What is a shared appreciation mortgage (SAM) and how does it generally function?

A shared appreciation mortgage, often abbreviated as SAM, is a type of mortgage where the homeowner shares a percentage of the appreciation in their home's value with the lender. In exchange for this share of future property value increase, the lender typically offers an interest rate that is lower than the prevailing market rate. The repayment of the loan includes the original amount borrowed plus the agreed-upon share of the property's appreciation.

How is a shared appreciation mortgage structured in the UK, particularly as a form of equity release?

In the UK, a shared appreciation mortgage is arranged as a form of equity release, which allows homeowners to unlock the value tied up in their property without having to sell it. The lender provides a capital sum to the borrowers, who, in return, agree to share a portion of the property's future increase in value. Borrowers typically retain the right to live in the property until their death.

What was the general outcome for borrowers who took out shared appreciation mortgages in the UK between 1996 and 1998?

Shared appreciation mortgages sold in the UK between 1996 and 1998 have not consistently proven beneficial to the borrowers who acquired them. This suggests that many borrowers faced unfavorable outcomes, likely due to the terms of these mortgages combined with subsequent market conditions.

Which banks were prominent in selling shared appreciation mortgages in the UK during the late 1990s, and how did they market them?

Bank of Scotland sold approximately 12,000 shared appreciation mortgages between November 1996 and March 1998, primarily through financial advisers and mortgage brokers. Barclays Bank sold 3,253 SAMs between May and July 1998, marketing them directly to borrowers. These products were largely aimed at mature homeowners, particularly those aged 65 and over who had paid off their mortgages, as a way to release cash from their homes without selling.

What was the average loan size for Barclays Bank's shared appreciation mortgages?

Barclays Bank loaned a total of £98 million in shared appreciation mortgages. Given that they sold 3,253 such mortgages, the average size of each loan was approximately £30,126.

What were the typical terms for the loan amount and the lender's share of appreciation in a UK shared appreciation mortgage?

The lender of a shared appreciation mortgage typically lent a sum up to a maximum of 25% of the property's initial value. The borrower retained ownership, and no repayments were made until the property was sold or the borrower died. At that point, the repayment included the original loan amount plus a share of the property's increase in value, with the lender's percentage share being three times the percentage of the property's value originally borrowed.

How was the final value of a property determined for shared appreciation mortgage repayment calculations?

For the purpose of calculating the repayment on a shared appreciation mortgage, the final value of the property was not necessarily the actual sale price. Instead, it was based on a valuation commissioned by the lender and paid for by the borrower. This meant that if the property sold for less than this valuation, the borrower's percentage share of the equity would be further reduced.

Provide an example of a shared appreciation mortgage repayment calculation based on Barclays' booklet, assuming a significant increase in property value.

Barclays' booklet provided an example where a £25,000 loan (25% of an initial £100,000 valuation) on a property that increased to £150,000 would result in a repayment of £62,500 (original loan plus 75% of £50,000 appreciation). However, if the property's final valuation was £400,000, the repayment for the same £25,000 loan would be £250,000 (original loan plus 75% of £300,000 appreciation), representing 62.5% of the final valuation. This demonstrates how a large increase in property value could lead to a significantly higher repayment than initially illustrated.

What were the characteristics of Bank of Scotland's interest-bearing shared appreciation mortgages?

Bank of Scotland also offered shared appreciation mortgages that charged interest at approximately 5.75% to 6% per annum. For these mortgages, the maximum loan amount was 75% of the property's value (compared to 25% for zero-interest SAMs), and the lender's percentage share of the appreciation was equal to the percentage ratio of the loan to the original property value. Interest was paid monthly, and the final repayment included the original borrowed amount plus the lender's share of the appreciation.

What negative consequences could borrowers face due to the large repayment amounts of shared appreciation mortgages?

The substantial repayment amounts associated with shared appreciation mortgages, coupled with the small share of equity remaining for the borrower, could lead to several negative consequences. Borrowers might not have enough money to downsize to a smaller property, would have less money to cover care home fees (potentially requiring greater local authority contributions), and would have less inheritance to leave to their children or grandchildren, some of whom might have provided care for many years.

Under what unlikely circumstance would a shared appreciation mortgage effectively be interest-free?

In the unlikely event that the value of the property remained the same or decreased over the loan term, a shared appreciation mortgage would have effectively been interest-free. This is because the 'appreciation share' component of the repayment would be zero or negative, meaning only the original loan amount would be due, without any additional cost for the use of the money.

What is the formula for calculating the equivalent compound interest rate of a 'zero-interest' shared appreciation mortgage, assuming monthly interest charging?

The equivalent compound interest rate for a 'zero-interest' shared appreciation mortgage, assuming interest is charged monthly, can be calculated using the formula: Equivalent compound interest rate = ((R/L)^(1/(12t)) - 1) × 1200. In this formula, R represents the total repayment amount, L is the initial loan amount, and t is the time in years between the loan origination and its repayment. This formula helps to understand the true cost of the loan over time, even without explicit interest payments.

Who originated the idea of shared appreciation mortgages and why?

The idea of shared appreciation mortgages originated with Craig Corn, a director in structured finance at Merrill Lynch. He was seeking a way to provide investors access to the housing market, which was a large asset pool dominated by owner-occupiers. By linking an investment to a mortgage, he aimed to allow investors to tap into the owner-occupier sector and enable homeowners to utilize their property as a financial asset.

Which financial institutions were involved in the development and initial marketing of shared appreciation mortgages?

After Merrill Lynch's management decided the product didn't fit their portfolio, Craig Corn moved to Swiss Bank Corporation (SBC) and collaborated with David Garner. SBC, an investment bank, supported the project. They then partnered with Bank of Scotland, which was known for its innovation, to market and manage the mortgages. S. G. Warburg & Co. also became involved after its merger with SBC.

Who were the key individuals at Bank of Scotland involved in approving and developing the shared appreciation mortgage product?

At Bank of Scotland, Willie Donald, Director of Sales, was initially contacted by Craig Corn and liked the idea. He then presented it to George While, Head of Mortgages, and George Mitchell, Divisional Chief Executive of Personal Banking, who also approved. Mitchell then brought the idea to the main board, which approved it in principle in June 1996. Neil Forrest, with expertise in securitization, was selected to work with Willie Donald on the product's development.

What role did securitization play in the shared appreciation mortgage product, and why was it initially excluded?

Securitization, the process of pooling debt like mortgages and selling their cash flows as securities or bonds, was crucial for shared appreciation mortgages to attract investors. It was initially excluded from the first version of the product because it had a negative reputation, typically used only when direct financing was unavailable, and proposed interest rate swaps posed a significant taxation risk for the bank. The second version of the product, however, did incorporate securitization.

What were the two main interest rate choices offered to borrowers for shared appreciation mortgages by Bank of Scotland?

Bank of Scotland offered borrowers two main interest rate choices for shared appreciation mortgages. One option was a 0% interest mortgage, where borrowers could borrow up to 25% of the property's value and give up appreciation worth three times the percentage borrowed (up to 75%). The second option was a 5.75% interest mortgage, allowing borrowers to borrow up to 75% of the property's value and give up appreciation at the same percentage as the amount borrowed.

How were the 0% and 5.75% SAMs securitized for investors?

For investors, the 5.75% SAMs were securitized into fixed rate bonds, offering a fixed interest rate of approximately 55% of the 10-year gilt yield (a UK government bond). The 0% SAMs were securitized into floating rate bonds, with a variable interest rate of about 60% of the three-month Libor (London Inter-bank Offered Rate). Interest on these bonds was paid quarterly, including a fixed/floating element and an additional element from terminated SAMs, with the debt amortizing as the number of SAM homes decreased.

What made SAMs appealing to investors, and which types of funds were expected to invest?

Shared appreciation mortgages were expected to appeal to investors because they were considered less risky than equity investments, offered a long-term investment, and their earnings were linked to house prices, which historically performed better than inflation but not as well as shares. Consequently, they were anticipated to attract pension funds, property funds, and equity investors.

How did Bank of Scotland manage the funds and legal aspects of shared appreciation mortgages to keep them separate from its other operations?

To keep funds associated with shared appreciation mortgages separate from its other operations, Bank of Scotland established an independent company for each SAM. BoS acted as an agent for these companies, and legal charges were held in the name of the specific BoS SAM entity rather than Bank of Scotland itself. Separate companies were even set up for interest-bearing and zero-interest Scottish SAMs, such as BoS SAM 3 and BoS SAM 4.

What IT system challenges did the implementation team face when launching shared appreciation mortgages?

The implementation team encountered IT system challenges, specifically with Unisys, one of the bank's IT systems. Unisys could only process loans up to 50 years, whereas SAMs were open-ended until property sale or owner's death. Additionally, Unisys could not process a 0% interest rate. Concerns also arose about overnight processing overruns due to separate companies for each SAM, leading to an upgrade of processing capacity and a dedicated system for mortgages.

When were Bank of Scotland's first shared appreciation mortgages launched, and what was the initial market reaction?

Bank of Scotland's first shared appreciation mortgages (BoS SAM 1 and BoS SAM 2) were launched on November 11, 1996, following a press announcement. The initial market reaction was overwhelmingly positive, with demand far exceeding expectations. The bank received around 2,000 phone calls daily, mostly from people interested in the 0% option, and ran out of brochures by the second week of December.

Who were the unexpected investors and borrowers for the initial Bank of Scotland SAMs?

Unexpectedly, pension funds did not invest in the initial Bank of Scotland SAMs. Furthermore, while borrowers were anticipated to be in their seventies, most of them turned out to be in their fifties or sixties, indicating a broader appeal than initially projected.

Why were SAMs 3 and 4 for Scotland delayed, and what happened to SAMs 5 and 6?

SAMs 3 and 4 for Scotland were delayed because their securitization could not be completed until SAMs 1 and 2 were finalized, and they also faced delays due to Scotland's different legal system. They were introduced in mid-February 1997. During the preparations for SAMs 5 and 6, SBC Warburg merged with Union Bank of Switzerland to form UBS AG. Investors could not be found for SAMs 5 and 6, forcing SBC Warburg itself to take them up, and eventually leading Bank of Scotland to withdraw the product.

When did Barclays Bank launch its shared appreciation mortgage product, and what were its key features?

Barclays Bank launched its shared appreciation mortgage product in March 1998, after Bank of Scotland had already withdrawn theirs. Similar to Bank of Scotland's zero-interest option, Barclays' SAM had a maximum loan-to-property value ratio (LTV) of 25%, charged no interest, and the lender's share of appreciation was three times the LTV. Barclays sold 3,253 SAMs between May and July 1998.

What was the ultimate fate of shared appreciation mortgages in the market?

Shared appreciation mortgages did not subsequently return to the market after being temporarily withdrawn in July 1998. This withdrawal occurred because demand from borrowers exceeded the supply of money from the bonds market, with Bank of Scotland having sold £750 million worth of bonds and Barclays Bank £98 million.

How did the significant increase in house prices impact borrowers with shared appreciation mortgages?

When house prices increased significantly, and the appreciation became much greater than the initial value of the properties, borrowers with shared appreciation mortgages found themselves owing the investors the majority of their property's value. This left them with only a small proportion of the property's value for themselves, leading to substantial financial burdens.

What recognition did the Bank of Scotland shared appreciation mortgage receive from the Design Council?

The Bank of Scotland shared appreciation mortgage was selected as one of 1,012 'Millennium Products' by the Design Council. This concept, launched by Prime Minister Tony Blair, aimed to highlight the 'very best of British innovation, creativity and design.' The Design Council described it as a mortgage allowing cash release from a home for 0% interest in return for a share of appreciation upon sale.

What was the status of shared appreciation mortgages by the time the final list of Millennium Products was announced?

By the time the final list of Millennium Products was announced in December 1999, shared appreciation mortgages were no longer being offered for sale by either Bank of Scotland or Barclays Bank, despite one of their products being recognized.

According to the BoS SAM No. 4 PLC sales booklet, what was an example of a shared appreciation mortgage repayment, including fees?

An example from the BoS SAM No. 4 PLC sales booklet detailed a shared appreciation mortgage with a £30,000 loan on an initial £120,000 house value, repaid after 20 years, assuming 4.5% average house price inflation. The total repayment, including the initial loan (£30,000), shared appreciation (£127,054), arrangement fee (£500), legal fees (£600), valuation fees (£490), and an administration fee (£300), amounted to £158,944, with an Annual Percentage Rate (APR) of 8.7%.

What was the historical trend of the UK House Price Index before the sale of Shared Appreciation Mortgages?

In the 20 years preceding Bank of Scotland's sale of Shared Appreciation Mortgages in November 1996, the UK House Price Index increased by 460%, from £10,682 in October 1976 to £59,885 in October 1996, representing an average annual inflation of 9.0%. Similarly, before Barclays Bank started selling SAMs in May 1998, the index rose by 461% from April 1978 to April 1998, also at an average of 9.0% per annum.

How did the regulatory environment in the 1990s affect shared appreciation mortgages?

In the 1990s, mortgages were not fully regulated. Banks operated voluntarily under the Banking Code, and mortgage lenders under the Mortgage Lenders Code. Although Barclays and Bank of Scotland marketed SAMs under their brands, they set up separate companies to administer them. These separate companies were not signatories to the Banking Code, which meant the Financial Ombudsman Service could not investigate customer complaints about SAMs, despite Barclays' booklet stating compliance with the Codes.

What was the purpose of the Mortgage Code, and when was it replaced?

The Mortgage Code, which came into effect on July 1, 1997, for lenders and April 30, 1998, for mortgage intermediaries, aimed to set out commitments and standards for banks in dealing with customers, including helping them understand the financial implications of a mortgage. It remained in force until October 31, 2004, when it was replaced by the Financial Services Authority's (FSA) Mortgage Conduct of Business Sourcebook (MCOB).

When did the Financial Services Authority (FSA) begin regulating mortgage business?

The Financial Services Authority (FSA) did not begin to regulate mortgage business until October 31, 2004. This means that shared appreciation mortgages sold in the late 1990s were not subject to the same level of statutory regulation as later mortgage products.

How did the Consumer Credit Act 2006 impact borrowers with shared appreciation mortgages?

The Consumer Credit Act 2006 extended the scope of the Consumer Credit Act 1974 and allowed borrowers to challenge unfair debtor-creditor relationships in court. This act, with its retrospective changes, made it possible for shared appreciation mortgage customers to argue that the arrangement, particularly the 75% appreciation share for a 25% loan, constituted an unfair relationship, giving courts wide powers to vary loan agreement terms.

What did the Unfair Terms in Consumer Contracts Regulations 1999 stipulate regarding contract language and fairness?

The Unfair Terms in Consumer Contracts Regulations 1999, specifically Regulation 7, mandated that any written term of a contract must be expressed in plain, intelligible language, and if there's doubt about its meaning, the interpretation most favorable to the consumer should prevail. Regulation 8 further stated that an unfair term, defined as one causing a significant imbalance in rights and obligations to the consumer's detriment, would not be binding upon the consumer.

Who was Harold Fisher, and what was his experience with a Bank of Scotland Shared Appreciation Mortgage?

Harold Fisher and his wife borrowed £90,000 from Bank of Scotland under its Shared Appreciation Mortgage Scheme in October 1997. By the third year of the loan, Mr. Fisher realized that the significant increase in house prices had caused their debt to the bank to grow much more than he had anticipated. He expressed his concerns to the bank, but they maintained he had signed the contract, and the Financial Ombudsman Service ruled against him, stating they typically sided with banks in such disputes.

What was Geoffrey Cooke's legal challenge regarding his shared appreciation mortgage?

Geoffrey Cooke and his wife, who borrowed £72,000 from Bank of Scotland, planned to apply to the High Court in September 2003. He intended to challenge their mortgage contract under the Unfair Terms in Consumer Contracts Regulations 1994 (and amendments), believing there was evidence that the loan's entry and exit procedures violated statute and European Union law.

What did the House of Commons Standard Note SN/BT/3414 indicate about shared appreciation mortgages?

The House of Commons Standard Note SN/BT/3414, titled 'Shared Appreciation Mortgages' and last updated in December 2013, noted that there had been a significant number of debates in the House of Commons concerning equity release mortgages in general, and SAMs in particular, as the consequences of these policies became apparent years after they were taken out.

What was the Treasury's stance on the regulation of equity release plans, as stated in the 2002 Green Paper?

In December 2002, a pensions Green Paper titled 'Simplicity, Security and Choice: Working and Saving for Retirement' stated that the Treasury would explore options to create a level playing field for the regulation of equity release and home reversion plans. The goal was to protect consumers and improve the functioning of the market.

What did Financial Secretary to the Treasury Ruth Kelly state regarding future regulation and redress for shared appreciation mortgage borrowers?

During a debate in January 2003, Ruth Kelly, then Financial Secretary to the Treasury, stated that the Financial Services Authority's (FSA) upcoming mortgage regulation would include an advice and disclosure regime to ensure borrowers were fully aware of equity release loan implications. In the interim, she advised that constituents who believed they were badly advised or missold a mortgage could seek redress from the Financial Ombudsman Service after exhausting internal complaints procedures.

When were all mortgage-based equity release schemes slated to be regulated by the Financial Services Authority (FSA)?

In July 2003, Chief Secretary to the Treasury Paul Boateng announced that all mortgage-based equity release schemes would be regulated by the Financial Services Authority (FSA) starting from October 31, 2004. This move aimed to provide better consumer protection for significant financial decisions like mortgages and equity release.

What was the distinction between Home Reversion plans and Shared Appreciation Mortgages in terms of property ownership?

The key distinction between Home Reversion plans and Shared Appreciation Mortgages lies in property ownership. Under Home Reversion plans, a portion of the house is sold to the lender, transferring part of the property's ownership. In contrast, with Shared Appreciation Mortgages, full ownership of the property is retained by the borrower, even though the lender shares in the property's appreciation.

Describe the Barclays Shared Appreciation Mortgage (SAM) Hardship Scheme launched in 2007.

In June 2007, Barclays launched its Shared Appreciation Mortgage (SAM) Hardship Scheme to assist customers facing substantial hardship due to changed circumstances. The scheme aimed to help those who needed to move to a more suitable property or adapt their existing home but were prevented by their SAM. It offered an interest-free loan to cover the difference between the sale proceeds of their old home and the cost of a new one, up to 50% of the new home's value, repayable upon the sale of the new home (likely at the borrower's death).

What was the Bank of Scotland's approach to hardship cases for shared appreciation mortgage customers?

Unlike Barclays, the Bank of Scotland did not establish a formal hardship scheme for its shared appreciation mortgage customers. Instead, they stated that they would evaluate each individual case on application, suggesting a more discretionary and less structured approach to addressing customer hardship.

What was the Shared Appreciation Mortgage Action Group (SAMAG), and what legal action did it pursue?

The Shared Appreciation Mortgage Action Group (SAMAG) was formed in 2009 by Hilary Messer to coordinate legal action against banks on behalf of over 300 shared-appreciation mortgage customers. They pursued a class action, contributing £5,000 each towards legal fees, arguing that recent retrospective changes to the Consumer Credit Act made it possible to sue banks over unfair debtor-creditor relationships. A group litigation order (GLO) was granted in the High Court in October 2009.

What was the outcome of SAMAG's class action against the banks?

The banks appealed the decision that allowed the class action to proceed and won their appeal. As a result, the customers' solicitors required more funds, which the customers could not provide, forcing them to withdraw their case. This left the customers liable for the banks' legal costs, which the banks agreed to waive if the customers signed 'gagging orders' not to make further complaints. SAMAG was subsequently dissolved and merged into the Struggle Against Financial Exploitation (SAFE) action group.

Which law firms have been involved in recent claims against banks concerning shared appreciation mortgages?

Teacher Stern LLP initiated claims in 2014 against Bank of Scotland and Barclays Bank for compensation related to shared appreciation mortgages. More recently, Teacher Stern LLP, Trowers and Hamlins LLP, Clarke Willmott LLP, and Acuity Law LLP are planning further claims, though Clarke Willmott will not be pursuing claims against Bank of Scotland. Some firms, like Clarke Willmott and Acuity Law, might offer 'No Win No Fee' arrangements.

What was the outcome of Teacher Stern's recent legal actions against Barclays Bank and Bank of Scotland regarding SAMs?

Teacher Stern successfully negotiated a confidential settlement with Barclays Bank in June 2021 on behalf of 37 clients. Additionally, on the day before a trial was set to begin on January 31, 2024, Teacher Stern announced a commercial settlement with Bank of Scotland (and other defendants) for 160 Shared Appreciation Mortgage Claimants in a County Court action. Both settlements were confidential and did not alter the existing mortgage terms and conditions.

Why are group claims for Scottish shared appreciation mortgages currently challenging?

Group claims for Scottish shared appreciation mortgages are currently challenging because some of these agreements are governed and interpreted under Scots law, which differs from English law. At present, English solicitors are not prepared to make group claims for Scottish SAM customers or their families. It is suggested that a group claim would be possible if more people join the 'Scottish SAM' Facebook group, likely to be handled by Scottish solicitors.

Shared Appreciation Mortgage Wiki: The Appreciation Equation: Deconstructing Shared Appreciation Mortgages

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Introduction to SAM

Defining the Shared Appreciation Mortgage

A Shared Appreciation Mortgage (SAM) represents a unique financial instrument where a homeowner shares a predetermined percentage of their property's appreciation in value with the lender. In exchange for this future share, the lender typically offers an interest rate significantly lower than prevailing market rates, or even a zero-interest loan. This structure allows borrowers to access capital or reduce immediate mortgage costs, while lenders participate directly in the property's capital growth.

The Core Mechanism

The fundamental principle of a SAM involves a deferred repayment component. The borrower receives a loan, and regular repayments might be minimal or non-existent (in the case of zero-interest SAMs). The substantial portion of the loan repayment, comprising the original principal plus the agreed-upon share of the property's appreciation, becomes due upon a specified event, such as the sale of the property or the death of the borrower. This mechanism ties the lender's ultimate return directly to the performance of the real estate asset.

Risk and Reward Dynamics

SAMs introduce a distinct risk-sharing dynamic between borrower and lender. For the borrower, the benefit is reduced immediate financial burden, but the trade-off is relinquishing a portion of future property gains. For the lender, the risk of property value stagnation or decline means a lower or zero appreciation share, but this is balanced by the potential for substantial returns if property values escalate significantly. This structure differentiates SAMs from conventional mortgages, where the lender's return is primarily fixed by the interest rate, irrespective of property value changes beyond collateralization.

SAMs in the UK Context

Genesis and Marketing Strategies

In the United Kingdom, Shared Appreciation Mortgages were primarily marketed between 1996 and 1998 by institutions such as Bank of Scotland and Barclays Bank. These products were often positioned as a form of equity release, specifically targeting mature homeowners, typically aged 45 or over, who had substantial equity in their properties (e.g., property worth over £60,000). The appeal was the ability to unlock cash from their homes without the need to sell or make ongoing interest payments, particularly for the zero-interest variants. Bank of Scotland utilized financial advisers and mortgage brokers, while Barclays engaged directly with borrowers.

Loan and Repayment Mechanics

The structure of UK SAMs involved a loan amount up to a maximum of 25% of the property's initial value. The borrower retained full ownership, with no repayments due until the property was sold or the borrower passed away. At this point, the repayment consisted of the original loan amount plus a share of the property's appreciation. Critically, the lender's percentage share of the appreciation was often three times the percentage of the original property value borrowed. For instance, a 25% loan meant a 75% share of appreciation for the lender. The final property value for this calculation was determined by a lender-commissioned valuation, paid for by the borrower, not necessarily the sale price.

Consider an initial property valuation of £100,000 and a loan of £25,000 (25%). If the property's final valuation is £150,000, the appreciation is £50,000. The repayment would be:

£25,000 (original loan) + (75% of £50,000 appreciation) = £25,000 + £37,500 = £62,500.

This equates to 42% of the final valuation. Over 20 years, this was presented as an equivalent compound interest rate of 4.7%.

However, actual house price growth significantly altered these outcomes. If the final valuation reached £400,000, the appreciation would be £300,000. The repayment would then be:

£25,000 + (75% of £300,000 appreciation) = £25,000 + £225,000 = £250,000.

This represents 62.5% of the final valuation, an equivalent compound interest rate of 12.2% over 20 years, far exceeding initial projections and leaving the borrower with a significantly reduced equity share.

Historical Performance and Impact

The period preceding the introduction of SAMs saw substantial growth in the UK House Price Index, with average annual inflation around 9.0% for two decades. Banks, possessing this historical data, could reasonably anticipate continued high appreciation. This context is crucial because the examples provided to borrowers often underestimated future house price inflation, leading to a significant disparity between expected and actual repayment amounts. The rapid increase in property values meant that borrowers often found themselves owing a disproportionately large share of their home's value to the lender, severely impacting their ability to downsize, cover care home fees, or leave an inheritance.

SAMs in the US Context

Commercial Mortgage Applications

In the United States, Shared Appreciation Mortgages have also found application, particularly in commercial real estate. Here, the lender offers a lower-than-market interest rate on the mortgage in exchange for a share of the property's appreciated value. This "contingent interest" is typically determined and becomes due upon the sale of the property or the termination of the mortgage. This arrangement allows borrowers to benefit from reduced monthly payments, while lenders gain an upside potential tied to the property's market performance. The lender assumes an additional risk related to property value fluctuations, making the trade-off dependent on market conditions.

Affordable Housing Initiatives

Beyond commercial applications, shared appreciation clauses are utilized by non-profit organizations and local governmental agencies in the US to facilitate affordable homeownership. These loans are often structured as "silent" second mortgages, meaning borrowers make no payments until the home is sold or the first mortgage is refinanced. At that point, the borrower repays the original loan amount plus a portion of the home's appreciation. This mechanism helps to preserve the "buying power" of public subsidies by ensuring that a share of the increased value returns to the subsidizing entity, allowing for reinvestment in future affordable housing programs. Limitations, such as usury caps (e.g., a maximum of 6% effective interest), can be applied to these programs, as seen in some down payment assistance initiatives.

Tax and Legal Considerations

The Internal Revenue Service (IRS) in the US has addressed SAMs, notably in Revenue Ruling 83-51 (1983), which outlines conditions under which the contingent interest may be considered tax-deductible mortgage interest. A critical requirement is that a SAM must stipulate an unconditional obligation for the payment of the principal to avoid being recharacterized as an equity-sharing agreement, which carries different tax implications. Given the intricate nature of tax laws and the tailored terms of individual SAM agreements, particularly for private, non-commercial arrangements, seeking counsel from a real estate attorney is strongly advised to navigate potential legal and tax complexities.

Quantifying SAM Returns

Equivalent Compound Interest Rate

To accurately assess the true cost of a "zero-interest" Shared Appreciation Mortgage, it is useful to calculate its equivalent compound interest rate. This rate represents the annual interest that, if charged monthly and compounded, would result in the same total repayment amount as the SAM at the end of the loan term. This calculation provides a standardized metric for comparison with traditional mortgage products.

The formula for calculating the equivalent compound interest rate, assuming monthly compounding, is:

Equivalent compound interest rate = ((R/L)^(1/(12t)) - 1) × 1200

Where:

R is the total amount of the repayment (original loan + appreciation share).
L is the initial amount of the loan.
t is the time in years (including fractional parts) between the loan origination and the repayment.

This formula yields the interest rate as a percentage, reflecting the effective annual cost of the mortgage when considering the appreciation share as a form of interest.

Annual Compounding Alternative

Alternatively, if one assumes that interest would have been charged and compounded once a year on the outstanding amount, a slightly different formula is applied. This annual compounding model offers another perspective on the effective cost, though monthly compounding is more common in traditional mortgage calculations.

The formula for calculating the equivalent compound interest rate, assuming annual compounding, is:

Equivalent compound interest rate = ((R/L)^(1/t) - 1) × 100

Where:

R is the total amount of the repayment.
L is the initial amount of the loan.
t is the time in years.

For SAMs where the loan was 25% of the property's initial value, the repayment typically included the initial loan amount plus 75% of the difference between the initial and final property values. These formulas are crucial for understanding the long-term financial implications of SAMs, especially in markets with significant property value growth.

History and Evolution

Conception and Development

The concept of Shared Appreciation Mortgages originated from Craig Corn, a director at Merrill Lynch, who sought to provide investors access to the vast housing market, traditionally dominated by owner-occupiers. Recognizing that much wealth was tied in homes, he envisioned linking investment to mortgages. Collaborating with David Garner at Swiss Bank Corporation (SBC), they developed the framework where homeowners would cede a share of property appreciation for low-interest mortgages, while investors gained access to this appreciation. Bank of Scotland, known for its innovation, partnered with SBC to bring this product to market, with a team dedicated to its realization, including expertise in securitization.

Market Introduction and Challenges

The initial launch of SAMs by Bank of Scotland in November 1996 was met with unexpectedly high demand, particularly for the 0% interest option. However, the implementation faced technical hurdles, such as IT systems unable to process open-ended loans or 0% interest rates, necessitating system upgrades. Investor uptake also presented challenges; pension funds, initially targeted, did not materialize as expected, with most investors being institutions seeking high returns. The merger of SBC Warburg with Union Bank of Switzerland to form UBS AG further complicated matters, leading to difficulties in finding investors for later SAM tranches and ultimately forcing Bank of Scotland to withdraw the product.

Millennium Product Recognition

Despite the eventual withdrawal of SAMs from the market, the Bank of Scotland's Shared Appreciation Mortgage was notably selected as one of 1,012 "Millennium Products" by the UK Design Council. This initiative, launched by Prime Minister Tony Blair, aimed to celebrate British innovation, creativity, and design. The Design Council described the SAM as "A mortgage which allows you to release cash tied up in your house for 0% interest payments, in return for a share in any appreciation in value from the sale of the home." This recognition, however, came at a time when the product was no longer being offered, highlighting the complex and often unforeseen long-term implications of financial innovations.

SAM Product Variations

Overview of SAM Products

The Shared Appreciation Mortgage market, though brief, featured several distinct product offerings, primarily from Bank of Scotland (BoS) and Barclays. These products varied in their interest rate structures, whether they were fixed or variable, and crucially, in the ratio of the lender's appreciation share to the initial loan percentage. The table below summarizes the key characteristics of these products, illustrating the different approaches taken by the lenders.

Shared-Appreciation Mortgage Products

Name	Interest Rate	Fixed/Variable	Appreciation Share : Loan Ratio	Sold In	Issued
BoS SAM 1	5.75%	Fixed	1:1	England and Wales	11 November 1996
BoS SAM 2	0%		3:1	England and Wales	11 November 1996
BoS SAM 3	5.95%	Variable	1:1	Scotland	mid-February 1997
BoS SAM 4	0%		3:1	Scotland	mid-February 1997
BoS SAM 5	5.99%	Variable	1:1	England and Wales	1997/98
BoS SAM 6	0%		3:1	England and Wales	1997/98
Barclays	0%		3:1	England and Wales	March 1998

"Appreciation share : loan" is the ratio of the lender's percentage share of the appreciation to the percentage of the initial value of the property that was borrowed.

Associated Companies and Structure

To manage and issue these mortgages, both Bank of Scotland and Barclays established separate, often specially incorporated, companies. This structural separation had significant implications for regulation and customer recourse, as these entities were not always direct signatories to broader banking codes. The table below details some of these associated companies, their incorporation dates, and their business classifications, providing insight into the corporate architecture behind SAM offerings.

Shared Appreciation Mortgage Companies

Incorporated	Company Number	From	To	Name	Status	SIC
05/10/1995	03110558	05/10/1995	26/04/1996	REFAL 474 Limited	Renamed
		26/04/1996	01/11/1996	BoS (Shared Appreciation Mortgages) Limited	Renamed
		01/11/1996		BoS (Shared Appreciation Mortgages) No. 1 PLC	Active	64921
23/01/1996	03149607	23/01/1996	11/10/1996	REFAL 485 Limited	Renamed
		11/10/1996		BoS (Shared Appreciation Mortgages) No. 2 PLC	Active	64921
20/11/1996	03281120	20/11/1996		BoS (Shared Appreciation Mortgages (Scotland)) Limited	Active	99999
12/03/1997	03331868	12/03/1997	28/04/1997	REFAL 507 Limited	Renamed
		28/04/1997	09/02/1998	BoS (Shared Appreciation Mortgages (Scotland) No. 2) Ltd	Renamed
		09/02/1998		BoS (Shared Appreciation Mortgages (Scotland) No. 2) Limited	Active	99999
12/03/1997	03331871	12/03/1997	17/04/1997	REFAL 506 Limited	Renamed
		17/04/1997		BoS (Shared Appreciation Mortgages) No. 3 PLC	Active	64921
12/03/1997	03331873	12/03/1997	17/04/1997	REFAL 505 Limited	Renamed
		17/04/1997		BoS (Shared Appreciation Mortgages) No. 4 PLC	Active	64921
18/09/1997	03436151	18/09/1997	24/10/1997	REFAL 513 Limited	Renamed
		24/10/1997	09/02/1998	BoS (Shared Appreciation Mortgages (Scotland) No. 3) Ltd	Renamed
		09/02/1998		BoS (Shared Appreciation Mortgages (Scotland) No. 3) Limited	Active	64921
24/10/1997	03457750	24/10/1997		BoS (Shared Appreciation Mortgages) No. 5 PLC	Active	64921
24/10/1997	03457742	24/10/1997		BoS (Shared Appreciation Mortgages) No. 6 PLC	Active	64921
22/10/1990	02550646	22/10/1990	20/10/1993	BARSHELFCO (No. 41) Limited	Renamed
		20/10/1993	20/01/1998	The Mortgage House Limited	Renamed
		20/01/1998	11/05/1998	BARSHELFCO (TR No. 2) Limited	Renamed
		11/05/1998		Barclays SAMS Limited	Active	74990

SIC (Standard Industrial Classification of Economic Activities) Codes

Code	Description
64921	Credit granting by non-deposit taking finance houses and other specialist consumer credit grantors
74990	Non-trading company
99999	Dormant company

It is important to note that Bank of Scotland PLC and its associated SAM companies are now subsidiaries of Lloyds Banking Group PLC, following a series of mergers and acquisitions.

Regulatory and Legal Landscape

The Pre-Regulation Era

During the period when SAMs were actively sold (1996-1998), the UK mortgage market lacked comprehensive statutory regulation. Banks and mortgage lenders operated under voluntary codes, such as the Banking Code and the Mortgage Lenders Code. A significant issue arose because the banks marketed SAMs under their main brand names but established separate, often non-signatory, companies to administer and issue these mortgages. This structural separation meant that the Financial Ombudsman Service (FOS), which has legal powers to address unfair treatment, was unable to investigate customer complaints regarding SAMs, leaving many borrowers without an effective recourse mechanism.

Legislative Interventions

Several pieces of legislation have become relevant in the context of SAMs, particularly as the long-term implications became apparent. The Consumer Credit Act 1974 reformed consumer credit law, and its successor, the Consumer Credit Act 2006, significantly extended its scope. The 2006 Act, with its retrospective application, empowered courts to vary the terms of loan agreements if the debtor-creditor relationship was deemed unfair. Furthermore, the Unfair Terms in Consumer Contracts Regulations 1999 mandated that contract terms be expressed in plain, intelligible language and that any ambiguity be interpreted in favor of the consumer, with unfair terms being non-binding. These acts provided potential avenues for SAM customers to challenge their agreements.

Evolution of Regulatory Oversight

The regulatory landscape for mortgages in the UK underwent a significant transformation after the SAMs were sold. The Financial Services Authority (FSA) began regulating mortgage business from October 31, 2004, a move that was intended to provide greater consumer protection and ensure borrowers were fully aware of the implications of equity release loans. The FSA was later replaced by the Financial Conduct Authority (FCA) in 2013. This regulatory shift, however, came too late for many SAM borrowers. It's also important to distinguish SAMs from Home Reversion plans, which involve selling a share of property ownership to the lender and were also brought under FSA regulation, whereas SAMs maintained full borrower ownership.

Hardship and Advocacy

Early Dissension and Formation of Action Groups

As UK house prices soared, many SAM borrowers, like Harold Fisher and Geoffrey Cooke, realized their debts had escalated far beyond expectations, leading to severe financial distress. Their attempts to seek redress through the Financial Ombudsman Service were largely unsuccessful, as the FOS typically ruled in favor of the banks due to the unregulated nature of the specific SAM entities. This widespread dissatisfaction led to the formation of advocacy groups, such as the Shared Appreciation Mortgage Victims Action Group (SAMVIC) in 2003, comprising hundreds of homeowners who felt deceived and sought to coordinate legal action against the lenders.

Parliamentary Scrutiny

The growing plight of SAM borrowers attracted significant attention in the UK Parliament. Numerous debates were held in the House of Commons, with Members of Parliament like Angela Browning, Vince Cable, and Stephen O'Brien raising specific concerns about SAMs. In 2002, a pensions Green Paper highlighted the need for better regulation of equity release products. Financial Secretaries to the Treasury, including Ruth Kelly and Paul Boateng, acknowledged the issues and committed to future mortgage regulation, which eventually came into force in October 2004, aiming to protect consumers from unsuitable products.

Class Actions and Settlements

The Shared Appreciation Mortgage Action Group (SAMAG) was established in 2009, initiating a class action against the banks under the Consumer Credit Act. Over 300 homeowners contributed significantly to legal fees. While a Group Litigation Order (GLO) was initially granted, allowing collective action, the banks successfully appealed, leading to the withdrawal of the customers' case due to prohibitive costs. Many borrowers were then compelled to sign "gagging orders" to waive the banks' costs. More recently, solicitors like Teacher Stern LLP have successfully negotiated confidential commercial settlements with Barclays Bank (2021) and Bank of Scotland (2024) on behalf of SAM clients, with further claims being planned by other law firms, some offering "No Win No Fee" arrangements. Claims for Scottish SAMs, governed by Scots law, are also being organized.

Public and Media Scrutiny

Extensive Media Coverage

The significant financial distress caused by Shared Appreciation Mortgages garnered extensive attention across various media platforms in the UK. National newspapers frequently reported on the issue, alongside in-depth investigations by consumer advocacy publications such as Which? magazine (August 2003) and Saga Magazine (September 2006, August 2007). Television and radio also played a crucial role in raising public awareness, with BBC programs like Inside Out South and Radio 4's Money Box dedicating segments to the SAM scandal, bringing personal stories and expert analysis to a wider audience.

Key Figures and Allegations

Journalists and legal professionals became central to the media narrative surrounding SAMs. Nick Wallis, through his BBC investigations, highlighted the plight of affected homeowners. Legal experts like Christopher Philpot and David Bowman from Teacher Stern LLP have been interviewed extensively, articulating the legal arguments against the banks. Allegations frequently centered on the claim that SAMs were "fundamentally unsuitable" for consumers and "inherently unfair" under the Consumer Credit Act 1974. Recent articles in The Sunday Times by Ali Hussain, including a 2024 piece titled "Victory for families whose unfair loans cost them their homes," underscore the ongoing public and legal battle and the eventual commercial settlements reached.

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References

"Managing Innovation, Design and Creativity" by Dr Bettina von Stamm, published by John Wiley & Sons Ltd, 2003, Chapter 23: "Innovation in Financial Services, Case study 8: Shared Appreciation Mortgage – Bank of Scotland"

"Home loan for the Dome" by Michelle Carabine, published in the Evening News – Scotland, 2 November 1998

Companies House, retrieved 28 December 2018

Bank of Scotland ("as agent for BOS (Shared Appreciation Mortgage) No. 4 PLC") Shared Appreciation Mortgage sales booklet, 1997

Barclays Mortgage Service information checklist, reference number 1797 (2/98) at the foot of the page

Financial Ombudsman Service, retrieved 6 February 2018

"Financial Services Bill receives Royal Assent" published by HM Treasury 19 December 2012, retrieved 13 February 2018

Were shared appreciation mortgages sold unfairly?, a BBC Inside Out South investigation by Nick Wallis, broadcast on BBC One on 8 September 2014

Mortgage victims may go to court by Paul Lewis, broadcast on BBC Radio 4 Money Box, 27 September 2008, retrieved 27 February 2018

Why is Joan trapped in her home? presented by Paul Lewis, broadcast on BBC Radio 4 Money Box, 22 April 2017, retrieved 6 February 2018

Shared Appreciation Mortgages presented by Paul Lewis, broadcast on BBC Radio 4 Money Box, 23 September 2017, retrieved 6 February 2018

A full list of references for this article are available at the Shared appreciation mortgage Wikipedia page

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This page was generated by an Artificial Intelligence and is intended for informational and educational purposes only. The content is based on a snapshot of publicly available data from Wikipedia and may not be entirely accurate, complete, or up-to-date.

This is not financial or legal advice. The information provided on this website is not a substitute for professional financial consultation, legal counsel, or expert advice regarding mortgages, investments, or property transactions. Always seek the advice of a qualified financial advisor, legal professional, or mortgage specialist with any questions you may have regarding your specific financial situation or legal concerns. Never disregard professional advice or delay in seeking it because of something you have read on this website.

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The Appreciation Equation

💡 Dive in with Flashcard Learning! 💡

Introduction to SAM 💡

🏠 Defining the Shared Appreciation Mortgage

🤝 The Core Mechanism

⚖️ Risk and Reward Dynamics

SAMs in the UK Context 🇬🇧

📈 Genesis and Marketing Strategies

💰 Loan and Repayment Mechanics

📊 Historical Performance and Impact

SAMs in the US Context 🇺🇸

🏢 Commercial Mortgage Applications

🏘️ Affordable Housing Initiatives

📜 Tax and Legal Considerations

Quantifying SAM Returns 🧮

➗ Equivalent Compound Interest Rate

✖️ Annual Compounding Alternative

History and Evolution 📜

🌱 Conception and Development

🚀 Market Introduction and Challenges

🏆 Millennium Product Recognition

SAM Product Variations 📋

📑 Overview of SAM Products

Shared-Appreciation Mortgage Products

🏢 Associated Companies and Structure

Shared Appreciation Mortgage Companies

SIC (Standard Industrial Classification of Economic Activities) Codes

Regulatory and Legal Landscape 🏛️

🚫 The Pre-Regulation Era

📜 Legislative Interventions

🔄 Evolution of Regulatory Oversight

Hardship and Advocacy ✊

💔 Early Dissension and Formation of Action Groups

🗣️ Parliamentary Scrutiny

⚖️ Class Actions and Settlements

Public and Media Scrutiny 📰

📺 Extensive Media Coverage

🎤 Key Figures and Allegations

Teacher's Corner 🧑‍🏫

Edit and Print this course in the Wiki2Web Teacher Studio

True or False? 🤔

❓ Test Your Knowledge! ❓

Gamer's Corner 🎮

Are you ready for the Wiki2Web Clarity Challenge?

Explore More Topics

📜 Discover other topics to study!

References

📜 References

Feedback & Support 👍

To report an issue with this page, or to find out ways to support the mission, please click here.

Disclaimer ⚠️

📜 Important Notice

Dive in with Flashcard Learning!

Introduction to SAM

Defining the Shared Appreciation Mortgage

The Core Mechanism

Risk and Reward Dynamics

SAMs in the UK Context

Genesis and Marketing Strategies

Loan and Repayment Mechanics

Historical Performance and Impact

SAMs in the US Context

Commercial Mortgage Applications

Affordable Housing Initiatives

Tax and Legal Considerations

Quantifying SAM Returns

Equivalent Compound Interest Rate

Annual Compounding Alternative

History and Evolution

Conception and Development

Market Introduction and Challenges

Millennium Product Recognition

SAM Product Variations

Overview of SAM Products

Associated Companies and Structure

Regulatory and Legal Landscape

The Pre-Regulation Era

Legislative Interventions

Evolution of Regulatory Oversight

Hardship and Advocacy

Early Dissension and Formation of Action Groups

Parliamentary Scrutiny

Class Actions and Settlements

Public and Media Scrutiny

Extensive Media Coverage

Key Figures and Allegations

Teacher's Corner

True or False?

Test Your Knowledge!

Gamer's Corner

Discover other topics to study!

References

Feedback & Support

Disclaimer

Important Notice