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Thursday, December 10, 2009

Negative Amortizing Loans Getting a Bad Rap?

Dean C. Piller by GRI Instructor Dean C. Piller
Teaches GRI Course 109 - Residential Real Estate Finance, West Los Angeles College Instructor, Mortgage Broker
View future classes taught by Dean C. Piller

I have a few neg-am loans in my portfolio and they have performed very well for me. In fact, our current interest rate is in the 3.8% range, so I am not complaining. That is because I know what I am doing and was fully informed about how the Neg-Am loan works. Several borrowers took neg am loans who did not understand, and in several cases, these loans were done on a stated income basis. As a reminder, stated income loans are where the borrower or their lender "Lie" about their income. Lets restate the facts. If a borrower really makes the income, then they should be able to document it.

As we have become accustomed to, here is more evidence of an overreaction by a government bureaucracy.

Comptroller of the Currency John Dugan said regulators worldwide should prohibit lenders from making payment-option adjustable-rate loans and other negative amortizing products. "We should generally prohibit the decreasing of payments through so-called negative amortization loans, which have performed terribly," Mr. Dugan told an international banking conference in Tokyo. The U.S. national bank supervisor urged regulators to adopt minimum standards that require verification of borrowers' income and assets, meaningful down payments and underwriting that takes into account the fully indexed rate. The comptroller noted that real estate markets around the world are heating up due to low rates and they should be careful. "We in America fundamentally lost our way" and the consequences have been "disastrous," Mr. Dugan said. He went further, "It's simply hard to believe how far and how fast originators strayed from basic, fundamental, common-sense principles of sound underwriting. And perhaps it's even more astounding that lenders, investors and yes, regulators, allowed this to happen," he added. In the U.S., few, if any, are still originating these types of loans. Source: National Mortgage News

In summary, it is throwing out the baby with the bathwater. The Neg-Am loan can be a great cash flow tool if used correctly. But big brother does not think any of us are smart enough and they prefer to regulate us to death

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