Chapter 23. Innovation in financial services

CASE STUDY 8: SHARED APPRECIATION MORTGAGE – BANK OF SCOTLAND [71]

The UK housing market is thought to have an aggregate value of about £1,200bn, greater than the combined value of the UK's stock and bond market.

Financial Times, 14 November 1996

The idea – rationale and getting buy-in

"There must be a way of giving investors access to one of the largest asset pools there is, the housing market", thought Craig Corn, working at Merrill Lynch at the time as a director in structured finance. The UK housing market was dominated by owner occupation with private rental playing only a small role. This meant that for many households, a large proportion – in some cases well over 100% – of their net wealth was tied up in a single illiquid asset. The housing mortgage, which plays an essential role in financing housing purchase, does nothing to help householders reduce or diversify their risks. At the same time, commercial investment in residential property was very limited, discouraged by the cost of managing rented property and the difficulties of getting repossession of the asset. Pulling these thoughts together Craig was convinced there should be some value in designing a financial device that would somehow open up the enormous asset pool and give homeowners an opportunity to leverage their asset. What if one could find a way of linking an investment to a real mortgage? An alternative option would have been to have call options – but he felt that ...

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