- quote -

Not always - in a very expensive market such as Los Angeles or San
Francisco, it may be the only way that a person of moderate means can
afford a place to live. It can also be suitable for someone who knows
for sure that they will only be living in the house for a moderate
period of time.

John Cowart

joetaxpayer wrote:
- quote -


Don't forget about balloon payments. ==(8-0

You buy a house with a payment schedule like this with the expectation
that it will increase rapidly in value, and you'll either sell ("flip")
it or refinance in a few years (like maybe just before the balloon
payment comes due, or before the monthly payment jumps.)

It's a good way to overleverage yourself. I suppose it can have a happy
ending, but it's certainly a lot more risk than I could accept.

Best regards,
Bob

"jIM" <noreplysoccer[at]hotmail.com> wrote in message
news:1147368646.029160.52140[at]q12g2000cwa.googlegroups.com...
- quote -

[snip]

- quote -


A really stupid idea.

jIM wrote:

- quote -

I think you have the right idea, if not the exact words.

The premise of the negative ammortization loan is two-fold, first, that
the price of the home will increase each year, second, that one's income
would increase each year.
Those two assumptions are true over the long term, and the ideal
scenario puts a person in a home they wouldn't otherwise be able to
afford. Magically, 5 years later, the home is worth 25% more, and the
homeowner is making 20% more income, and able to throw half of that at
the mortgage. Or maybe the spouse is now working when before s/he wasn't.
The risks we all believed existed, that the increased required payments
would result in huge default rates, appear to be exaggerated, as
observed by that cited article.
(you are correct, though, if a person tries to sell, and their mortgage
rose by more than the value of the home, they may find themselves
'upside down' on the note, owing more than the they can sell the home for.)

Banks offer a stagering number of variations on the theme.
A mortgage that starts with negative ammortization, but payments that
grow by a fixed percentage each year, until leveling out. Note, the
interest rate itself may be fixed or variable for such a deal.

Other mortgages combine a fixed and variable period. Maybe fixed for 7
years (and the rate reflects that), then variable for the next 23.

JOE

So I would assume some banks offer loans like this if they are being
discussed?

I assume this lowers the initial payment, but would require the
borrower to pay a much higher amount in future years? So if person
tries to sell their house and cannot make up for the "ammortization
increase" when selling, they lose money and that sound I just heard was
the real estate credit bubble bursting.

jIM wrote:
snip
- quote -

Normally, a mortgage will ammortize, that is, the priciple is paid down
at whatever rate, each year.
Negative ammortization loans allow the priciple to increase, maybe only
for the first few years, sometimes longer.
Usually, there's a provision for the payments to increase each year as
well so that in X years, the payment is now sufficient to pay all the
interest and start to pay some principle.
JOE

"jIM" <noreplysoccer[at]hotmail.com> writes:

- quote -

It is a loan where the loan payments are less than
the accrued interest, meaning that the loan balance
actually *increases* with time.

--
Rich Carreiro rlcarr[at]animato.arlington.ma.us

Tad Borek wrote:
- quote -

Yesterday's online WSJ had a pointer to this in-depth study by First
American, about mortgage debt. This one goes beyond averages and shows,
for example, the percentage of home equity for buyers with mortgages
taken out in 1995, 2000, 2004, etc., as well as the amounts of
adjustable debt that are festering out there (broken down by rate & year
of origination). Lots to dig into for the housing bubble watcher (or
skeptic) - data supporting both views:

http://www.firstamres.com/pdf/MPR_White_Paper_FINAL.pdf

The author's conclusion is that the most risk is 2004-05 buyers using
ARMs, especially at teaser rates and those with negative-amortization
loans. They already have minimal equity, and many will be put under high
stress when rates adjust - some will see a doubling of payments and
can't sell to get out unless prices rise. It's worse if the market were
to sit still or drift downward 10%. The charts are interesting because
you can see the % equity that would result for different buyer groups
(year, interest rate) if prices rose or fell different percentages. It's
the best "global" view of the mortgage market I've seen.

Now the study shows that these teaser/ARM/neg-am buyers are a small
minority, but one open question to me is quantifying the potential
"feedback" effects - for lack of a better word. To my knowledge there
isn't a precedent to look at. Arguably these buyers represent the
marginal purchasers that helped fuel unprecedented price gains (kind of
like the guy who bought VA Linux on margin at 400X earnings). Some of
these buyers, we know, will be forced to sell, including some
foreclosure sales. How much inventory does it take to marginally lower
the price, sending yet another owner into negative equity? It's a
market-liquidity question really and to my knowledge there isn't a
precedent to look at. The amplifying factor is that today's buyer can't
go and borrow at 4% to sustain the high price.

Another fact cited, which to me is "burying the lead", is that the
percentage of home equity has remained stable at about 57-58%, while
aggregate home values rose from about $12T to over $19T over the past
five or so years. This is pointed to as a positive sign, but I think of
how a sizable portion of the $7T price gains seems to have vanished
(i.e., the gains for homeowners who simply remained in a home that
increased in value perhaps 80%, and kept paying down their mortgage) .
The equity percentage should have risen, in the same way your capital
gains in a stock portfolio rise when the stock market goes up.

-Tad