Further questions
2. How many UK homeowners have already paid back their SAMs?
5. Why did the Share of Appreciation Percentage vary slightly, below the level of 75%?
6. What do these SAM holders hope to gain from a GLO?
7. What are these SAM holders hoping to achieve by this litigation?
8. How is this case being funded?
9. How much do the banks stand to lose in this case?
1. SAMs made sense for Borrowers at the time, so why should they complain now, when their houses are worth more than they ever envisaged? Aren’t they just trying to have their cake and eat it?
It is not right to say that SAMs “made sense” for Borrowers at the time. They could only have “made sense” if Borrowers knew exactly what it was that they were letting themselves in for when they entered into a SAM.
The Brochures issued in the marketing of SAMs gave the impression that, viewed from the perspective of a Borrower, a SAM was a highly attractive proposition. However, there are “problems” with the content of the Brochures. For a range of reasons (which will in due course be the subject matter of detailed argument in Court), it is the Claimants’ case that the terms of the Brochures, objectively viewed, were likely to mislead a prospective Borrower into thinking that the true costs of entering into a SAM were less than they would be or less than they were likely to be.
Furthermore, the core of the Claimants’ case is that the terms of the SAMs (if properly understood) were inherently unfair, because the amounts payable as the Lender’s Share of the Appreciation were grossly excessive and because such amounts should have been fairly and properly capped or limited but were in fact uncapped and unlimited.
In any case, it has not been to the Borrowers’ advantage that their houses are worth more than they ever envisaged. The nationwide increases in house prices have not only caused the costs of SAMs to be much higher than they would have expected, but have also caused the costs of substitute accommodation to be much higher. Many Borrowers need to move to smaller homes because they are elderly, yet they are unable to afford to do so because the cost of a suitable smaller home is now much greater than their share of the sale proceeds would if they were to sell their present home.
2. How many UK homeowners have already paid back their SAMs?
Our estimate is that there were some 12,000 SAMs altogether and in May 2009 we estimated that there could be around 7,000 SAMs which were unredeemed. On that basis, about 5,000 UK homeowners have already paid back their SAMs. However, these estimates are subject to confirmation by BOS and Barclays.
3. You mention that SAMs originated in the US in the 1980s. Have homeowners there faced the same difficulties?
The situation in the US was very different, and the same difficulties did not arise.
First, SAMs were capped in some states in the US with the result that the potential liability of SAM holders was limited, unlike that of SAM holders in the UK.
Secondly, the circumstances in which SAMs came on to the scene and left the scene were very different.
SAMs were first offered to the public in the US in 1980, at a time when mortgage interest rates were very high and very volatile. They were developed in order to permit individuals to afford to purchase houses, where the individuals needed a lower fixed interest rate to be able to make their monthly mortgage repayments and/or did not have significant savings for a deposit. They were not an equity release product. At the same time, SAMs provided lenders with a reasonable rate of expected return from the appreciation in house prices which was expected to continue from the inflation in the 1970s.
However, the US SAM market largely collapsed when both inflation and interest rates fell in the 1980s. Lower inflation decreased returns to lenders with the result that SAMs yielded less (after the event) than conventional mortgages. Lower inflation also resulted in a reduction in interest rates payable by home owners or buyers and this in turn meant that they were then able to afford conventional mortgages.
4. Why were SAMs withdrawn from the market in 1998 and did both banks withdraw them at the same time and if so, why?
It appears that SAMs were discontinued as a product ultimately because of a lack of interest from, and / or regulatory intervention in, the secondary market for the SAMs-backed Notes (or Bonds).
The banks could not take SAMs on their own balance sheets because they calculated that the average time between the taking out of a loan and its repayment was too long. The Treasury prevented life insurers from buying the Bonds. The result was that the banks ran out of organisations which would provide the funds required to finance the SAMs loans.
The Bonds offered on the securitisation of BOS’s second tranche of SAMs in February 1998 took much longer to place than those on the first tranche in July 1997, and (although previously planned) there were no public offers on BOS’s third (and final) tranche after the SAMs in that tranche were issued between early November 1997 and about the end of May 1998. Barclays’ SAMs were issued in a single tranche between about the middle of May 1998 and about the end of August 1998: their securitisation took place in March 1999 and it is believed that (notwithstanding the public offer) the Bonds are in fact now held for the benefit of one or more of Barclays’ executive pension funds.
5. Why did the Share of Appreciation Percentage vary slightly, below the level of 75%?
The Share of Appreciation Percentage was (in any particular case) determined by the loan to value (“LTV”) Percentage.
In the case of a fixed interest SAM, the maximum LTV Percentage allowed by the banks was 75% (and the Lender’s Share of the Appreciation was one times the LTV Percentage), and in the case of a zero interest SAM, the maximum LTV Percentage allowed by the banks was 25% (and the Lender’s Share of the Appreciation was three times the LTV Percentage).
Thus if a SAM holder borrowed something less than the maximum amount which could be borrowed in that particular case, the Share of Appreciation Percentage worked out at less than 75%.In fact, most SAM holders borrowed the maximum amount which could be borrowed or an amount which was not much less.
6. What do these SAM holders hope to gain from a GLO?
The common issues of law and fact which arise in relation to all these claims will now be dealt with in a limited number of test cases and all the remaining individual cases will be stayed. This will reduce the costs of the litigation. If every claim had to be dealt with individually, there would be a huge duplication of costs and the costs of each individual claim would be disproportionately high.
7. What are these SAM holders hoping to achieve by this litigation?
If they are successful with their claim under the 1994 Regulations, nothing will be payable by them to BOS or Barclays as the Lender’s Share of the Appreciation. If that claim fails but they are successful with their alternative claim under the new provisions in the Consumer Credit Act, the Court will have to decide what a “fair” return would have been for the loan and the amount payable by a SAMs holder should then be substantially reduced.
8. How is this case being funded?
The case is being funded by contributions made by the Claimant or Claimants in respect of each individual claim.
9. How much do the banks stand to lose in this case?
Assuming that the Claimants are successful, the answer to this question depends on two matters.
First, it depends on the number of SAM holders who decide to issue proceedings which will be dealt with under the provisions of the GLO.
Secondly, it depends on the relief granted by the Court. If the Court were to decide (under the 1994 Regulations) that no Lender’s Share of Appreciation is payable to BOS or Barclays at all, the “loss” would be very substantial. If on the other hand the Court were to decide (under the Consumer Credit Act) to impose some form of cap on the Lender’s Share of Appreciation, a borrower would have to provide the lender with a fair return on the loan for the period of the loan, and given that the loans were made as long ago as 1997 or 1998, the amount of the “loss” would inevitably be less than it would be if the case were determined under the 1994 Regulations.
Whatever happens, given that it is likely that there will be a very substantial increase in the number of SAM holders who decide to issue proceedings, the “losses” involved are likely to run into many millions of pounds.
In so far as the rights under the SAMs have been securitised, the “losses” will be borne in part by the holders of the Bonds and in part by the banks since the banks will be liable to compensate the holders of the Bonds to the extent provided by the terms of the Bonds.
10. Why is it that of the many claims issued to date, all but one have been issued against BOS and only 1 claim has been issued against Barclays?
There is a 12 year limitation period in each case (a restriction which does not apply to SAMs in respect of properties in Scotland). SAMs were issued by BOS in 1997 and 1998, and by Barclays in 1998.
Claims have had to be issued against BOS in order to avoid their becoming statute barred.
Claims against Barclays will not start to become statute barred until 2010. Thus there was no urgency to issue against Barclays and the one claim issued was issued for procedural reasons so that Barclays were proper parties to the proceedings seeking a GLO.
11. Where SAMs were issued in respect of properties in Scotland, can the SAM holders issue proceedings in England and thus become subject to the GLO?
Yes.
Furthermore, provided they have not repaid their SAM they can take proceedings even though their SAMs were issued more than 12 years ago since they are not subject to a 12 year limitation period.