious that these expectations were overblown.

"The original growth estimates on these policies were simply way too optimistic, while the funds just didn't perform as expected," says Phillip Bray, of independent financial advisers Investment Sense.

"In the coming years we'll see just how bad the endowment mortgages mis-selling scandal is."

In the late 1990s, regulators told insurance companies to write "traffic light" warning letters to policyholders to explain the level of shortfall that might occur. A "red letter" meant there was a high risk of the policy paying out less on maturity than the target amount.

Many thousands of people cut the link between the endowment and their mortgage, making alternative plans to pay off their home loan with other savings, investments, or a tax-free lump sum from their pension. Others have switched their mortgage to a repayment model.

Switching mortgages

But Steve Wilkie, managing director of Responsible Equity Release, says his business sees many older people who have not made any plans and may need to downsize where they live.

They are receiving letters asking them how they intend to pay off their mortgage, so suddenly the poor performance of their endowment has become a critical matter.

One issue to their advantage, he says, is that the value of their property has often risen, so there is sufficient equity in the home to pay off the loan, if they choose to sell.

This, clearly, is not the scenario many of these people would have wished for. They wanted the mortgage to be paid off and the property owned outright, ready for their family to inherit in due course.

Houses There are options for homeowners who have still to address a potential shortfall

There are other options for those facing a critical point in their finances, who face a shortfall, and who have not decoupled their endowment and their mortgage, according to Danny Cox, of financial advisers Hargreaves Lansdown.

He suggests people can switch to a repayment mortgage, or part endowment and part repayment - although they should check with their lender that there are no penalties or costs for doing so.

Others may consider cashing in their endowment and using the proceeds to pay down the mortgage, before paying the rest through a repayment method. Again there might be penalties, and there is a judgement to be made here over the future performance of the endowment.

Alternatively people could switch to saving in a more tax-efficient product such as an Individual Savings Account, rather than an endowment.

Compensation

While considering what to do next, many people who were sold endowment mortgages and face a shortfall might feel somebody else was to blame.

But they could face fresh disappointment because of a deadline on claiming for compensation for any apparent mis-selling.

Policyholders can make a claim to the Financial Ombudsman Service if they believe they were mis-sold the policy, and their endowment provider turns down their claim. Grounds for complaint may include:

•     Not receiving a full explanation that there could be a shortfall at the end of the mortgage  term
•     Being told that the endowment would definitely pay off the mortgage
•     The fees and charges were not explained
•     An adviser did not complete an assessment of finances and attitude to risk
•     Sales staff failing to ensure that income was available if the policy ran into retirement years
•     Receiving advice to cash in an endowment and being sold another

These rules led to complaints to the ombudsman about mortgage endowments totalling nearly 70,000 a year at their peak in the middle of the last decade.

The latest figures show that 2,109 complaints were made between April and September 2012.

However, about half of all the complaints received by the ombudsman are turned down because of a deadline. Claims must be made within three years of the householder realising that the policy was mis-sold.

That date is generally taken three years from the point at which policyholders received their red warning letter from their provider.

Time, it seems, has dealt these people another blow.

Kevin Peachey Personal finance reporter, BBC News
4 January 2013 Last updated at 00:01 GMT

China's red-hot property market shows no signs of slowing

THE RISE OF CHINA
By Charles Riley @CRrileyCNN May 20, 2013: 1:12 AM ET
Article from http://money.cnn.com/2013/05/20/news/economy/china-property/index.html

Property prices in China increased again in April.

HONG KONG (CNNMoney)

Property prices continued to rise last month in China, defying policymakers who have sought to cool the housing market while preserving robust economic growth.

Housing prices rose in 68 of 70 Chinese cities in April when compared to the previous month, according to the National Bureau of Statistics. Compared to last year, prices were higher in all but two of the 70 cities tracked by the government.

Prices in the capital, Beijing, registered one of the largest increases, rising 10.3% over the previous year. In the southern manufacturing hub of Shenzhen, prices jumped 11.3%.

On average, new home prices across the cities increased 4.3% over the previous year.

Fearing the development of a real estate bubble, China has sought to stem rising property prices in recent months. But policymakers have also been forced to consider the broader impact of such policies as China's economy shows signs of slower economic growth.

"This [data] suggests that polices aimed at cooling the property market have not yet tightened sufficiently," said Zhiwei Zhang, an economist at Nomura. "We believe this will add further pressure on the government to tighten monetary policy in the months ahead."

China's urban housing costs have grown for much of the last decade, sparking a cycle of government reaction. Earlier this year, the central government directed local governments to rein in housing prices by April 1.

Authorities in Shanghai told banks to stop issuing loans to individuals attempting the purchase of a third home.

Beijing announced that single residents will now be allowed to purchase only one home. Both cities said they would strictly enforce a 20% capital gains tax on income earned in property sales.

The announcements set off a fresh wave of buying to beat the restrictions, and some couples even hatched schemes to skirt ownership restrictions by obtaining a divorce.

Yet additional measures may be required if the market does not soon show signs of deceleration.

Citing rampant speculation and poor planning, some China analysts are worried about the development -- and possible deflation -- of a housing bubble. Chinese citizens have limited investment options, and real estate is a popular choice for those looking to expand their portfolio.

Yet other analysts insist that fears of a bubble are overstated. Hundreds of millions of Chinese are expected to move from rural areas to cities over the next decade, they say, and demand is likely to remain strong.  

Charles Riley @CRrileyCNN May 20, 2013: 1:12 AM ET
Article from http://money.cnn.com/2013/05/20/news/economy/china-property/index.html

Study Confirms College Endowment Drop

By TAMAR LEWIN
Published: February 1, 2013
Article from http://www.nytimes.com/

On average, college and university endowments’ investments lost 0.3 percent in the last fiscal year, a sharp drop from the average return of 19.2 percent in fiscal 2011, according to a study by the Commonfund Institute and the National Association of College and University Business Officers, known as Nacubo.

The returns were dragged down mostly by the dismal performance of international equities, whose returns declined by 11.9 percent, attributable in good part to the economic turmoil in Europe and the slowdown in China. Domestic stocks had an average return of 2 percent, and fixed-income assets 6.8 percent.

The study, based on data from 831 American colleges and universities with a total of more than $400 billion in endowment assets, showed more positive long-term results. Preliminary results were released in late October.

“Over the last 10 years, the average rate of return was 6.2 percent,” said John D. Walda, the president of Nacubo. “That’s a good number when you compare it with various indices.”

In the fiscal year that ended in June 2011, the average 10-year return was 5.6 percent.

The study, which includes large and small institutions, public and private, found that those with the largest endowments had the greatest returns last year. Among universities with endowments greater than $1 billion, the average return was 0.8 percent. Those with endowments of $25 million to $500 million had negative returns, and those with endowments under $25 million had a return of 0.3 percent.

Altogether, 71 institutions have endowments greater than $1 billion, and 145 have more than $500 million.

The colleges and universities in the study spent an average of 4.2 percent of their assets last year to support their operations, down from 4.6 percent the previous year. But while the spending rate had declined somewhat, the average dollars spent per institution grew by about 7 percent. Most colleges and universities have a policy of spending 4 percent to 5 percent of their average endowment value over the previous three years, so the sharp rises in endowment values in 2010 and 2011 increased the amount paid out last year.

The institutions with the largest endowments, which get a significant portion of their operating budgets from endowment spending, spent an average of 4.7 percent last year. The institutions with the smallest endowments spent slightly under 4 percent.

“The long-term goal of most endowments is to exist in perpetuity and grow with the rate of inflation,” said Verne O. Sedlacek, president of Commonfund.

To do that while paying out 4 percent to 5 percent a year, he said, would require annual returns of at least 8 percent, given that the higher education price index has been rising about 3.8 percent a year over the last decade. “Universities are still not back to where they need to be,” Mr. Sedlacek said.

This article has been revised to reflect the following correction:

Correction: February 6, 2013

Because of an editing error, an article on Friday about a study of university endowments misstated the change in their investment returns. On average, college and university endowments lost 0.3 percent in the fiscal year ending in June, a sharp drop from the average gain of 19.2 percent in the 2011 fiscal year; the returns on endowments did not decline by 0.3 percent.

TAMAR LEWIN

Published: February 1, 2013

Article from http://www.nytimes.com/