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CHAPTER 9

THE FINANCIAL ANALYSIS OF CASE 2
EXPOSING FRAUD

9.6.1The Real Risks
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We have already highlighted (in Section 7.4.3: The Duty to Provide the Information Necessary to an Informed Decision) how First National and Irish Life did not disclose the following risk factors pertaining to the Endowment Mortgage. They did not disclose:

(i)

the fact that there is Risk associated with investing in the Endowment Mortgage.

(ii)

a measure of the Risk associated with investing in the Endowment Mortgage.

(iii)

a measure of the Reward for taking Risk, i.e.  the Risk Premium Return by which the Expected Return to be achieved by investing in the Endowment Mortgage would exceed the Expected Return to be achieved by investing in the Repayment Mortgage, the Repayment Mortgage Return being the benchmark Certainty Return available.

(iv)

a measure of the Reward relative to the associated Risk, i.e. a Performance Evaluation Measurement for the Endowment Mortgage Fund.



We have also highlighted in Section 9.4, Case 2: Financial Chicanery, how, with a Risk Investment, the absence of any indicative measure of associated Risk, of itself, constitutes ‘an additional risk factor’ superimposed on that associated Risk.


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But, on top of all this investment Risk, your house is also on the line.


Your Home is at Risk.


With any loan there is the risk that a downturn in your economic circumstances will leave you unable to meet the repayments on the loan and, therefore, you are always exposed to the risk that you will suffer loss on any security pledged as a guarantee for repayment. With a Mortgage, your home is pledged as security on the loan.


But, as we have shown, there are considerable additional Risks associated with the Endowment Mortgage that do not exist with the Repayment Mortgage.


Your Home is therefore under much greater Risk with the Endowment Mortgage than with the Repayment Mortgage.


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The following historical assessment of the performance of the First National Home-Way Mortgage Fund (Series 4), over the 17 year period subsequent to its launch, should dispel any nebulous subjectivity you may be associating with the concept of Risk (and, consequently, with the concept of Reward for Risk taken) as pertaining to investment in an Endowment Mortgage. (This ‘with the benefit of hindsight assessment’ is purely to illustrate how real the Risk actually is.)

Home-Way Mortgage Fund (Series 4) Performance

Period
(Start Date 1/2/91)

Net Growth Achieved
(p.a.)

91 — 92

4.09%

92 — 93

0.30%

93 — 94

20.97%

94 — 95

0%

95 — 96

2.62%

96 — 97

14.16%

97 — 98

25.97%

98 — 99

10.44%

99 — 00

5.89%

00 — 01

5.10%

01 — 02

0%

02 — 03

0%

03 — 04

0%

04 — 05

0%

05 — 06

14.16%

06 — 07

7.30%

07 — 08

2.22%



The average annualised net growth rate achieved by the Fund over the 17 year period subsequent to its start date was 6.39% p.a.


The Risk Measurement associated with the Fund, as measured by its performance over the 17 year period subsequent to the Fund’s start date, is given by the Standard Deviation () —— the Standard Deviation is 7.72% p.a. (See Section 7.2: Measuring Risk, for a refresh on the computation of the Standard Deviation.)


The Risks associated with an Endowment Mortgage are therefore very real and very substantial.

 

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