After being slapped with a lawsuit five months ago, Bear, Stearns & Co. is now pushing forward with a new mortgage program designed to give borrowers lower interest rates.
The Shared Appreciation Mortgage (SAMs) is a product in which borrowers receive a low interest rate on their mortgage in exchange for a share of the profit when the house is sold.
It operates essentially the same as a reverse mortgage, with term structure being the main difference. "The underlying risk factors are the same: mortality, mobility, and also price risk," said David Zhai, vice president and senior analyst at Moody's Investors Service. "Borrowers have an option to redeem the loan in full or in part prior to the mandatory maturity on a pro rata basis. For example, the shared appreciation can be three times the original loan-to-value ratio multiplied by the net home appreciation."
The program was developed several years ago by UBS Warburg, and was eventually abandoned due to development problems in the U.K. When UBS' Sam Masucci was hired by Bear as a managing director to help officially launch the program, his former partner at UBS, Steven Marcus, sued Masucci and Bear for an undisclosed amount of damages this past May. The suit also seek to open all books regarding SAMs to Marcus.
Masucci has no comment on the development of the suit, but he did say that Bear has teamed up with National Commerce Bank Services Inc. to begin originating the loans for the program, and possible securitization of these loans down the road.
"The first lender, NCBS, is out originating and ultimately we'd like to securitize, but it's premature for that," Masiccu said. "It's just getting started."
The launch of this product comes at an opportune time in the securitization world, as mortgage-backed issuance is 55% below levels seen last year. "Right now the market needed more loans," said Zhai. "That's the issue; if you don't have loans you don't have a securitization. I think in a year or two when volume really builds up, they can start to securitize it."
Bear and NCBS have selected Coraopolis, Penn.-based ATM Corporation of America to process SAM loans, including appraisal, title insurance and settlement services.