The Problem with Poor Credit Home Loans, Negative Amortization Loans and other Interesting Notes on the Mortgage Meltdown.
Many people have been casting blame on certain sectors of the Mortgage Industry and while I believe that the blame cannot be placed on only one sector, after a personal analysis of the situation, as a loan officer who wrote loans during the past few years, I have concluded that the banks and lending institutions that invented these tempting loan payment programs are the most culpable. The fact that these lenders could not figure out that such lending opportunities would eventually turn sour, showed incredible naiveté and lack of common sense.
The crux of the problem came when homeowners and renters saw ads like, "Buy a $300,000 home and pay $800 per month". Normally a $300,000 loan would cost $1,800 in principal and interest and possibly $1,500 if the borrower wanted to only make interest payments. So then how could a lender offer a borrower a $300,000 home for $800 per month?
Introducing the NEGAM loan.
Although this kind of loan represents only one contributing factor to the current mortgage meltdown, it best illustrates why we are in the mortgage mess that we are today.
In such a program the borrower was given an option to pay $800 per month, but since their interest only payment was $1,500, the remaining $700 would be added to the principal. So that if a borrower put down $30,000 on their home and so owed $270,000, the next month they would owe $270,700 on their home. The next month - $271,400, etc. After a year they would owe an additional $8,400 bringing their principal balance to $278,400.
Furthermore, after one year into the new loan, their minimum payment would adjust higher. Instead of $800 per month the minimum payment might become $1,000 per month, until the 3rd year or 4th year, depending on the program, when the actual minimum mortgage payment would equal the original interest only payment of $1,500 per month. Furthermore, after three years , the principal would have increased another $20,000 because of all of the unpaid interest tacked onto the loan's principal. Since the borrower was carrying a higher principal balance their new interest only payment would actually be closer to $1,650 per month.
When the homeowner originally bought their home and only had to pay $800 per month that might have been a comfortable payment to make, even $1,000 might have been doable, but imagine their surprise when in the 3rd or 4th year they were looking at a payment of $1,650. Furthermore, the debt on their $300,000 home had increased from the original $270,000 to over $290,000; and then to top it all off, the housing market softened. Their $300,000 home was only worth $275,000.
After year three, this homeowner, like so many others across the country, (just change the numbers to match home values in each city), had a $290,000 debt, owned a $275,000 home, and a monthly payment that had adjusted to $1,650 per month. It's no wonder so many have decided to walk away.
The result of all of this chicanery is that homeowners are now foreclosing in record numbers creating a mortgage crisis of epic proportions. January of '08 saw a record number of foreclosures for one month. Don't think this is over yet. I suspect another three years before the dust finally settles.
In conclusion do not be caught by something that seems too good to be true. A $300,000 home should cost you $1,500 per month and if you cannot afford that then look for a less expensive home. Even more critical be sure that the next time you buy a home or refinance your home, you are working with a trained professional who is looking after your best interest and who is considering every aspect of your particular financial situation. If you do not understand what that loan officer is telling you, go somewhere else.
