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Shared Appreciation Mortgages: Lessons from the UK

Author

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  • Sanders, Anthony B.

    (Ohio State U)

  • Slawson, V. Carlos, Jr.

    (Louisiana State University)

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.

Suggested Citation

  • Sanders, Anthony B. & Slawson, V. Carlos, Jr., 2005. "Shared Appreciation Mortgages: Lessons from the UK," Working Paper Series 2005-16, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
    • Handle: RePEc:ecl:ohidic:2005-16
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    File URL: http://www.cob.ohio-state.edu/fin/dice/papers/2005/2005-16.pdf
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    References listed on IDEAS

    as
    1. José A. Azevedo‐Pereira & David P. Newton & Dean A. Paxson, 2002. "UK Fixed Rate Repayment Mortgage and Mortgage Indemnity Valuation," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 30(2), pages 185-211.
    2. John C. Cox & Jonathan E. Ingersoll Jr. & Stephen A. Ross, 2005. "A Theory Of The Term Structure Of Interest Rates," World Scientific Book Chapters, in: Sudipto Bhattacharya & George M Constantinides (ed.), Theory Of Valuation, chapter 5, pages 129-164, World Scientific Publishing Co. Pte. Ltd..
    3. Jimmy E. Hilliard & James B. Kau & V. Carlos Slawson, 1998. "Valuing Prepayment and Default in a Fixed‐Rate Mortgage: A Bivariate Binomial Options Pricing Technique," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 26(3), pages 431-468, September.
    4. Kau, James B & Slawson, V Carlos, Jr, 2002. "Frictions, Heterogeneity and Optimality in Mortgage Modeling," The Journal of Real Estate Finance and Economics, Springer, vol. 24(3), pages 239-260, May.
    5. Kau, James B, et al, 1992. "A Generalized Valuation Model for Fixed-Rate Residential Mortgages," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 24(3), pages 279-299, August.
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    Cited by:

    1. David Miles, 2015. "Housing, Leverage, and Stability in the Wider Economy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 47(S1), pages 19-36, March.
    2. David Miles, 2012. "Population Density, House Prices and Mortgage Design," Scottish Journal of Political Economy, Scottish Economic Society, vol. 59(5), pages 444-466, November.
    3. Ebrahim, M. Shahid & Shackleton, Mark B. & Wojakowski, Rafal M., 2011. "Participating mortgages and the efficiency of financial intermediation," Journal of Banking & Finance, Elsevier, vol. 35(11), pages 3042-3054, November.
    4. Sanders, Anthony B., 2005. "Barriers to homeownership and housing quality: The impact of the international mortgage market," Journal of Housing Economics, Elsevier, vol. 14(3), pages 147-152, September.
    5. George Mihaylov & Ralf Zurbruegg, 2014. "The Socioeconomic Impact of Shared Appreciation Mortgages on Borrowers: Empirical Evidence from South Australia," Urban Studies, Urban Studies Journal Limited, vol. 51(2), pages 371-389, February.
    6. Varli, Yusuf & Yildirim, Yildiray, 2015. "Default and prepayment modelling in participating mortgages," Journal of Banking & Finance, Elsevier, vol. 61(C), pages 81-88.

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    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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