Participating Mortgages and the Efficiency of Financial Intermediation

38 Pages Posted: 15 Mar 2010

See all articles by Muhammed Shahid Ebrahim

Muhammed Shahid Ebrahim

Durham Business School

Mark B. Shackleton

Lancaster University - Department of Accounting and Finance

Rafal M. Wojakowski

University of Surrey; Lancaster University - Management School

Multiple version iconThere are 5 versions of this paper

Date Written: March 12, 2010


This paper offers a means to enhance the efficiency of the financial system in the form of Participating Mortgages (PMs) to make it more resilient and to mitigate systemic risk. We establish a basic setup to study the variants of PMs, distinguish them from convertible mortgages and derive closed-form solutions to price a range of PMs. We obtain new results for Shared Appreciation Mortgages, Shared Income Mortgages and Shared Equity Mortgages. We illustrate our findings with examples showing that PMs are attractive in an environment with prepayments. Finally, we conclude our study with the public policy implications of employing PMs as workout loans, especially in the current sub-prime crisis.

Participating Mortgages have the capacity to manage risk at the micro-economic level with the potential for reducing default at the macro-economic level. They are more appealing than convertible mortgages as they are more versatile and retain features of debt through the tenure of the facility (without diluting control rights of its investors). We proceeded by investigating variants of participating mortgages (such as Shared Income, Shared Appreciation and Shared Equity Mortgages) and demonstrate, that the closed-form profit cap formula allows tractability. We thus contribute by evaluating closed-form finite maturity pricing conditions, which are scarce in real estate finance.

We also focus on random tenure mortgages, which arise in the context of default and prepayment risk. Furthermore, we illustrate the general applicability of the variants of a PM in a range of projects ranging from infrastructure to technology start-up's. Finally, we illustrate the employment of PMs as work-out loans especially in the recent sub-prime crisis. A PM is basically a financial innovation that matches the income in addition to the appreciation in value of the property instead of just the borrowers permanent income.

Keywords: Participating mortgage, Shared appreciation mortgage, Shared income mortgage, Shared equity mortgage, Profit caps and floors, Prepayment risk intensity

JEL Classification: C63, D11, D14, D92, G13, G21, R31

Suggested Citation

Ebrahim, Muhammed Shahid and Shackleton, Mark B. and Wojakowski, Rafal M., Participating Mortgages and the Efficiency of Financial Intermediation (March 12, 2010). Available at SSRN: or

Muhammed Shahid Ebrahim

Durham Business School ( email )

Mill Hill Lane
Durham, Durham DH1 3LB
United Kingdom

Mark B. Shackleton

Lancaster University - Department of Accounting and Finance ( email )

The Management School
Lancaster LA1 4YX
United Kingdom
44 1524 594131 (Phone)
44 1524 847321 (Fax)

Rafal M. Wojakowski (Contact Author)

University of Surrey ( email )

Faculty of Business, Economics and Law
The Surrey Business School
Guildford, Surrey GU2 7XH
United Kingdom
+44 1483 683477 (Phone)


Lancaster University - Management School ( email )

Lancaster, LA1 4YX
United Kingdom
+44 (1524) 593630 (Phone)
(01524) 847321 (Fax)


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