I wrote an article about ARMs with a broken link about "tempering negative amortization".
That encouraged this question from Jim Little, a Realtor in Sun City, AZ:
More importantly, after reading this article, I re-read the ARMs dealer post. You have a broken link regarding tempering reverse amortization. This sounds like an important concept, maybe you could adress it in a future post.
Great question, Jim. Sorry about the broken link. World Savings (now owned by Wachovia Bank) was the grand-daddy of negative amortization loans They are a portfolio lender and underwrote these loans very well. One of the "bells and whistles" they offered was their Equity Builder feature with the negative amortization loan.
The Equity Builder feature was combining a bi-weekly payment feature with the neg-am loan. What that did was allow a full extra mortgage payment to be applied to the loan balance during the negative amortization phase. It's actually pretty slick. The borrower repays half of a mortgage payment 26 times each year which tempers the negative amortization.
It's kind of like going down the highway at 85 miles an hour with one foot on the brake but it allowed many hesitant borrowers to feel comfortable that their loan wouldn't "reset" early. I found it useful to help clients budget and still invest the difference between the "two half payments" and a 30 year fixed amortizing loan into a side fund.
It wasn't "pure" in its financial planning approach but it worked by getting a lot of people to move "off the dime" and start increasing liquidity.
In your market, Jim, many retirees loved the concept of the negative amortization loan but hated the idea of eating into their heirs potential inheritance. Thus, this "bell and whistle' worked very well for them. World Savings was successful, they had (or may still have) a HUGE loan production branch right at 101st Ave and Bell Road, not too far from your office.
Thanks for bringing this point up, Jim!
