Mortgages and annuities

Another week, another giant financial institution comes crashing down.  This time it is the turn of HBOS, a large UK mortgage provider.  The problem was not one of leverage as such, since all banks are highly leveraged.  The problem was one of funding: HBOS's mortgage liabilities were long-term, whereas its funding was short-term.  When HBOS came to renew its short-term funding, nobody was willing to lend.

In an earlier post we showed why the annuities business is also leveraged. However, a crucial distinction between annuities and banking is that the money "borrowed" from the policyholder cannot be recalled at short notice like ordinary loans.  This is one huge appeal of the annuities business to bankers: they regard it as a source of cheap, long-term and stable funding (leaving aside the question of longevity and other risks).

It is an irony of UK financial services that mortgages are not provided by insurance companies.  In many ways, long-term, fixed-rate mortgages and annuity portfolios are natural complements to one another.  Perhaps once the dust has settled from the credit crunch we will see annuity providers offering mortgages?