As a mortgage company owner in I was quite perplexed as to why any sensible person would choose a negative amortization loan on a home. These loans offer and advertise a ridiculously deceiving rate such as 1% or 2% to show unknowing homeowners an artificially low required payment. The real rate is usually in the 8's and the interest is simply added to the loan balance. Once your loan increases to a certain amount the bank insists on a much higher payment and the homeowner is decimated.
When I asked the wholesale rep of the bank what advantages this loan provided he unconfortably replied "it's a cash flow loan". So I asked if it was for investors he replied " well not at that 90% loan to value... That is only for a Primary residence" I told him it only made sense for very sophisticated investors who had very short time horizons to flip a home. He then replied " it also has a 3 year pre payment penalty. I asked him why I would offer this... His biggest reason... THE COMMISSIONS!!!
This loan is the worst contributor of the financial meltdown in this country as it has encouraged rampant speculation in the housing market and has tricked unknowing homeowner to place the ownership of their homes at risk.
George Carlin, God rest his soul, was wonderful at pointing out how humans will re-word things to make them more appealing. I. E The Estate tax has been changed to death tax. To die can be referred to as pass away. The mortgage industry was no exception to this practice.
Instead of properly describing the loan as a negative amortization loan the banks changed the program to terms like "pick a pay" or "pay option arm". These terms were much easier to market than a mortgage that has the very word "negative" right in the description. It should have been called "live off the equity of your home for the next few years and hand it over to the bank loan". So shame on the mortgage industry as they figure out how to pass the buck on these deals to the tax payers of America with the proposed bailout.
My company Simplymodify re-negotiates the terms of homeowners loans by what is referred to as a loan modification. We contact the borrowers lender and get them to change the terms of the loan without refinancing. People stuck in risky adjustables and negative amortization loans as well as homeowners who owe more than the house is worth are candidates for our program. The banks via their own systemic practices are now also in dire straights. We are finding them more than happy to talk to us to give more stable terms to homeowners and in many cases are forgiving homeowners portions of principal to make the payments affordable. A homeowner has the option to contact the bank directly however many homeowners are coming to us because the banks are turning them away. As Congress ponders solutions thousands are losing homes.
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