The Risks of Negative Amortization Home Mortgage Loans

admin — Wed, 17 Mar 2010 23:31:34 +0000

Negative amortization loans, also known as deferred interest loans, neg am and payment option ARMs (adjustable rate mortgages), are home financing options that have payment adjustment caps in addition to interest rate adjustment caps. This means that even though the loan’s interest rate may increase, your payment will generally stay the same. As housing prices skyrocketed, these loans became more popular because they gave homebuyers more power to purchase more house for a lower initial cash outlay. The 1% start rate also makes house payments more affordable for the first few years of the loan.

How Negative Amortization Occurs

A mortgage is largely figured by using the loan amount, the interest rate and the number of years to pay back the loan. Traditional mortgages consist of monthly payments to cover interest and a gradual reduction of the principal (amortization). With negative amortization loans there are payment caps that limit the amount of payment increases, but not interest-rate increases. As a result, the minimum payments do not even cover the monthly interest. The shortfall is automatically added to your loan balance, causing the principal balance to increase rather than decrease.

Neg-Am and Option ARM Risks

If you make the minimum payment, in addition to the unpaid interest being tacked onto the loan balance, additional interest may be charged on the shortfall. So, the deferred interest can take your equity and cause you to owe more than what the house is worth over time.

Comptroller of the Currency John C. Dugan said regulators are especially concerned about negative amortization loans in real estate markets entering down cycles: “If real estate prices decline — and there already is evidence of softening in some markets — these borrowers could face the bleak prospect of loan balances that exceed the value of the underlying properties.” Dugan and other regulators are also worried that many people may not fully comprehend the impending payment shock when the loan adjusts to fully indexed payment.

The federal financial regulatory agencies express concern over the fact that these low payment home buying options are offered to a wider spectrum of buyers who may may not otherwise qualify for a similar-size mortgage under traditional terms and underwriting standards. And, institutions are increasingly combining these loans with other features that may compound risk (“risk layering”) including reduced or no documentation loans, and the 100% 1st mortgage, also known as a no money down home loan or 80-20 loan because of the typical 1st mortgage that covers 80% of the purchase price and simultaneous piggyback 2nd for the 20% balance.

By: Mary Ny

State Fee Limits for Second Mortgages in California

admin — Thu, 14 Jan 2010 10:48:49 +0000

Everywhere you go, advocacy groups are urging stricter laws on non-conforming 2nd mortgages and home equity loans. Sub-prime mortgages are likely to be more costly than “A -paper” loans, but they are intended for borrowers who pose a greater risk to lenders. In most cases they are considered non-conforming because of the lack of credit or past credit problems.

California’s new laws, AB 489 and AB 344, became effective July 1, 2002. They apply to a mortgage or deed of trust with a loan balance of no more than $250,000. The protections provided by the laws are triggered if the annual percentage rate of the loan is more than eight percentage points over the yield on Treasury securities, or if the total points and fees payable by the consumer exceed six percent of the total loan amount. Thus, there is a 5.99% max in fees. (i.e., $35,000 second mortgage in CA is restricted to 5.99% of loan amount = $2,096 for APR affecting fees. Maximum APR for a 15 year 2nd mortgage in August in CA is 13.10%, and for the rest of the nation its 15.07%.

What is happening is that people in California are being rejected for 125% second mortgages and sub-prime home equity loans because the State of California thinks that they can’t make financial decisions on their own. And, some groups continue to feel the need for legislation further tightening the provisions of AB 489 which would make it even more difficult for California homeowners to use their home equity to secure loans.

If California homeowners want to consolidate credit card debt that they are paying 20% a month for, they should be able to consolidate the debt into a second mortgage. Interest rates are driven by market conditions, and credit risks determined by the lenders. CA should follow suit with the rest of the nation.

Excessive anti-predatory lending laws can hurt legitimate lenders and the consumers they serve. For example, sub-prime loans do help people with poor FICO scores by extending debt consolidation refinancing and second mortgage loans to pay off high-interest debts. Also, sub-prime loans are legitimately extended to borrowers with good credit who are self-employed or who have unpredictable incomes.

By: Maria Ny

Mortgage second » Loan Balance

The Risks of Negative Amortization Home Mortgage Loans

State Fee Limits for Second Mortgages in California