1. The negative amortization mortgage was not the only reason but it did play a major role. At one time last year some major lenders like Countrywide had something like 8% of their mortgage portfolio in the State Of California were Negative Amortizing loans. As most of us know home prices in California are not cheap and to know that the 8% of the loans were in the billions of dollars its easy to see why Countrywide took a dump.
2. I don’t know what idiot or genius thought of this loan. The idiot that said lets give people the opportunity to pay less than the interest so the loan goes up in balance and you know what let’s give them the option to defer it up to 115% or even 125% of the value of the loan. The genius that said we can make a boat load of money making these loans and selling them in bundles to other financial companies. With the lower requirements to get approved on a loan it will be so easy to approve somebody on one. How can we lose.
3. For the people that don’t know what a Negative Amortization Mortgage is exactly, let me explain it as best as I can. What happens is you get 4 monthly payments when you get your bill. You get a 30 Year Fixed, 15 Year Fixed, Interest Only, and the Neg Am minimum payment. All of these payments would will give you an option of what you want to put towards your mortgage. As long as you make more than the minimum payment you do not get any mortgage lates on your credit report. The Neg Am payment is usually based on whatever you rate is minus 3%. Oh yeah, the kicker is your rate is never fixed. If you make the minimum payment the difference between that and the interest only gets put onto the balance of the loan and your loan gets bigger. Yippie, more debt. You can defer this money until it reaches usually 115% of the original mortgage and then it resets. What do you mean by resets says the weary client?
4. Here’s an example of what the 4 payments, commonly called “Pick A Payment” would look like with a $200k loan at 7%. 30 Year Fixed – $1330. 15 Year Fixed – $1797. Interest Only – $1166. Neg Am (7%-3%=4%) = $666(That’s funny huh). What happens is you take Interest Only – Neg Am which is $1166-$666=$500 and you roll this on to the loan. So your balance the next month on your mortgage will now be $200,500 and so on and so on.
5. Getting back to this reset thing. Once you have reached the 115% value you are required to start paying back the balance. If you make larger payments through out the life of the loan you could get back with it never resetting. Who are we kidding though, the people that took this couldn’t afford to pay it anyways.
6. Going back to the $200k example. You could defer $30k of interest on the loan in a span of usually 3 years. So now you owe $230k on the house. I hope you live in a market where you could sell or at least put that $30k to good use and put in a bank account or made money investing it. So here is how your payment breaks down at the $230k. You take the $230k and calculate it over 27 years now because you had already been in it for 3 years. You are required to make principle and interest payments now. Your new monthly payment at 7% interest is……$1581.97. Imagine you were making the minimum payment of $666 and then the next month having to fork out about $900 more just to keep your house. Hello foreclosure.
7. In the example above this is assuming that the interest rate never changes. This is probably being nice but the interest rate is probably around 8.5%-9% so those payments I used are on the low side. The interest rates for the neg am loan is based of of the Libor which is a daily moving rate. So your payment every month is calculated based on what it is the day your bill is printed.
8. This is a real shocker to any home owner who thought they had a great loan with all of these options to choose from. If things got tight one month you could just make the minimum payment and catch up when you had the money. This sounds good but that is not how our society thinks. We should be thinking I need to save a years worth of expenses in a savings account in case I lose my job or something else happens. then you wouldn’t need a loan like this.
9. The absolute worst part about this loan is that it was so easy to sell. Major lenders like Countrywide, Wachovia, and Washington Mutual all sold this loan but was not apart of their main bread and butter loans that they originated. They bought these loans from mortgage brokers that made the loans and the lenders in turn paid them for the mortgage note. The broker is now off the hook because they didn’t even use their money to fund it and they got paid.
10. Here is a good example of how a typical sales call would sound like from a broker or banker pushing this loan. After battling with the client over who has the best interest rate and costs with 3 or 4 different mortgage companies the broker decides to throw the Neg Am loan in front of them to see if they like it. (They can’t win the 30 year fixed war and really nobody can. 30 year fixed rates are based off of for the most part the 10 Year Treasury Bond. You take that number that day and add 2-2.25% on top of it, that’s what your 30 year fixed rate is for the day. You might be able to save.125-.25% with your local bank or credit union but I covered mortgage rates already.) “OK client I have this loan that the interest rate is at 3%,” says the mortgage broker. ” What,” the client replies. “Yes, I have a loan that is fixed at a 3% interest rate. This is the lowest interest rate around and I know this beats the 4 other mortgage companies you have talked to am I right?,” replies the broker. “Yes, that sounds really good,” an excited soon to be client says. “Great, so what we need to do now is get my documents out to you to sign and order an appraisal.” The client thinks they are getting a 30 Year Fixed Mortgage at 3% and does not even stop to think why this loan sounds too good too be true and why this brokers interest rate is so much lower than everybody else’s. Americans only want to hear what interest rate you have to offer and not the terms with the loan and that’s why this was an easy sell. Even during the 2-3 weeks you are in process with them you still get phone calls from other mortgage companies trying to get you to go with them but you stick with your 3% and close. Little did you know that the 3% thing is partially true. Its a fixed 3% minimum payment. They did not tell you that the actual interest rate is probably 2% higher then the 30 year fixed rate that you were battling with the other mortgage comapnies with. Most brokers do not go over what the interest rate is and the terms of the loan and will try to side step any questions you have. The said part is when clients would get to the closing table the actual terms of the loan will be discussed with a notary and then you find out about a pre-payment penalty. Not to say it will happen or this is how it always goes down but it has happened. Instead of walking from the table people will close because they do not want to go through the process again and really need the money they might be asking to take out of the equity of the home. Its hard to point the finger because both sides are at fault. The borrower should have read the terms(come on who reads all 23 pages of application documents) and the broker for not being honest about how the loan actually works. I believe its the broker to blame. Its like going to the hospital and just assuming they know what they are doing and taking their word for it. You have to do that because you have no training on how to do brain surgery. The broker knows they are getting a sale and then they can move on. Stupid Negative Amortizing loans.