Negative amortization Loans, how to get out of it!!!

What can I do with my “Negative Amortization” Loan now?

We are still being haunted by these really tricky loan called “ Negative Amortization Loan”, whereby in good times nobody really has anything bad to say because when the property appreciates, its hiding the increasing balance due to deferred interest payments. But when the market is down and your balance is actually going up on a monthly basis, it’s a terrible feeling. Let me explain it differently, this “Negative Amortization Loan” or “1% Loan” or “Teaser Loan” as we called it before is a really bad loan. World Savings wrote a lot of these types of loan but use to require a minimum of 20% down for them. But when Wall Street started buying up these loans, they became wild and crazy and offered 10% down and even zero down loans with these types of mortgages.

Now, folks this is a loan that supposedly allows home borrowers to pay a minimum payments of 1% but actually is collecting about average 6% monthly. So, when you are given an options to pay a 1% rate compared to a 6% rate without really warning you of what will happen to the balance owe for the deferred payments. You and everyone else will probably pay the 1% right? I would if I am told that its my payments and who looks at your monthly balances and really tries to see the monthly deductions, right? Well, my friends this loan is “DEAD” and will never come back as long we there is a mortgage lender out there.

I think they should have put a BIG warning sign on your coupon that says, WARNING, THIS MINIMUM OPTION PAYMENT MAY ALLOW THE DEFFERED INTEREST BALANCE TO BE ADDED TO YOUR BALANCE FOR THIS MONTH. Just like they do on your cigarette boxes, your food labels and your fire hazardous toys…

So, now what do we do with them!

World Savings is no longer around and guess who owns all these loans now? Wachovia ( now owned by Wells Fargo) and if you have a Wachovia Loan of this sorts, are they modifying?

Actually my personal opinion since about a year ago is that these loans are no longer sellable in the secondary marketing, therefore these lenders will want to start to get rid of these loans either by modification or Short Sale.

If you have a “Neg AM Loan” and still are paying the minimum payment option, there is a clause in the note called “Recapture Option”, once your mortgage balance increases to between 110-125% ( depending on lenders ) over the original balance. The lender will recast your loan and adjust your payments based on current rates and fully amortizes it to start to pay down your principal balances.

If this loan was sold to homeowners who understood this types of loans, they were told that they could refinance this quick and get out of it. But they did not realize that the market was overheated already and was about to bust.

Southern California is suppose to only have between 68-90 thousand homeowners still toying with this type of loan. So, what are they doing with this.

MY ANSWER : WAITING!!!! Waiting for what? Waiting for a miracle, waiting for property values to go up again while they are paying these unrealistic payments. See my above notation about the “Recapture Options” its going to come back and bite you where it really hurts. Waiting for a Loan Mod, maybe I have seen lenders switching these loans to fully amortize fixed rate loans. You have to be able to afford the much higher payments though. Waiting for a short sale, maybe because I feel that lenders are very eager to sell this type of loan and they should approve the short sales a lot quicker for “Neg Am Loans”

If you happen to still be paying on this loan, call me and we will try to evaluate your situation and find out options.

A quick Q & A. I got an interesting call from a borrower who is still making their mortgage payments but tried to modify their home loan. Of course, they got declined and paid an attorney about 4K to help them. Now, after interviewing this borrower, I advised for them to stay at their property and continue to pay the mortgage. Here is their situation: current mortgage payment is about $ 2400.00 ( with Taxes ) per month, property of course is upside down about 100K, the borrower lives and works in the area and no distant driving required. Borrower also has parents living with them, total income is about 7K net and after paying all expenses on a monthly basis, they have about maybe 500-800 surplus funds. If they were to rent, they would be paying I guess between 1600-1800 per month. It’s a brand new home, maybe they also put some money into some upgrades and everyone is comfortable there.

I suggested for this borrower to stay because if they all move the savings that will have will go back to paying taxes if they loose the interest deduction. And the market in their area is getting stable. Assuming they will be approved for short sale and sells it for around current market of $ 250K, when they are ready to buy in about 3-5 years maybe the value of the property will be around $ 350K where its at now, will they get the same size property now and age, probably not. How much would they have saved for the down payment? Probably minimal or maybe equal to what would have been reduced on the principal if they continued the payments.

So, I hope you see where I am coming from, every situation is truly unique to your situation cannot be generalized. BTW, this homeowner above had mentioned that all his peers have Short Sale their property and that is one of the reason they want to do it. I hope my explanation is right, all I can do is give it my best judgement.

Thanks for the inquiries, please feel free to comment or inquire by phone or email. Call Ken Go of 1st Innovative Finance Group at 562-697-7028 or write to :kennethgo@verizon.net.