Shared appreciation mortgage

Sales and Marketing

About 12,000 Shared Appreciation Mortgages were sold by Bank of Scotland between November 1996 and February 1998, and about 3,000 were sold by Barclays Bank between May and August 1998. They were sold by Bank of Scotland through financial advisers and mortgage brokers, and by Barclays directly to the borrowers.^[1] Barclays Bank loaned a total of £100m of Shared Appreciation Mortgages, and so the average size of each of their loans would have been about £33,333.^[2]

Barclays' booklet on Shared Appreciation Mortgages says that they were "specially designed for the needs and lifestyles of the mature homeowner... aged 45 or over and... property worth over £60,000."^[3] They were mostly aimed at people aged 65 and over, and marketed as ideal for people who had paid off their mortgage, allowing them to release cash tied up in their home without having to sell up.^[4]

In 2014, nearly half of the Shared Appreciation Mortgages were still active.^[5]

Millennium Product

The Bank of Scotland Shared Appreciation Mortgage was selected as one of 1,012 Millennium Products by the Design Council. The Millennium Product concept was launched by Prime Minister Tony Blair in September 1997^[6] and the full and final list was unveiled by him in December 1999. He hailed the Millennium Products companies as "the very best of British innovation, creativity and design."^[7] The Bank of Scotland Shared Appreciation Mortgage was described by the Design Council 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."^[8] The description does not state the size of the share in the appreciation in the value of the home. 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.

The Loan and the Repayment

The lender of a Shared Appreciation Mortgage lent a sum of money up to a maximum of 25% of the value of the property. The borrower retained ownership of the property and no repayments were made until the property was sold or the borrower died. At that time the repayment was the original amount borrowed plus a share of the increase in the value of the property. The lender's percentage share was three times the percentage of the value of the property that was originally borrowed.^[3] Therefore if the original loan was 25% of the value of the property, the share of the increase in the value would have been 75%. For the purpose of this calculation, the final value of the property was not the price at which the property was sold, but a valuation commissioned by the lender and paid for by the borrower.^[9] So if the property was sold for less than the valuation, the borrower's percentage share would be further reduced.

Barclays' booklet on Shared Appreciation Mortgages gives an example of a property with an original valuation of £100,000 and a final valuation of £150,000.^[3] For a loan of £25,000, i.e. 25% of the original valuation, the repayment would be £25,000 + (75% × £50,000) = £62,500, i.e. 42% of the final valuation. Over a period of 20 years this would be equivalent to a compound rate of interest of 4.7%.

However the value of property has increased by a much greater amount than Barclays used in their example. The final valuation of the property in the example might now be £400,000. For a loan of £25,000, the repayment would be £25,000 + (75% × £300,000) = £250,000, i.e. 62.5% of the final valuation. Over a period of 20 years this would be equivalent to a compound rate of interest of 12.2%, two and a half times the rate of the example. The borrower's share of the equity would be £150,000, less than half the final valuation of £400,000 of the property.

The large repayment amount of a Shared Appreciation Mortgage and the small share of the equity remaining mean that the borrower might not have sufficient money to be able to downsize to a smaller property. The borrower would have less money to pay care home fees, which would require the local authority to make a greater contribution to those fees. And the borrower would have less money to leave to his or her children or grandchildren, some of whom might have been looking after the borrower for many years.

Conversely, in the unlikely event that the value of property had remained the same or reduced, the Shared Appreciation Mortgage would have effectively been interest-free.

Barclays SAMS Limited Agreement

The Agreement between Barclays SAMS Limited (the "Lender") and the "Borrower" states that it is a Credit Agreement Regulated by the Consumer Credit Act 1974.^[10]

The Agreement gives an example of a Shared Appreciation Mortgage, with an unrealistic £20,000 increase in the value of the property: an Original Property Valuation of £120,000, Property valuation before redemption of £140,000, and a Total Loan of £20,000, i.e. 16.6% of the original valuation. In this example the repayment would be (3 × 16.6% × £20,000) + £20,000 = £29,960 (Barclays' figures), i.e. 21.4% of the final valuation.^[10]

Section 6 of the Agreement says, "You have read and understood this Agreement (including the Conditions and any special conditions). In particular, you confirm that we have recommended that you obtain independent legal advice on the meaning and effect of this Agreement and the Mortgage."^[10]

Barclays' booklet on Shared Appreciation Mortgages says, "Before making any commitment to a shared appreciation mortgage you may wish to seek independent advice or discuss it with your family."^[3]

Barclays used a checklist titled "Barclays Mortgage Service" when they were discussing a mortgage with prospective borrowers. "Y/N" was printed against 18 statements for "Y" or "N" to be circled by hand as appropriate. None of the statements included any recommendation to seek legal or other independent advice, or any recommendation to discuss the mortgage with their family.^[11]

Regulation

In the 1990s, mortgages were not fully regulated. Banks operated voluntarily under the Banking Code, and mortgage lenders operated voluntarily under the Mortgage Lenders Code. As a condition of operating under the Banking Code, banks had to sign up to the Financial Ombudsman Service, which has legal powers to put things right if customers have been treated unfairly.^[12]

Although Barclays Bank and the Bank of Scotland marketed Shared Appreciation Mortgages under their company branding, they set up separate companies to administer and issue the mortgages. These separate companies were not signatories to the Banking Code, and so the Financial Ombudsman Service was not able to investigate customers' complaints about Shared Appreciation Mortgages.^[5]

However Barclays' booklet on Shared Appreciation Mortgages says on the back cover, under the heading "THE MORTGAGE CODE AND THE BANKING CODE", "Barclays is committed to The Mortgage Code and The Banking Code, both of which set out the commitments and standards of banks in dealing with their customers. As such, we ensure that our products and services comply with the terms of both Codes. The Mortgage Code relates specifically to the service we provide, the provision of information regarding our mortgage products and services and how they operate."^[3]

The Financial Services Authority (FSA) did not start to regulate mortgage business until 31 October 2004.^[13] The FSA was replaced by the Financial Conduct Authority (FCA) on 1 April 2013.^[14]

Early Dissension

In October 1997 Harold Fisher and his wife borrowed £90,000 from Bank of Scotland under its Shared Appreciation Mortgage Scheme. By year three of the loan, Mr Fisher realised that the large increase in house prices meant that their debt to Bank of Scotland had increased by a much greater amount. He wrote to the bank to express his fears but they said he had signed the contract.^[15]

Mr Fisher then took his claim to the Financial Ombudsman Service, which ruled against him. They said that in Shared Appreciation Mortgage disputes, they usually ruled in favour of the banks.^[15]

Another couple who borrowed money from Bank of Scotland under its Shared Appreciation Mortgage Scheme, £72,000, were Geoffrey Cooke and his wife. Mr Cooke was planning to make an application to the High Court in September 2003 to have their mortgage contract dealt with under the Unfair Terms in Consumer Contracts Regulations 1994 (and amendments). He thought there was evidence that the entry and exit procedures from the loan breached statute law and European Union law.^[16]

After The Times reported on Geoffrey Cooke's case in August 2003, they said they were inundated with letters, telephone calls and e-mails from readers who similarly ended up facing crippling debts.^[17]

Shared Appreciation Mortgage Victims Action Group (SAMVIC)

As the Financial Ombudsman Service was ineffective, Shared Appreciation Mortgage customers contacted their Members of Parliament and in 2003 created the Shared Appreciation Mortgage Victims Action Group (SAMVIC), a body of 500 homeowners who felt that they had been deceived by lenders into taking on debts that were now exorbitant,^[15] to coordinate legal action against the banks.^[13]

Parliament

The House of Commons Standard Note SN/BT/3414 "Shared Appreciation Mortgages", written by Timothy Edmonds and last updated on 12 December 2013, says, "There have been a significant number of debates in the House about equity release mortgages in general and SAMS in particular, as the consequences of policies taken out some years ago now come to be appreciated."^[13]

A pensions Green Paper, "Simplicity, Security and Choice: Working and Saving for Retirement", was published in December 2002. It stated that the Treasury would be "looking at options to create a level playing field for the regulation of equity release and home reversion plans to protect consumers and make the market work better".^[13]

There was a general debate on 14 January 2003 in an adjournment debate in Westminster Hall launched by Angela Browning. During the debate, a number of members specifically mentioned Shared Appreciation Mortgages, including Vince Cable, Stephen O'Brien and the then Financial Secretary to the Treasury, Ruth Kelly.^[13]

During her speech, Ruth Kelly said, "I am pleased to say that, when the FSA's mortgage regulation comes into force, the proposed advice and disclosure regime will enable borrowers to become fully aware of the implications of all equity release loans before they take a decision on the right one for them... In the meantime, if Hon. Members' constituents believe that they have been badly advised, or that their mortgage was missold, and, assuming that all internal complaints procedures have been completed, they may be able to seek redress from the Financial Ombudsman Service."^[13]

In June 2003 the then Chief Secretary to the Treasury, Paul Boateng, initiated a consultation and in the following month he announced in response to oral questions, "All mortgage-based equity release schemes will be regulated by the Financial Services Authority with effect from 31 October 2004."^[13]

He also said, "... he is right to point out that a mortgage is one of the biggest financial decisions that a consumer makes. Equity release falls into that category too. They are very significant financial decisions. It is absolutely essential to protect consumers adequately. Indeed, I should point out that the FSA is the only statutory regulator in the world, as far as we aware, that has consumer protection as one of its statutory objectives. As he knows, there will be better protection for consumers when the regulation of mortgages and mortgage advice comes into force on 31 October 2004. The new regime will give the borrower greater confidence in the decisions that he or she is making."^[13]

During a further debate held in December 2003 in Westminster Hall, the Financial Secretary said, "... the FSA will regulate the selling of mortgages by first legal charges on UK property where at least 40% is residential accommodation to be occupied by the borrower or their immediate family. That definition was derived following consultation and is designed to protect loans when a person's home may be at risk as a result of being sold an unsuitable product."^[13]

The outcome of the consultation initiated by the then Chief Secretary to the Treasury, Paul Boateng, was announced by the then Financial Secretary, Ruth Kelly, on 10 May 2004. It was that Home Reversion plans would be regulated by the FSA. Under Home Reversion plans, part of the house is sold to the lender and part of the ownership of the property passes to the lender, whereas under Shared Appreciation Mortgages, full ownership is retained by the borrower.^[13]

Hardship Scheme

ln June 2007 Barclays launched the Barclays Shared Appreciation Mortgage (SAM) Hardship Scheme. According to Barclays, it was designed to assist customers who were in a situation of substantial hardship due to a change in circumstances, and needed either to move to a more suitable property or to adapt their existing home to make it suitable to their needs, but were unable to do so due to their Shared Appreciation Mortgage. It was aimed to help customers who were genuinely facing hardship and therefore not everyone would be eligible.^[18][19]

The Barclays Hardship Scheme would provide an interest-free loan to make up the difference between the amount of money the borrower would have after selling his or her existing home, and the amount of money the borrower would need to buy a new home, up to 50% of the value of the new home. The loan would be repayable on the sale of the new home, which would probably be on the death of the borrower.

The Bank of Scotland did not set up a formal hardship scheme,^[5] but said they would look at each individual case on application.^[20]

Class Actions

The Shared Appreciation Mortgage Action Group (SAMAG) was set up in 2009 by Hilary Messer, who was then head of litigation at RWP Solicitors (Richard Wilson Pangbourne^[21]), based in Reading, Berkshire. Over 300 Shared Appreciation Mortgage customers paid £5,000 each, a total of £1.5m, towards legal fees for a class action. Hilary Messer said that recent changes to the Consumer Credit Act made it possible to sue the banks over the mortgages. Under the act, the changes to which were retrospective, if a court determined that the relationship between a creditor and a debtor was unfair to the debtor, it had wide powers to vary the terms of the loan agreement. A legal letter before action was sent to the banks in January 2009. A Group Litigation Order (GLO) was sought at a hearing on 14 July 2009 and it was made in the High Court on 5 October 2009, enabling the Shared Appreciation Mortgage customers to take legal action as a group against the banks.^[22][23][24]

The banks appealed against the decision that allowed the case to be heard and, with a different judge, won their appeal. The customers' solicitors needed more money, which the customers did not have, and so they had to withdraw their case. The customers then became liable for the banks' costs.^[5]

The banks agreed to waive their costs if the customers made legal agreements ("gagging orders"^[20]) not to make any further complaints about their Shared Appreciation Mortgages.^[5] The Shared Appreciation Mortgage Action Group (SAMAG) was dissolved and became part of the wider Struggle Against Financial Exploitation (SAFE) action group.^[13]

Christopher Philpot of the solicitors Teacher Stern is planning to make a claim against Bank of Scotland and Barclays Bank for compensation relating to Shared Appreciation Mortgages that were sold between 1996 and 1998.^[25]

Media Coverage

As well as many reports concerning Shared Appreciation Mortgages in the national newspapers, there were reports in the August 2003 edition of Which?, the magazine of the Consumers' Association, and in the September 2006 and August 2007 editions of Saga Magazine.

A BBC Inside Out South investigation into Shared Appreciation Mortgages, presented by Nick Wallis, was broadcast on BBC One on 8 September 2014. One of the people interviewed on the programme by Nick Wallis was Dr Julian Lewis, Member of Parliament for New Forest East in Hampshire.^[20]

Christopher Philpot, Senior Associate in Teacher Stern's dispute resolution department, was interviewed on the BBC's One Show on 3 April 2017 in relation to the claim being organised against the Bank of Scotland and Barclays. There were also reports concerning Shared Appreciation Mortgages on the BBC Radio 4 Money Box programme on 27 September 2008, 22 April 2017 and 23 September 2017.^[21][26][27]

There is also a Facebook page: Shared appreciation mortgages Scandal

In Commercial Mortgages

A shared appreciation mortgage is a mortgage in which the lender agrees to an interest rate lower than the prevailing market rate, in exchange for a share of the appreciated value of the collateral property. The share of the appreciated value is known as the contingent interest, which is determined and due at the sale of the property or at the termination of the mortgage.

For instance, suppose the current prevailing interest rate is 6%, and the property was purchased for $500,000. The borrower puts down $100,000 and takes out a mortgage of $400,000 amortized over 30 years. The lender and the borrower agree to a lower interest rate of 5%, and to a contingent interest of 20% of appreciated value of the property. Because of the lower interest rate, the monthly payment is reduced from $2,398 to $2,147. However, this saving in monthly payments comes with a trade-off. Suppose the property is later sold for $700,000. Because of the agreement on the contingent interest, the borrower must pay the lender 20% of the profit, namely, $40,000.

By participating in the appreciation of the property, the lender takes an additional risk that is related to its value. Hence, whether this is a favorable trade-off depends on the conditions of the housing market. A shared appreciation mortgage differs from an equity-sharing agreement in that the principal of the loan is an unconditional obligation (to the extent collateralized by the property). Thus, if the property’s value decreases, the borrower would still owe whatever principal is outstanding, and if the borrower sells the property for a loss, the contingent interest is simply zero.

Revenue Ruling 83-51 (1983) of the Internal Revenue Service specifies conditions under which the contingent interest in a shared appreciation mortgage may be considered tax-deductible mortgage interest. In particular, a shared appreciation mortgage must stipulate an unconditional obligation of payment of principal to avoid being recharacterized as an equity-sharing agreement, which may lead to different tax consequences. Because of the complexity of tax laws and terms tailored for individual situations, private, noncommercial mortgages involving shared appreciation should always be executed with the counsel of a real estate attorney.

In Affordable Housing (Subsidized Home Ownership)

Shared Appreciation clauses are also used by non-profits and local governmental agencies.^[28] These shared appreciation loans are structured as second mortgages, but are considered "silent" in that borrowers make no payments until they sell the home (or, in some cases, refinance the first mortgage). At the time of sale or refinance, the family is required to repay the full amount of the loan plus a portion of the home price appreciation. ^[29] In this way, the amount returned to the subsidizing entity is based on increases in home prices, which helps to preserve the "buying power" of public subsidies.

One common approach to designing shared appreciation loan programs is to base the share of appreciation payable upon sale of the home on the share of the original purchase price that was subsidized.

For example, if a family received a $50,000 subsidy to buy a $250,000 home, the family would be required to give the community 20 percent ($50,000 divided by $250,000) of any home price appreciation at the time of sale, in addition to repaying the initial $50,000.

Additional limitations on the shared appreciation can be placed, such as a usury limitation of a maximum of 6% effective interest on the money lent, as is the case in the down payment assistance offered by the City of Seattle.

Examples include:

• The Downpayment Assistance Loan Program of San Francisco
• City of San Diego's Shared Appreciation Loan Program