Negative amortization loan payments don't cover the interest, which is added to the principal, so every month you owe more on the principal than when you took out the loan. It makes sense if you bought a house you could not afford fully intending to flip it. Also makes sense if you have a good reason to think you'll make more money in the future so you can start making bigger payments. Typically, the borrower has the option of making a fully amortizing payment, an interest only payment, or a payment that doesn't pay the full month's interest and increases the principal.
mtgprofessor.com
Too bad about not wanting to read The Big Short. It explains what caused the global financial meltdown very well. Just the thing to read on a cold winter's night. One takes away the belief that as long as the lenders were flipping the toxic mortgages, they were doing all right. The stupid thing was keeping them. Somehow the smart guys decided that they actually were acceptable investments if they were hedged against. Somehow it became OK to hold notes when the payors were convenience store clerks, go-go dancers, and landscape laborers, as long as someone was willing to give a good rating. Well, we know how that turned out. But watching the details unfold from the point of view of the people who decided to short this is just riveting.
I am ordering Michael Lewis's new book, just came out this week, Boomerang: Travels in the New Third World.
amazon.com
I read the first chapter, on the Iceland meltdown, when it was printed in Vanity Fair. Absolutely fascinating. Other chapters are on the meltdowns in Greece, Ireland, Germany, and US state and local governments. |
