Where Have All the Negative Amortization Mortgages Gone?

Negative Amortization Mortgages just dont seem as popular today as they were a few years ago. It wasn’t all that long ago that the airwaves, and my mailbox, were stuffed with 1% payment rates on mortgages called “pay option”, “pick-a-payment”, and even “Secure Advantage” loans. Where have they all gone?

Negative Amortization: known as “NegAm” to those in the mortgage industry

Negative Amortization, or “deferred interest,” occurs when the mortgage payment is less than a loan’s accruing interest. This causes a loan’s balance to grow instead of reduce or “amortize.” These loans are also known as “pay-option” loans because the borrower had the option of making one of several payments (minimum payment based on a low “payment rate”, an interest only payment, or a fully amortizing payment, or anything in between).

These loans, also known as “neg-am” loans, could allow the borrower to add up to 15% of the original loan balance to the note (10% in New York State) in deferred interest. Generally, this meant that if the borrower made only the minimum payment each month, the loan would then be “recast” at a fully amortizing rate for the new balance at around the 53rd month into the loan. It is at this point that many homeowners saw their monthly mortgage payments triple as they moved from a low payment rate of around 1% to a fully amortizing principal and Interest payment at a rate of 6% or higher on a loan balance that had grown by 15%.

Californians loved Negative Amortization Loans

NegAm loans were huge in California (and to a lesser extent in Arizona, Nevada, Florida and New York). Californians loved the loose guidelines and the low payments on those expensive properties that seemed to only go up in value.

"Map of Misery" courtesy of Irvine Housing Blog

As property values declined in 2008, many homeowners found themselves owing significantly more that they had originally borrowed against a home that was now worth less (making them “upside down” or “under water”). This led to many deciding to walk away from their homes and allow the banks to foreclose on the property. Fortunately, there are many companies who offer mortgages in California that did not engage in this practice, and kept their borrowers in good financial shape.