Lenders offer cut rates now for a future piece of your pie
By Michael Larson • Bankrate.com

Moms always say it pays to share. Now, mortgage hunters can find out exactly how much.

National Commerce Bancorp. of Memphis, Tenn., recently rolled out what's known as a shared appreciation mortgage, or SAM, through its Southeast branches and NCBS Correspondent Lending division, which provides loans via affiliated banks and mortgage companies around the country. The loans let borrowers get lower rates and payments in exchange for sharing with their lenders part of the appreciation in value their properties experience. While the concept isn't new, this is the first time in recent mortgage history an institution has attempted to make the loans widely available through a high profile, nationwide launch.

"It makes a house more affordable right now," says Scott Stafford, president of National Commerce's correspondent division. "We've been getting some incredible feedback and a lot of excitement."

For consumers, the loans make buying homes and managing debt easier. But they come with drawbacks, too. People need to understand what they're getting into and what they're giving up with a SAM before signing anything.

Understanding SAM
SAMs have been around in various forms for many years. Along with adjustable rate mortgages, they drew thousands of customers during the early- and mid-1980s because double-digit mortgage rates left people scrambling to lower their mortgage bills any way they could. Yet most SAMs were done through private investors or small lenders, and since then, experts say, they've fallen in popularity along with interest rates.

Now, National Commerce thinks it can excite borrowers about the product again thanks to recent declines in housing affordability and higher mortgage rates. Affordability, which is an index created by the National Association of Realtors to show how easy or difficult it is for people to afford housing, slipped to its lowest level since 1992 during the second quarter of this year, and mortgage rates hit five-year highs this spring before declining over the past several weeks.

The bank has tweaked the program's parameters so lenders can earn a decent return in order to boost its chances of success. It has also partnered with Bear, Stearns & Co., a major mortgage investor, to develop a secondary market for the loans. If the Wall Street firm can convince investors to purchase bonds backed by SAM mortgages and National Commerce can sign up enough correspondents, some $2 billion in loans could be originated over the next year.

Monthly mortgage payment comparison
	Shared appreciation	30-year fixed
House value	$325,000	$325,000
Loan-to-value	80%	80%
Loan amount	$260,000	$260,000
Term (years)	30	30
Interest rate	7.00%	8.25%
Monthly payment	$1,729.79	$1,999.18
Monthly savings	$269.39

"Really what you find when you speak to homeowners is they have the same problem -- they're priced out of the market. A lot of them are really stretched to get into the house or the neighborhood that they'd like to be in," says Sam Masucci, a managing director at New York-based Bear Stearns. "The concept of sharing, say, half the appreciation in exchange for either a larger home or saving a few hundred dollars a month, which in turn they can invest in other things, is prudent and makes a lot of sense."

The exact amount of the rate and payment savings depends primarily on the mortgage's loan-to-value ratio and the percentage of appreciation the borrower is willing to share. Generally speaking, the higher the loan-to-value ratio and the lower the amount the customer agrees to share, the higher the SAM rate. The maximum LTV allowed is 95 percent, while the sharing percentage can range from 30 percent to 60 percent.

On Sept. 5, 30-year fixed rates on National Commerce's SAMs ranged from 5.125 percent at the bottom of the sliding scale to 7.875 percent at the top, assuming zero discount points. Most Memphis lenders surveyed by Bankrate.com were quoting rates in the high 7s with no points around that time while the Bankrate.com national average, which includes mortgages with points, was 7.64 percent.

SAM mortgages don't come with any additional closing costs and customers don't have to pay their appreciation bill until they pay off their loans. There is an average fee of about $150, however, for the end-of-loan appraisal that determines how much appreciation occurred.

Share later means pay later
While SAMs can help first-time buyers into homes and allow other customers to buy larger homes than they otherwise could, there's no such thing as a free lunch.

For starters, SAM borrowers have to agree to sign away several thousand and possibly tens of thousands of dollars that would otherwise be theirs. That leaves them with less money to put down on future homes. As a result, they may need larger mortgages down the road -- something that eats away at the money they saved by getting the lower SAM rate.

In certain circumstances, the impact from the loss of a portion of the appreciation can be more severe. People who plan to start families and live in high-appreciation markets, for instance, will have less money to buy down the road even as they need larger homes that are more expensive.

Borrowers who plan to stay in their homes for the full 15- or 30-year terms of their mortgages face a difficult task, too. They don't have money from a home sale to cover their lenders' appreciation payments. If they haven't been putting cash aside, they may need to refinance or take out new loans to foot the bill.

Comparison of loan payoff amounts and total amounts paid to lender
	Shared appreciation (50% of appreciation)		Conventional mortgage
Initial home value	$325,000	$325,000	$325,000
Interest rate	7%	7%	8.5%
Annual appreciation	2%	6%	N/A
Years	7	7	7
Mortgage balance	$236,983	$236,983	$242,006
Total monthly payments	$145,302	$145,302	$167,931
Future home value at payoff	$373,323	$488,680	N/A
Home appreciation	$48,323	$168,680	N/A
Share due to lender	$24,161	$81,840	$0
Loan payoff amount	$261,145	$318,823	$242,006
Total paid to lender	$406,447	$464,125	$409,937

"Most people aren't going to save that extra money. In order to come up with what might be a $50,000 or $100,000 lump sum, I would suspect that most consumers would have to take out a new mortgage," says Marilyn Bergen, a certified financial planner with Capital Management Consulting in Portland, Ore.

"Instead of having a 15-year loan or 30-year loan, they're going to have to extend that another 15 years or so."

Markets make the difference
At the same time, borrowers who live in housing markets with little or no appreciation have virtually nothing to lose by getting SAMs. Lenders can't come after equity that customers establish through down payments or build through principal payments. So when home values stagnate, borrowers get cut-rates loans essentially for free.

"It doesn't sound like a great time to be doing this for buyers because the market is so hot around the country. You're giving up the upside," says Robert Shiller, an economics professor at Yale University in New Haven, Conn. "But the homeowners that would be most advised to do this would be homeowners in declining markets."

People interested in National Commerce's SAM program will have to spend some time hunting, though. The bank only introduced the program in mid-August and it isn't available everywhere. Customers who live in the Southeast can get one through branches of National Commerce's mortgage division while others should call the bank (toll-free, 888-317-0858) to see if one of its correspondent lenders offers them nearby.

Nevertheless, Stafford says he's convinced the program's popularity will blossom.

"With some of the national originators we have in place and some of the large local lenders we have in place, to expect to be producing north of $100 million a month is extremely reasonable," he says. "It's just a function of getting people educated."

"Bear has a very large appetite for the product and in their eyes, more is better."