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Consumers and Lenders Beware, the Biggest Real Sstate Bust Enduced by Negative Amortizing Loans
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Added: 09/08/2006
Type: Summary
Viewed: 715 time(s)
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Consumers and Lenders Beware, the Biggest Real Sstate Bust Enduced by Negative Amortizing Loans
"What are they thinking?" Consumers anxious to receive some relief from a heavy debt load are constantly bombarded with loan programs that offer a very low mortgage payment. Donna Beinfeld, President of Donnashi Enterprises, Inc., based in La Quinta, CA a firm specializing in post-closing quality control audits or closed mortgages and default loan review states, “today’s loan programs are extremely confusing to the consumer who believes the payment rate of 1-2% is the interest rate on the loan. The reality is, the payment is based on the 1 or 2% and that has nothing to do with the true interest rate of the loan. This program has a false bottom to it by touting payments based on 1-2% interest rate with a fixed term of 1, 2, 3 or 5 years. The borrower's true interest rate is based on index plus margin would be higher than today’s fixed rate mortgage of 6-7%.”
Many consumers don’t even know they have just signed loan documents for a negative amortizing (Neg/am) loan. How does a negative amortizing loan work? It is based on a payment plan lower than what the actual interest would be. If you borrowed money at 8% and paid 2% every month, the borrower really owes payments on 8% interest. The balance is tacked onto the principal loan balance. Donna Beinfeld explains that, “Instead of a loan balance declining every month, it could potentially increase every month until the maximum negative interest is reached, which can be as high as 25%.”
This program actually has a history. I first saw these loans explode onto the market in the early 1980’s when I was an underwriter for Cal Fed and PMI Mortgage Insurance. When this program first reared its ugly head, it was used primarily to help individuals qualify for home purchases in an interest rate environment of 13-18%. It stopped being popular when borrowers started to mail back their keys to the lender as well as a lower interest rate market in the mid 1980’s. Today's version is very different because it is meant to encourage individuals to use their home like an ATM machine, by paying of credit cards with home equity, and reducing their monthly “payment.” In a market where values are not increasing, but the loan balance is, will put the average consumer in a worse situation then before he refinanced. The ability for a consumer to recover from this type of mortgage is overwhelming. And to make matters worse, many of these mortgages have amortization schedules of 40 to 50 years, and/or prepayment penalties up to the first 3 years of the mortgage.
Mortgage bankers, borrowers and the real estate industry have a lot to worry about. Donna Beinfeld also states, “The number of defaults just beginning to occur is staggering. Most of the defaults are from interest first and negative amortizing loans. Consumers now realize that their loan balance is not declining, but the value of their home is.” Whenever I see or hear an ad to “lower your monthly payment” I shake my head and say, what are we as a lending community thinking?
Donna Beinfeld has been assisting mortgage bankers with new products, training, quality control and manuals since 1984. Donnashi Enterprises, Inc. formed in 1993 is a nationwide firm offering a variety of services to the mortgage banking industry including post-closing quality control, quality control plans, assisting banks and lenders with broker to banker conversion and new products.
www.donnashi.com
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