A new mortgage that offers borrowers a rate as low as 5% in return for a portion of the appreciation in their home could enliven lenders loan volume and the all but dead refinance market.
The shared appreciation mortgage, or Sam, is the result of a collaboration among Bear Stearns & Co. Inc., NCBS Correspondent Lending Group, and Alliance Mortgage Co.
Memphis-based NCBS, a subsidiary of National Commerce Bancorp, is offering the product through its network of more than 1,000 lenders and brokers. Bear Stearns will buy the loans from NCBS which buys and aggregates loans from its lender network and ultimately securitize them to offer to investors. In return for the lower rate, borrowers agree to share up to 60% of the homes appreciation.
Alliance Mortgage of Jacksonville, Fla., will service the loans, while Triad Guaranty Inc. of Winston-Salem, N.C., will provide mortgage insurance and ATM Corp. of Pittsburgh the appraisal and title services.
Shared appreciation mortgages are not brand-new. Bank of Scotland has offered them in England for five years, but they have not been available in the United States since the late 1970s, when U.S. companies attempts to market them failed, said Scott Stafford, president of NCBS.
Mr. Stafford said Sams have altruistic qualities they increase a borrowers purchasing power 15% to 20% and thus making homeownership available to more people and that they will in effect create their own refinancing market.
Sam Masucci, managing director of Bears Stearns mortgage group, agrees. Shared appreciation mortgages will get to certain markets where people wouldnt normally be thinking about refinancing their loan, he said, noting that refinance activity has virtually disappeared in the last 18 months. These people can refinance into a Sam and invest the savings in other things, such as college and retirement savings, or stocks and bonds.
Lender and broker interest in the product has been strong, Mr. Stafford said. Those offering it include Allied Mortgage of Houston, which has 570 offices in 39 states; IPI Skyscraper, one of the countrys largest brokers, will add the product to its menu after Thanksgiving.
Further, Mr. Stafford said the SAM will boost originations in several groups of borrowers, including borrowers who can afford more home through the product; home owners who want to diversify their assets through money saved on the lower rate; and pre-seniors, who he said may want the lower interest rate over future home appreciation. And because the loans will be immediately purchased by NCBS and then Bear Stearns, lenders will collect the origination fees but pass the lower interest-rate and appreciation risk on to investors.
Its a great product, said Doug W. Naidus, CEO of mortgageIT.com. Mr. Naidus said lenders will also benefit from the three-year prepayment penalties built into the Sam loans, which are included to prevent borrowers from using the loan as a short-term financing tool until rates move down.
The biggest risk to a bank is refinance, where a portfolio is being churned, he said. A bank can eliminate runoff through the Sam, and therefore sell the servicing for much more.
For the borrower, the Sam offers an opportunity to receive a below-market rate in exchange for a cut in an unknown variable: real estate appreciation. And for savvy borrowers who know their markets, said Mr. Naidus, Sams offer an investment hedge.
The borrower knows whether he got a good deal or how long he intends to own the home, while the bank has no idea, Mr. Naidus said. Why not save 2% for a year or two?
Mr. Masucci said that, though most of the risk will be taken by the ultimate investor, Sam securities should pose less risk than other investments, pointing out that investors only share in appreciation, not depreciation.
Neil Bader, chief executive officer of New York-based IPI Skyscraper, said: Its an absolute home run in the majority of the country. Its smart business, and it will put people in homes who could not otherwise have done so.
NCBS began offering the product in September, and Bear Stearns expects to do its first securitization sometime next year. NCBS and Bear Stearns will buy loans of up to $650,000 on property worth up to $1 million.