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Negative Amortization Loans: Relevant Now More Than Ever

sales Remember the "sleazy Option ARM advertisements"?

They're back but with a whole new twist:

This is why I never did option arms. This is part of the reason why we are in the housing mess we are in. Yes, borrowers have to claim responsibility, but every Bank that pushed neg am as a financing alternative deserves the billions in write downs and losses in stock options that they are mired in. I have no sympathy for them...only contempt!

Oh, brother! If I see one more loan hack Monday morning quarterbacking this mess I'm gonna puke. There is nothing wrong with negative amortization loans; there was something drastically wrong with the way they were prescribed. The "new neg-am" advertisements are "posited indignation" and they're just as sleazy as the original advertisements. They prey upon the opposite of the greed motivation; fear. That ain't helping anybody!

Let me try to break down the negative amortization loan for you:

There is an interest rate charged; it may be adjustable monthly, annually, or for a specified period.
There are payment options. One option is LESS than the interest assessed for the month. Borrowers have the "option" to pay the minimum amount or a higher payment.
The difference between the lower amount paid and the higher amount assessed is added to the loan balance. The loan balance rises or amortizes "negatively".
If that balance rises to a pre-determined amount (usually 110% to 125% of the original balance), all bets are off; the loan becomes a fully-amortizing loan and the payment goes up...a lot.

Neither the neg-am loans nor the banks caused the housing mess; a supply and demand imbalance, combined with an adolescent nature towards understanding complicated loan products (by both borrowers and originators) did. I'm gonna help you out with this. Neg-am loans are neither good nor evil; they're just financial instruments. When prescribed properly, they can be a super-charged problem solver or liquidity builder BUT...you gotta do your homework, first.

When does a negative amortization loan make sense for you?

How about when you're looking to buy in a soon to recover market? NAR Chief Economist, Lawrence Yun believes that a V-shaped spike is due in three markets: sales

Middle-America cities that performed evenly over the past few years – like Cincinnati, Milwaukee and the Kansas City, Mo., area – are likely to experience home price gains in the 20 to 30 percent range over the next five years, while markets like Miami, Las Vegas and Phoenix could see prices go up as much as 50 percent during that time period, Yun said.

If you're looking to buy a $300,000 home, with $150,000 down payment, in Las Vegas, you might consider buying a rental property in Phoenix, for $150,000, as well (geographically diversify). Spread the $150,000 over both homes and use a negative amortization loan to keep your payments affordable, for the recovery period. You might sell the Phoenix rental for $225,000, in 2013, and use the extra $50,000 to pay down the Vegas loan under $100,000, in 2013. That's what wealthy people do. They buy low and sell high and the do it with other people's money.

Maybe you're saddled with debt and no lender is going to let you refinance with "cash-out", you might need a negative amortization loan. Let's assume you're paying $2,200/month on your $300,000 fixed rate loan and $800/month in $40,000 in consumer debt (credit cards). In 3 years, your mortgage balance will drop to $290,000 and your credit card balance will drop to $27,000. If you took out a neg-am loan, with a $1,400 payment, and applied the $800 cash-flow savings to your credit cards, you'll pay OFF your credit card debt in 3 years. You will have INCREASED your mortgage balance some $15,000 but you'll be swapping 14% debt for 6.5% debt.

none In the existing scenario, you'll owe an aggregate of $317,000 in 2011. With the neg-am loan, you'll owe an aggregate of $315,000 (on your mortgage) but your high-interest consumer debt will have been retired. Your credit score will most likely have risen, making your eligible for a MUCH better loan program. Oh, you'll save a bunch of money on taxes, as well.

Finally, maybe you have no liquidity (we call that cash in the bank in financial planning circles). That's VERY dangerous ! Investing that $800 monthly difference (if you have no consumer debt), can grow to a $35,000 nest-egg (assuming a 7% return). While the difference in mortgage balances will be $25,000 higher, with the neg-am loan, the investment account will have grown to $35,000; you'll be ahead some $10,000 and have what we call in financial planning circles, liquidity.

Oh...by the way...liquidity=safety. When the dung hits the blades, cash in the bank is king !

Here's the advice for today; don't be swayed by the fear mongers of today; you weren't swayed by the greed merchants of yesteryear. Do your homework, perform your due diligence, and call a mortgage adviser who has financial planning background. He'll analyze ALL of your assets and liabilities, and tailor a loan solution specifically for your situation.

After all, aren't you special enough to warrant personal attention?

Posted by Brian Brady- America's VA Home Loan Broker on 06/01/2008 03:33 AM

Comments (78)

negative amortization loans, truth about option arms

Originally posted at: America's #1 Mortgage Broker: Negative Amortization Loans: Relevant Now More Than Ever

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78 Comments on Negative Amortization Loans: Relevant Now More Than Ever

JUN

2008

Brian... excellent breakdown. I agree 110% and make sure that you put this in your week in review... I am dead serious... this post goes hand in hand with the post that I wrote : Are 'interest only' loans just like renting???

There were several comments within my post that stated.... : "interest only loans were bad"

No, interest only loans were not meant for everyone. And it wasn't always the consumers fault for taking one. It would be the loan officer that used the lower payment and didn't talk about the negative ramifications, just to get the client to take a loan that might have paid more to the loan officer. And the Pay Option Arm is the best example of this.

Yes, the Pay Option Arm did help create a small part of the mess that we are in now, but it was started by the loan officer preying on the consumer. So, who is at fault. And yes, the Pay Option Arm can be one of the better types of programs out there, if used correctly.

Excellent post and worthy of a feature... hence why I am flagging this. This is called educating the masses and not throwing stones at a particular product just because.

jeff belonger

and I wantd to add this....

This post is an eye opener that we should not blame the mortgage products, but blame the loan officer that preyed on consumers, giving them something that should have never been given to them in the first place. The consumer was never educated properly, but given false hope and promises...and lied to.....

jeff belonger

Jeff,

Yes...yes...yes...yes...and...

The consumer was never educated properly, but given false hope and promises...and lied to

maybe. Some consumers chose to ignore disclosures. Education is a two-way street. Thrown the bums out of the business and borrowers should shop mortgage advisers better.

Good comments.

Home buyers, the consumer, have stated to me over and over in the past 6 months that they would only have a fixed loan. They don't want any of those things that "move".

Brian, I agree with the paragraph that started with "This is why I never did option arms...." One can make scenarios to use Option ARM loans but the risk for even the eduacated borrower is too great more often than not. I totally agree with Jeff's comments about the loan offers preying on consumers. We need some stability in the credit market / housing market now. The faster we change consumer confidence, the faster the market will turn. AJ

One can make scenarios to use Option ARM loans but the risk for even the eduacated borrower is too great more often than not

AJ, that's just an incorrect statement. Educated borrowers, with a financial plan, greatly benefit from negative amortization loans. The wealthiest homeowners prefer the neg-am loan because of its leverage to incease their estate while avoiding the illiquidity of real estate investments.

Look, I know it's not "fashionable" to recommend neg-am loans today but I'm not about being "fashionable"; I'm about doing the job correctly. Mortgage originators, bank, correspondent, and brokers, seriously lack financial planning skills. That, combined with lazy borrowers are why we have so many foreclosures.

PS- By the way, if the argument against neg-am loans is because real estate might decline, why would anyone recommend a home purchase to their clients?

Brian.... you said... "By the way, if the argument against neg-am loans is because real estate might decline, why would anyone recommend a home purchase to their clients?"

BINGO.... why even buy property. If you use these programs correctly, then you limit any type of risk. I guess we are preaching this to the choir.

I wanted to add to this statement of yours. "Educated borrowers, with a financial plan, greatly benefit from negative amortization loans."

Those educated borrowers that work with a loan officer who asks about the consumers goals and properly walks them through these types of mortgages. Giving both pros and cons.....all of them, hiding nothing. And having the consumer repeat back 90% of what you went over. I always tell my clients that I want them to understand 85% to 95% of what I talk about. And if they have a question, to ask it, never hesitating.

jeff belonger

Brian- Great post! You are so correct that consumers need to do what is right for them and that sometimes people simply do not do what is best. We need to keep educating people and be as responsible as possible under all circumstances.

Best,

Scott

Brian great info in here, Jeff good insights as well.

JUN

2008

Brian - I agree with you wholeheartedly. Here in S.Florida many people were given option ARMs and while a few understood and made the right choice, I believe most borrowers didn't have a clue. LOs didn't educate, they misled - and made a lot of money. That's not the right way to do business.

JUN

2008

You're a Superstar brother & great post!! I honestly could not agree more & quite honestly haven't seen a post be as educating in a long time. If you're an LO...and not in a position to truly educate on WHY a neg am COULD be a great option NOW...you're mearly a used car salesman offering 30 yr fixed products that, even still, they may not understand. It's time to separate the pack & this is a great start!

Well said! - Josh

you're mearly a used car salesman offering 30 yr fixed products that, even still, they may not understand.

Exactly, Josh.

many people were given option ARMs and while a few understood and made the right choice, I believe most borrowers didn't have a clue

Dead on, Tchaka. The mortgage pros will remedy that. Choose a few of us wisely (as I'm sure you do).

JUN

2008

Again, for CERTAIN situations Option Arms work...lots of equity in the house and moving in a year...yes, it's not a bad idea...

Excellent post Brian! I too, am tired of the fear-mongers.

The numbers don't lie, but people do. It still amazes me how people will say that pay-options are too complicated and most consumers didn't understand what they were getting into. Give me a break! It's not that complicated.

I think some consumers and lenders just had their heads in the sand.

JUN

2008

Missed this one, not sure how. But bookmarked. Love your applications of this loan and honestly, this is one of the best pieces I have seen written on it. I can already think of clients who can use this loan. Thank you!

Are negative amortization loans very common these days? I have not seen one in several years.

Negative amortization loans are common in areas like California, Arizona, Nevada, and Florida (high growth areas). The thought was that the growth rate would exceed the deferred interest amount, and you could buy a bigger home.

Savvy mortgage originators use these loans as a financial planning tool. They are long held as a favorite of the wealthy because wealthy people understand arbitrage well.

JUN

2008

Brian,

I have never done one of these loans because I am aware of the dangers. I know that they can be an excellent financial planning tool if used properly; I will have to learn more about them. Thank you for the information that you've shared here. You really got me thinking there at the end about the possibilities of this loan.

Hi Brian -- I'm seriously impressed with the quality information and thoughtfulness that went into this post. Cudos!

JUN

2008

I have never done one of these loans because I am aware of the dangers. I know that they can be an excellent financial planning tool if used properly; I will have to learn more about them

That is one of the most intelligent and reponsible comments about neg-am loans I've read.

There are legit arguments for both sides.

I don't think these are good in a declining market and with rates going up. I have an "educated" real estate investor in my neighborhood that did an option ARM. His home is now listed and it says "Third Party Approval". He owes more than his home is worth and can afford the payment since the market went into the dumps.

Why recommend they even buy a home in a declining market? I believe they are buying a home for their family, not making an investment. Short term....we have not hit bottom yet. Long term, it will be a good investment.

That doesn't mean this isn't for some people. Heck, some people bought Worldcom at $5 per share after everything was made public.

I just can't see how this makes sense in a declining market with increasing rates. The risk definately outweighs the reward. I don't know of any smart investor that likes to pay a higher rate, have an adjustable rate in an increasing rate environment, and have their mortgage balance go up in a declining market.

I don't know of any smart investor that likes to pay a higher rate, have an adjustable rate in an increasing rate environment, and have their mortgage balance go up in a declining market.

Then don't recommend an ARM. Pick the fixed-rate term for 3 years, 5 years, or 30 years. Smart investors LOVE rising mortgage balances in any market (if they can invest the difference in a side account).

It's about liquidity, Bob.

Everyone has their own opinion. I am certainly not criticizing your's. I just usually associate these buyers that might consider option arms with not having liquidity concerns to where they will use their home equity as an investment. I am a bigger fan of IO loans, as I have one myself. My philosophy is you can always pay more every month, but the mortgage company won't let you pay less. Paying 6.5-7% on a loan for a 7% return, as your examples has, is not worth it to me. Just my opinion.

However, I respect yours.

Actually, paying 6.5% to get a 7% return is mega-profitable if you structure the investment properly

JUN

2008

Thats if you pay 6.5. The option ARMs back here are generally over 7% and none are fixed...thus the name ARM. And, again difference of opinion...I don't see a $10,000 gain over 3+ years as mega profitable.

What happens when you have recommend this to your borrower and they don't get those 7% returns?

And when it hits the 110-125% and they re-amortize, they have to pay to refinance or it re-amortizes and you pay interest on the interest you didn't pay. I have refinanced a lot of people out of these loans who were begging me for help.

Bob - Your point is well taken, however you're choosing to look at the worst-case scenarios only. The component you're leaving out is RISK. There is always risk and while we'd all like to minimize risk, we can't be totally fearful of it.

Yes the Option ARM can go up over 7% and yes it's possible to get less than 7% returns. But let's look at some positives....what's the ROI on the stock market over the past many years? I can't remember but I think it was around 8.9%. I believe the good (not just the top) growth funds are killing that. What if the person is investing that money into notes? Or flipping homes? Or something else that has high returns? Choosing to fix the 7% in this example but adjust the ARM portion suits your argument but doesn't necesarily reflect what will occur.

Also, let's say that the borrower does pay 7% and only gets returns of 6% on investment, that borrower would have lost out a bit. Are those the same people who came to you begging for refinance help? I'm guessing no. Your clients were probably those who invested $0 and returned 0%. The guy who invested and got back 6% is a tad behind the game, but that same person will have a lump sum of money to use for the reset. Brian, correct me if I'm wrong.

Yes, and if you explain the good and bad, and the customer still wants to do it...then that is their choice. However, recommending the use of equity in their home for possible gains is very risky for the LO to pitch. The borrower does need to consider worst case scenario and evaluate the risk. Simply advising them of the good and not the risk, is not responsible.

I guess worst case scenario is you lose your investment and your upside down in your home.

I would be very careful recommending this to invest in the market. For some scenarios, like flipping, it could be a good thing, but that wasn't the scenario. However, the guy down the street from me was an investor and took out a cash out neg am. When values corrected and his loan adjusted, he took a huge hit. He now has his home listed with 3rd party approval noted in the comments.

Lastly, it is also responsible to point out the bad and the risk in this forum, not just the upside.

I think most of these comments forget to mention that this product is for the (TRUE Investor), knowing about the product as one put it is easy, the TRUE INVESTOR doesn't need to be SOLD, as I repeat the TRUE INVESTOR doesn't need to be SOLD on this product. They all know about this product and have known for many of years as the COSI, COFI, and MTA, sorry if I missed an Index, but Understand from the True Investor standpoint, they wanted and understand the Product. I too never pitched this product and sold 10 loans to 3 people. One person took his 3.3 Mil, and did a 1031 and wanted this product as I did 6 loans for him, the other two had been Investors, and baught rental properties with them and have liked the cylce of returns when the vacancy comes into play. Yes reward and risk, but please mention the biggest down fall for this product as it was used for Liquidity, and money was risk and reward, but I truly believe that again the True INVESTOR had the rewards!!! The wage earner, the First Time home buyer, the 5th time home buyer, but still is a wage earner, they cannot afford the risk. Declining market or not, and they suffered and no rewards. Good Post, I hope your at the US OPEn, as what a day yesterday (Sat.) looking for a good finish.

Exactly. Chris, I couldn't agree more. These are not for the average home owner to invest in the market or pay down credit cards 2k more in a three period time. That was my point.

Is it for the investor you mentioned? Absolutely.

How many people are in option ARMs that are TRUE investors. What do you think the percentage is?

JUN

2008

Thats if you pay 6.5. The option ARMs back here are generally over 7% and none are fixed...thus the name ARM. And, again difference of opinion...

You're displaying your lack of product knowledge. I locked a customer in a 30 year fixed with a neg-am option at 6.95% last month. I have over 20 customers with a neg-am loan rate at 5.65%, for June (you have to pay attention to margin when you price ARMs).

I don't see a $10,000 gain over 3+ years as mega profitable.

It's not. If the difference, however, is invested in a tax-advantaged account (like a 401-k), then the AFTER-tax return is tremendous; you're arbitraging money at a 3% differential. That could be $10,000/year on a $350,000 loan.

Tchaka, you get it. Who cares if your ARM rate rises if you're invested in an equally rising investment; it's about arbitrage.

The wage earner, the First Time home buyer, the 5th time home buyer, but still is a wage earner, they cannot afford the risk

I disagree, Chris. You're peddling the fear I cite in the first paragraph. The first-time homebuyer can't afford a lack of liquidity- that's the real danger.

Have you ever wondered why the World Savings' default rate was far velow the industry? It's the liquidity! Smarter customer make wealthier customers.

PS: I wasn't at the Open but was glued to the TV. I'm a "Phil Guy" because I'm a homer but Tiger is perhaps the greatest athlete of all time. Today should be fun against Mediate

No need for personal attacks Brian. I am aware of what they are. You are now referring to a Fixed Pick a Pay loans. I don't consider these option ARMs. Again, my opinion.

Their indexes are low now, but we are in an increasing rate evironment and I would expect them to go up.

I am aware of what they are. You are now referring to a Fixed Pick a Pay loans. I don't consider these option ARMs

Of course they're not; they're negative amortization loans, Bob. This is why I wrote the article; to show that even mortgage originators are confused about this product.

Their indexes are low now, but we are in an increasing rate evironment and I would expect them to go up

I suspect the investmet vehicles' return would increase as well- that's the beauty of arbitrage.

Your right. The comments switched it over to an option ARM discussion.

Either way, unless they are a true investor with an opportunity with a good return (better than a spread of 1.5%), I still would not advise mortgaging their primary dwelling.

Investing in the stock market is a long term investment and this is a short term fix for increasing your liquidity.

Too risky just to invest in the market... Makes sense for flipping properties and other short term investments with big upside...but not for the examples listed above.

Understand, these are all opinions and no one is necessarily right... In my opinion, anyone that would offer this to a FTHB or some of the scenarios is very agressive or very confused. Just my opinion.

Understand, these are all opinions and no one is necessarily right... In my opinion, anyone that would offer this to a FTHB or some of the scenarios is very aggressive or very confused. Just my opinion.

Fair enough. Let me point out a vehicle that is perfect for arbitrage, Bob. It provides for added liquidity; the 401-k. The 401-k is designed as a long-term investment and allows borrowers to maximize their tax advantage by contributing pre-tax dollars. It provides for a loan provision in case they get in trouble.

Loss of liquidity is the number one reason for foreclosure- I think we OWE it to first time home buyers to keep their home equity separate from the house, in case they lose the jobg, become disabled, or suffer a loss of a spouse, they'll have adequate reserves.

JUN

2008

Brian

I personally took out an option ARM and feel that it is great product especially when used properly. I bought a property below market value and leverage with low monthly payments. Now I have an choice to make payments and given myself an opportunity to enjoy the lifestyle with extra liquidity. I agree though it may not be for everybody. But with right education and understanding it is great leverage tool and wealth creating instrument.

JUN

2008

I like the concept

JUN

2008

The problem lies with our education system. Our high shcools should have at least one class on Finance. Like Mortgages,debt, balancing check books etc. It the dumbing down of our society.its not perfect but damm we are the USA ! Neg am loans are great if you understand them and have the educaton to know what your getting into . Unfortunately banks offered subprime neg ams to alot of ignorant people and greedy Brokers and LOs. I remember World Savings offering subprime negams stated on 500 ficos to anyone . Of course these borrowers only wanted to pay $1000 mortgage payment on a $600000 mortgage stating theyre landscapers and day care businesses. Brokers and LOs stating $10K-$15k on 1003's ! of course the bank s were paying out big dollars on YSPs. THese loans were making cash money for everyone involved. unfortunately alot of people ,investors and banks got burned. oh yeah us lenders too.

Harold you're a new commenter so I'll have some fun with you, if you don't mind.

Be that educator; don't rely on the schools. When I was a kid, in Catholic School in Philly, we had a representative from Beneficial Savings Bank teach us the "miracle" of compound interest. With our parents permission, we were allowed to open a savings account as early as 2nd grade. Who do you think funded my first mortgage, in 1989?

Unfortunately banks offered subprime neg ams to alot of ignorant people and greedy Brokers and LOs. Neg am loans are great if you understand them and have the educaton to know what your getting into . Unfortunately banks offered subprime neg ams to alot of ignorant people and greedy Brokers and LOs. I remember World Savings offering subprime negams stated on 500 ficos to anyone

I don't think there was a "subprime" neg-am loan. World offered terms that were as negotiable as Countrywide's. I saw folks with low LTVs and 560 credit scores, with lower margins at World than 740 credit scores at Countrywide. I think that was more the mortgage brokerage community's fault bu the banks enabled them. Most neg-am loans I sold to CFC had lower margins than were offered retail. I had a lot of experience selling these loans and was originally trained by a superb World rep. Margin mattered to me.

Of course these borrowers only wanted to pay $1000 mortgage payment on a $600000 mortgage stating theyre landscapers and day care businesses. Brokers and LOs stating $10K-$15k on 1003's ! of course the bank s were paying out big dollars on YSPs. THese loans were making cash money for everyone involved. unfortunately alot of people ,investors and banks got burned. oh yeah us lenders too.

Yep. You're right about this.

oh yes there were 500ficos stated income deals. Guess who brought alot of these negam loans? yep CHL did and everytime I got a lead from our port . Looked up the old 1003 and credit file in our system. it was a usual suspect. low ficos 500 to 580 stated and landscaper and child care on the 1003. hey crap always rolls down hill and alot of people are left holding the bag . That s great you got to go to a catholic school im referring to our public school system. we do need some type of finance class in our public school system. Home ech aint going to cut it in the real world . you got kids or i mean young adults that dont even know how to balance a check book let alone understand how a 30yr mortgage works. by the way great site . thanks

That s great you got to go to a catholic school im referring to our public school system. we do need some type of finance class in our public school system

Public or private, Harold...YOU can make the difference. Volunteer to teach a weekly class about personal finance for high school juniors or seniors. If the schools won't address this, you and I will..

Thanks for the well wishes- please keep coming back

JUN

2008

Negative ARM loans may not have caused the housing mess, but they sure did'nt help when they are given to people with a how much is the payment mentallity and loan officers that don't fully explain.

Have A Great Day

JUL

2008

Brian,

Neg-am is just another loan product out there in the mortgage land. It is suitable only to those who know pretty much what to do with it and have great discipline. Standard homeowner should avoid it. Good reminder about its functions.

JUL

2008

Esko, I couldn't agree with you more...

It is suitable only to those who know pretty much what to do with it and have great discipline. Standard homeowner should avoid it.

Gentlemen, isn't it our job to educate our borrowers how to build wealth?

Absolutely. Why did Wachovia stop doing these loans as of yesterday?

Why did Wachovia stop doing these loans as of yesterday?

Because Wachovia doesn't know how to underwrite the risk properly.

And.....why doesn't Wells Fargo?

Why do banks ask for higher down payments, Bob?

JUL

2008

So, all the banks are discontinuing this product because of defaults and you recommend it?

Bob, that's a fallacious argument. Banks are discontinuing this product because it's risky TO THE BANK, not the borrower. The bank isn't my concern; my client's well being is.

Most originators should not recommend this product...but then again, most borrowers should avoid most originators.

What is fallicious? Why can't two people not have two different thought paths on your blogs? You are right in everything? I still disagree with this blog...but respect your opinion. This is a very debatable blog. Most do not care for Neg Ams.

If banks weren't experiencing losses, they wouldn't discontinue. Wachovia, Countrywide, etc were approving and funding these loans, not the LO.

I agree with your last statement.

Bob - I agree with you that at times Brian feels he's right in everything. But this is one of those times I will back him as being right. Yes, banks are experiencing losses and are discontinueing the product....but why are they experiencing losses? The reason is because of the misuse of the product. We have all (or almost all) established that it's the perfect product for certain situations. But the lenders do not have control over how their LOs or brokers present the Option ARM. So people get in trouble and in turn the lender gets in trouble. If they had STRICT controls over who could get an Option ARM and enhanced education, their losses would be greatly diminished.

JUL

2008

I agree with you that at times Brian feels he's right in everything.

Oy. Tchaka, I don't mind that you think that because I'm certain you and I won't agree on a lot of things- that's okay. I think the same about you and that's actually a compliment to you, Sir.

But this is one of those times I will back him as being right.

Thanks- I think I can count on you for being fair-minded. At the end of the day, I don't care if you agree with me but I do hope I've earned your respect- you have earned mine, Sir.

This is a very interesting and educational discussion. Every financial vehicle was developed for a particular niche and has it's place in the market. The historical problem with these products is that clients did not invest the difference. That is my problem with them. While it makes sense mathematically, the real life application for most is questionable.

I love your first scenario, but question the concept for someone straddled with debt. Would someone with that much consumer debt be disciplined to follow the strategy and actually apply the difference to debt. It seems to me that this should only be recommended to sophisticated and disciplined borrowers with an aversion to consumer (i.e. credit card) debt. Someone laden with debt does not fit that description even if they have high credit scores.

In the next few years, a huge number of these loans are going to recast and people are not going to be able afford the payments or refinance due to declining values. The subprime mess is just the tip of the iceberg.

My guess is that many banks are discontinuing this product because they are looking at their balance sheets and understand what's coming down the pike!

JUL

2008

Interesting discussion and lots of good information. A personalized loan solution is the bottom line. Most of my clients seem to go with straight conventional fixed.

JUL

2008

Excellent blog & explanation of Neg-Am loans......In my experience there are 2 types of borrowers:

1) Nesters - they actually want a HOME to live in, for a long time, with the same payment over & over....Fixed rate loans are best for them

2) Investors - they just want to make money, BOTTOMLINE, whether its via monthly cashflow or asset appreciation....Neg-Am or ARM's are the way to go with these guys

Neg-Ams were never meant for people who don't understand the principles of managing cashflow & debt, which is exactly who they got sold to....Too bad, especially for World Savings and now Wachovia.

JUL

2008

yes they are

Neg-Ams were never meant for people who don't understand the principles of managing cashflow & debt, which is exactly who they got sold to....Too bad, especially for World Savings and now Wachovia.

SOMEbody...gets it

JUL

2008

Unfortunately, even now, the masses could be sold a neg am loan if the market started to rebound. So, this is why the fed will make sure the market stays down until the get some type of regulation in place to ensure that this does not happen again. In my opinion, we need to stop trying to blame the customer or the broker that did these loans because the blame falls directly on the lack of regulation. We are a sales motivated industry and even though you and I may know the correct usage of a particular loan product, that will not stop someone or some bank from using it for profit purposes if the opportunity presents itself again. Great post and God Bless.

JUL

2008

Bravo! Although I had the option to sell these products, I never did. Many decietful loan consultants did, but my guess is that right about now they are exiting the industry, leaving us professionals here to do the business!

Chrsitina, did you even read the article? Your comment is an EXACT example of the "new" sleazy Option ARM advertisement.

JUL

2008

Negative Amortization was, is and will always be a bad idea..Never sold one, and never will. Thanks for the blog, I thoroughly enjoyed it!!

Negative Amortization was, is and will always be a bad idea..Never sold one, and never will. Thanks for the blog, I thoroughly enjoyed it!!

Example #2 of the "new" sleazy option ARM advertisement. Good Lord, originators on Active Rain are predictable.

NB: You MIGHT want to read the article before you comment to get your points

AUG

2008

Neg Am loans are definitely more relevant than ever to the shareholders of WAMU, Downey, First Fed, et al. The recast is like the "Margin Call" of old...time to "show me the money." We all know they money isn't there, never was. WAMU was counting Neg Am Interest as earnings for the past 3 years, so were many others. It was never there in the first place. If someone else's fubar only affected them, I wouldn't have so much of a problem with it. But loan failure ends up impacting everyone elses home values that were responsible, and yes, conservative.

I know we won't see eye-to-eye on this, and I hesitate even commenting but after getting another refi analysis complete for a dumb-@ss that allowed themselves to drink the "Real Estate only appreciates" Koolaid and having to tell him that he is screwed, I had to spout off.

I know we won't see eye-to-eye on this,

I don't think we're far apart. Rich, neg-am loans were bad for the issuing lenders, correct?

AUG

2008

Brian, thanks for being gentle with me...Know this, I completely accept the principles of equity repositioning and believe that for a "segment" (small segment) that neg am loans can be a useful tool.

IF there had been higher qualification standards in place for them; higher standards for LO's doing the loans, and possibly a neutral 3rd party involved in counseling the borrower like the process that exists for Reverse Mortgages, I think a lot of the mess would have been averted. The banks and investors got greedy and oversold the product en mass.

Ultimately, we as tax payers are funding all of the bailouts...that I am not excited about. If the government is not going to regulate, then the government shouldn't bail any of this guys out. They were able to take huge risks and now they are not having to eat any of the fall out. This is not the way capitalism works.

I agree that Neg-Am loans can work very well for an investor-type with the balance sheet, earning power and discipline to take advantage of them. I also think that in the world at large, that group is quite small.

Some of you posting to this blog may specialize in that market-place and for you, the neg-am and related products may make sense. In my experience, most mortgage lenders and originators are working with home-owner types who do not have the understanding nor perhaps the discipline to take advantage of the opportunities a neg-am might present.

Banks that are discontinuing these products may simply recognize that the people on the front lines offering the products are not educated enough in the down-sides to educate the borrower.

I train lenders and sometimes the younger ones will come up at lunch and ask about these types of loans. After questioning them, it is rare that I recommend neg-ams or even ARMs since so many of them are looking to buy a personal home or refinance because they have too much credit card debt.

I agree with an earlier comment that if they already have too much credit card debt, they are unlikely to have the discipline to use the cash freed up by a neg-am to pay down their debt or invest. Depends on why they have so much.

As for me, I always ask the lenders in my workshops if they agree that 'stated income' is another term for 'lier loan'. If anyone says yes, I fully disclose why I have used stated income myself, why it was the right vehicle and why it was a totally honest represenation of my income.

Great post and conversation.

In my experience, most mortgage lenders and originators are working with home-owner types who do not have the understanding nor perhaps the discipline to take advantage of the opportunities a neg-am might present.

Educate those homeowners; that's our job.

Banks that are discontinuing these products may simply recognize that the people on the front lines offering the products are not educated enough in the down-sides to educate the borrower.

Linda, I'll respectfully disagree. Banks are discontinuing these loans because THE BANKS don't know how they work,

Neg-am loans have been around for close to 30 years. They were offered by banks who understood how to underwrite them. When they were securitized, they were sold as "yield" to investors (who ate them up). The reason the banks discontinued these products? They worked TOO well; they transferred ALL of the market risk from the borrower and to the investor (that's where I was headed, Rich)

Great post and conversation.

Yep. Thanks to all of you.

hey guys - why don't we take out this really low payment mortgage and invest the difference in the monthly savings and all become millionaires? No really... I promise - it works! It's NOT neg am , it's deffered interest... at least thats how the World Mortgage people taught me back in the day - I remember it well Customer - What if the rates go up? - Answer - that means our savings and checking accounts will pay more interest wouldn't that be great..

= Pay Option Arm

Can I take a minute and tell you guys about this thing called an Australian Mortgage - now this is the real deal.... pay off your 2 million dollar home in just 7 months! Really! No Kidding - Would I lie to you? I saved you all that money and added 50 grand to the balance of your house when the flavor of the month was a 1% loan... trust me ~~~~~~~ for I am an EXPERT!

Lewis, that if funny.

Brian, Involuntary taxes have been around for thousands of years, don't make them a good idea.....

AUG

2008

Lewis, I have no idea what you just said; I"m guessing you were trying to be funny.

Bob, you;ll have to forgive my density; explain "involuntary taxes"

Hey Brian, hope you are having a nice weekend.

An example of involuntary taxes are income taxes.

Voluntary taxes would be things like road tolls, lotteries, sales taxes, etc...

But, I certainly don't want to open up another can of worms on your blog for people to get into debating taxes...

AUG

2008

Yes Brian - that was my lame attempt at humor....

An example of involuntary taxes are income taxes.

Allright. I understand that but I'm missing the connection. Every loan has interest (the tax?); every loan is voluntary. Where did the involuntary come in?

The correlation is.... Just because something has been around for a while, is not an argument that it makes sense or that its good.

Ahh, good correlation and excellent point. You pointed out that I used a fallacious argument. I said:

Neg-am loans have been around for close to 30 years.

I should have said:

Neg-am loans have been successfully utilized by responsible borrowers for close to 30 years which proves that the instrument itself is not inherently flawed.

DEC

Complexity seems to scare people, also taking responsibility seems to have gotten a bad name as well.

Hello, thanks for the interesting post. It seems that more and more people will suffer.

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