Shared Appreciation Mortgages: Lessons from the UK

Anthony B. Sanders and V. Carlos Slawson, Jr.
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Anthony B. Sanders: Ohio State U
V. Carlos Slawson, Jr.: Louisiana State University

Working Paper Series from Ohio State University, Charles A. Dice Center for Research in Financial Economics

Abstract: 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.

JEL-codes: G21 (search for similar items in EconPapers)
Date: 2005-01
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Citations: View citations in EconPapers (6)

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