Shared Appreciation Mortgages: Lessons from the UK

29 Pages Posted: 16 Aug 2005

See all articles by Anthony B. Sanders

Anthony B. Sanders

George Mason University - School of Business

V. Carlos Slawson, Jr.

Louisiana State University

Date Written: July 2005

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.

Keywords: Shared appreciation, mortgage pricing, options, prepayment penalty, default

JEL Classification: G21

Suggested Citation

Sanders, Anthony Bown and Slawson, Jr., V. Carlos, Shared Appreciation Mortgages: Lessons from the UK (July 2005). Available at SSRN: https://ssrn.com/abstract=772784 or http://dx.doi.org/10.2139/ssrn.772784

Anthony Bown Sanders (Contact Author)

George Mason University - School of Business ( email )

Fairfax, VA 22030
United States

V. Carlos Slawson, Jr.

Louisiana State University ( email )

E. J. Ourso College of Business
Department of Finance
Baton Rouge, LA 70803-6308
United States
225-578-6291 (Phone)

HOME PAGE: http://www.lsu.edu/business/finance/profile-viewer.php?un=cslawson

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