Q: I read your comments in the paper regarding the relative wisdom of negative amortization loans, and had a comment or two.
I’ve been in the wholesale mortgage business for eight years now. I am not an advocate of these types of loans except for a small slice of the lending pie.
In your example, with the buyer named Rebeca, it seems to me your reasoning is a little off in two respects. First, this type of loan qualifies on the fully-indexed payment, so qualifying for more home than you can buy rarely happens. Second, these loans are not as aggressive as some other options as they all require a down payment of at least 5 percent and usually 10 percent.
At least she will have some equity to start with! Also, I don’t see any explanation or reasoning behind the lender’s statement that using these loans is like “renting your home” instead of buying it.
I look at negative amortization loans as more of an option to be able to access your equity, one month at a time, without any costs! Truly, they are not for everyone. I don’t even see them as options for most home buyers.
My perfect borrower for this loan is someone with a $2 million property, with 35 percent in equity, where the borrower is going to invest the differential at a higher rate of return that the cost of the funds.
A: Yes, that sounds ideal. And, your ideal borrower is a long way off from a young woman in her mid-20s who earns $35,000 a year and is trying to buy a house that costs $320,000.
Too bad more lenders don’t share your view that negative amortization loans and interest-only aren’t for the masses. About half of all borrowers in Atlanta last year got one of these two types of loans. I’m guessing most don’t meet your specs for an “ideal” customer.
Thanks for your letter.
Sept. 15, 2005