The much-ballyhooed "shared appreciation mortgage," dubbed SAM by its federal proponents and SCAM by its detractors is in limbo, probably for at least the next four to six months.
Contrary to the hopes of the outgoing Carter administration, you won't be able to walk into your local savings and loan association (S&L) soon and get a low-rate home-mortgage in exchange for cutting the lender in on your property's future appreciation.
SAM, according to sources at the Federal Home Loan Bank Board, has been put on ice for two major reasons. First, the financial industry and public interest group criticisms of the profit-sharing concepts have been unexpectedly sharp.
And second, Jay Janis, the bank board's chairman who pushed the plan hard just before the presidential election, resigned Dec. 15, leaving SAM twisting slowly in the wind.
The appreciation-sharing idea, as this column argued four months ago, is rife with potential problems for consumers as well as for lenders.
Although some home buyers undoubtedly would be willing to sign away 30 to 40 percent of their future equity gains to their lenders in exchange for a 10-percent rate in today's 15-percent market, many buyers might regret their decision a few years down the road.
They might, for example, find themselves splitting thousands of dollars of inflationary profits that provide their lenders annual rates of return of 20 percent or higher, making today's market rates look like bargains in comparison.
They might also find the SAM program's mandatory 10-year home sale or refinancing rule to be disastrous. As proposed by the bank board, anyone getting a cut-rate SAM would have to agree in advance to split profits with their lender no later than 10 years from receipt of the original loan. They could get a new market-rate loan from the lender, but not an extension of the low-rate SAM.
That could force moderate-income families to sell homes they really don't want to leave, or to refinance them at interest rates and monthly payments far higher than their budgets can handle.
The consumer problems posed by SAM are numerous and serious. What the bank board has heard from professional lenders in recent weeks, however, has seen even more sobering.
For example, the Chicago-based U.S. League of Savings Associations, the largest trade group representing S & Ls, informed the bank board that SAM has so many flaws that few lenders could use it today. Ron Timms, who prepared the league's lengthy comments to the bank board, described appreciation sharing between home buyers and lenders as a "concept that could work -- but not in the shape of a SAM."
S&Ls writing SAMs wouldn't actually own a share of real estate equity, noted Timms, but would instead own the rights to a lump sum, deferred payoff of "contingent interest" when a property was resold of refinanced. That lump sum chunk of interest would be taxable not at low capital gains rates -- as an S&L would get as an equity partner -- but at higher ordinary income-tax rates.
S&Ls are also worried about other aspects of the federal government's SAM, some of which should be tip-offs to consumers.
For example, said Timms, lenders writing highly profitable SAMs could be sued under state "unconscionability" laws that protect borrowers from loan arrangements that are skewed heavily in the lenders' direction.
"I can just see a homeowner faced with having to pay out 40 percent of a 10-year, $100,000 gain on a property," says Timms. "The homeowner's lawyer tells him the whole deal was "unconscionable' and they file suit -- tying up the loan for the next two years."
Lenders also believe it will be difficult to avoid breaking existing federal anti-redlining laws with SAMs. On the one hand, observes Timms, lenders making SAMs are supposed to be free to "negotiate" interest rates and appreciation-sharing percentages with borrowers, according to the expectations of future growth in the value of the property. On the other hand, under federal laws they're not supposed to discriminate among neighborhoods in the availability of terms of credit.
In economically declining or stagnant neighborhoods, expectations of market gain would normally be lower than in more desirable, high-appreciation neighborhoods. The terms of a SAM set by an S&L inevitably would be less favorable to a borrower in a lower-growth neighborhood.
"The howls about violations of the Community Reinvestment Act [antiredlining] and equal-opportunity statutes could be deafening," suggests Timms.
The howls from lenders who miscalculate appreciation rates on the high side in any neighborhood -- whether in the poshest section of a city or the poorest -- could also be deafening. An S&L that assumed a continuation of 12- to 14-percent average annual appreciation rates throughout the 1980s, and made low-rate SAM loans on the expectation of hefty profits at resale, could be a major loser if Ronald Reagan succeeds in getting inflation under control.
Which raises an important question about SAM and the incoming Reagan administration; Will Reagan's team at the bank board really want to promote a mortgage tool whose ultimate success is grounded on the very inflation Reagan is pledged to eliminate?
The team hasn't been appointed yet and Reagan himself has never mentioned the issue. But the outlook for SAM in its present form isn't good.