By Tim Landvoigt, Stijn Van Nieuwerburgh and Daniel Greenwald
Shared Appreciation Mortgages (SAMs) feature mortgage payments that adjust with house prices. Such mortgage contracts can stave off home owner default by providing payment relief in the wake of a large house price shock. SAMs have been hailed as an innovative solution that could prevent the next foreclosure crisis, act as a work-out tool during a crisis, and alleviate fiscal pressure during a downturn. They have inspired Fintech companies to offer home equity contracts. However, the home owner’s gains are the mortgage lender’s losses. We consider a model with financial intermediaries who channel savings from saver households to borrower households. The financial sector has limited risk bearing capacity. SAMs pass through more aggregate house price risk and lead to financial fragility when the shock happens in periods of low intermediary capital. We compare house prices,mortgage rates, the size of the mortgage sector, default and refinancing rates, as well as borrower and saver consumption between an economy with standard mortgage contracts and an economy with SAMs.
I had not heard of the concept of shared appreciation mortgages. Interesting idea with some counter-intuitive results. For example, I would have expected to see a higher steady-state mortgage interest rate, as the risk is shifted more to the lender. Well, no, because there are hardly any foreclosures, the risk is actually going down.