Shared Appreciation Mortgages Research Articles

Financial Fragility with SAM?

Shared Appreciation Mortgages feature mortgage payments that adjust with house prices. They are designed to stave off borrower default by providing payment relief when house prices fall. Some argue that SAMs may help prevent the next foreclosure crisis. However, home owners' gains from payment relief are mortgage lenders' losses. A general equilibrium model in which financial intermediaries channel savings from saver to borrower households shows that indexation of mortgage payments to aggregate house prices increases financial fragility, reduces risk-sharing, and leads to expensive financial sector bailouts. In contrast, indexation to local house prices reduces financial fragility and improves risk-sharing.

Why Is Housing Finance Still Stuck in Such a Primitive Stage?

The institutions for financing owner-occupied housing have not progressed as they should, and the financial innovation that has followed the financial crisis of 2007-2009 has not been focused on improving the risk management of individual homeowners. This paper lists a number of barriers to housing finance innovation, and in light of these barriers, the problems of some major innovations of the past and future: self-amortizing mortgages, price-level adjusted mortgages (PLAMs), shared appreciation mortgages (SAMs), housing partnerships, and continuous workout mortgages (CWMs).

Why is Housing Finance Still Stuck in Such a Primitive Stage?

The institutions for financing owner-occupied housing have not progressed as they should, and the financial innovation that has followed the financial crisis of 2007-9 has not been focused on improving the risk management of individual homeowners. This paper lists a number of barriers to housing finance innovation, and in light of these barriers, the problems of some major innovations of the past and future: self-amortizing mortgages, price-level adjusted mortgages (PLAMs), shared appreciation mortgages (SAMs), housing partnerships, and continuous workout mortgages (CWMs).

The Socioeconomic Impact of Shared Appreciation Mortgages on Borrowers: Empirical Evidence from South Australia

Shared appreciation mortgages (SAMs) realign traditional incentives in the lender–borrower relationship by substituting future capital gains for interest income. This makes them a potentially innovative solution to affordability and other homeownership crises. Taxation and regulatory barriers have impeded SAM development limiting empirical studies of their impact on households. This has not been the case in South Australia where State government implementation of SAMs has made available a unique and detailed dataset of low-income SAM-financed households. Examining this population, it is found that SAM borrowers benefit from increased budgetary expenditure on discretionary items following take-up, while simultaneously saving on some non-discretionary items relative to a control sample. Furthermore, SAM homeownership also seems associated with increased borrower levels of neighbourhood satisfaction and community involvement. Overall, these results indicate that SAM-financed homeownership leads to changes in borrower behaviour and deserves further consideration by the housing industry and research community.

Strategic loan modification: An options-based response to strategic default

This paper presents a parsimonious barrier model for the optimal principal reset in a loan modification, thereby maximizing the loan value to the lender bank and minimizing the likelihood of strategic foreclosure by the homeowner. Writing down the loan-to-value (LTV) ratio will reduce the present value of future payments on the loan, but will also reduce the probability of default, thereby saving foreclosure losses. The optimal trade-off of these two countervailing effects will pinpoint the optimal LTV at which the loan must be reset. We present a simple barrier option decomposition of the loan value that makes the optimization of LTV easy to implement. An extension of the model is shown to account for varying growth rate assumptions about house prices. The model in this paper specifically accounts for the homeowner’s willingness to pay, and uses the framework to model shared-appreciation mortgages (SAMs).

Participating mortgages and the efficiency of financial intermediation

This paper establishes a basic framework to study three different variants of Participating Mortgages (PMs). We obtain results for Shared Appreciation Mortgages (SAMs), Shared Income Mortgages (SIMs) and Shared Equity Mortgages (SEMs) in closed-form. We illustrate our findings with examples that show PMs are also attractive in an environment where prepayment can occur. Finally we conclude with the public policy implications of employing PMs as workout loans, especially post sub-prime crisis. We argue that by facilitating better risk sharing, PMs offer a means to enhance the efficiency and resiliency of the financial system.

Strategic Loan Modification: An Options- Based Response to Strategic Default

This paper presents a reduced-form barrier model for the optimal principal reset in a loan modification, thereby maximizing the loan value to the lender bank and minimizing the likelihood of foreclosure by the homeowner. Reducing the loan-to-value (LTV) ratio will reduce the present value of future payments on the loan, but will also reduce the probability of default, thereby saving foreclosure losses. The optimal trade-off of these two countervailing effects will pinpoint the optimal LTV at which the loan must be reset. We present a reduced-form barrier option decomposition of the loan value that makes the optimization of LTV easy to implement. An extension of the model is shown to account for varying growth rate assumptions about house prices. The model in this paper accounts for the homeowner's ability to pay and willingness to pay, and uses the framework to model shared-appreciation mortgages (SAMs).

The Use of Shared Appreciation Mortgages to Increase Demand for 15-Year Mortgages

There are more than 5 times as many 30-year mortgages than 15-year mortgages in circulation even though the 15-year mortgage interest rate is consistently lower than the 30-year mortgage interest rate. The relative popularity of longer term 30-year mortgages can be attributed both to the tax deduction for mortgage interest and the inability of many individuals to afford payments on a shorter term 15-year mortgages. The use of shared appreciation mortgages (SAMs) can make 15-year mortgages affordable to homebuyers. The impact of SAMs combined with the use of 15-year mortgages on wealth accumulation depends on mortgage interest rates and capital gains. Calculations presented in this paper examine the wealth accumulation of different mortgage arrangements based on historic interest rates and different capital gain assumptions.

The UK SAM Experience: A Financial Service or a New Type of Loan Shark Product?

This paper investigates the pricing and valuation of Shared Appreciation Mortgages (SAMs) issued in 1997 in the UK. The analysis indicates high expected returns to the lenders, that were clearly predictable ex-ante, with even higher upside potential and virtually no material risk of loss to the investors. Since SAMs had been invented decades before, the high returns to the UK lenders do not represent pay for financial engineering a new, innovative product. Instead, the high effective interest rates on the SAMs appear to represent compensation for misleading repackaging of an existing product.

Shared appreciation mortgages: Lessons from the UK

The recent rise in shared appreciation mortgage (SAM) availability motivates careful consideration of underlying borrower incentives. The lender’s share of appreciation in SAMs (share) is essentially a dynamic prepayment penalty imposed on the borrower. However, the borrower faces a moral hazard due to his ability to affect the penalty by reducing maintenance. We adapt a competing risks mortgage-pricing model to calculate SAM theoretical equilibrium rates. Our borrower possesses rational expectations of both the house price market and interest rates. Our simulation results may help explain the lack of secondary market interest for the UK SAMs containing extreme contract terms.

Shared Appreciation Mortgages: Lessons from the UK

The recent rise in shared appreciation mortgage (SAM) availability motivates careful consideration of underlying borrower incentives. The lender's share of appreciation in SAMs (share) is essentially a dynamic prepayment penalty imposed on the borrower. However, the borrower faces a moral hazard due to his ability to affect the penalty by reducing maintenance. We adapt a competing risks mortgage-pricing model to calculate SAM theoretical equilibrium rates. Our borrower possesses rational expectations of both the house price market and interest rates. Our simulation results may help explain the lack of secondary market interest for the UK SAMs containing extreme contract terms.

Moral Hazard in Home Equity Conversion

Home equity conversion as presently constituted or proposed usually does not deal well with the problem of moral hazard. Once homeowners know that the risk of poor market performance of their homes is borne by investors, they have an incentive to neglect to take steps to maintain the homes values. They may thus create serious future losses for the investors. A calibrated model for assessing this moral‐hazard risk is presented that is suitable for a number of home equity conversion forms: (1) reverse mortgages, (2) home equity insurance, (3) shared‐appreciation mortgages, (4) housing partnerships, (5) shared‐equity mortgages and (6) sale of remainder interest. Modifications of these forms involving real estate price indexes are proposed that might deal better with the problem of moral hazard.