Mortgages Negative adjustable-rate mortgages are back

Pick-a-payment. Payment option ARMs. Or how about negative adjustable?

Do you remember some of the big players like World Savings, Washington Mutual Bank, Great Western Bank, Home Savings of America and the likes of Wachovia Bank pitching these cheap payment mortgages back in the day?

Fourteen years ago, that ended. Negative adjustable-rate mortgages allowed borrowers to make a partial or minimal house payment, with the unpaid portion added to the mortgage balance. The balance could grow as much as 125% of the original loan amount.

Never again. Never again would mortgage lenders have the chutzpah to peddle this largely unsustainable home financing pipe dream. Or would they?

San Diego-based Axos Bank is introducing the deferred-interest loan of the future.

“This Mortgage Will Blow Your Mind,” according to its marketing campaign.

This adjustable-rate mortgage product is much different from the olden days of negative amortization mortgages, according to James Shoop, FVP National Sales Director at Axos Bank. The maximum negative amortization, or increase in loan balance. is roughly 110% (compared with the 125% maximum during the 2000’s), according to Shoop.

“It can be an inflation buster,” said Shoop.

Additionally, underwriting is much more conservative than in the meltdown days, Shoop said.

Income verification and a minimum 700 credit score are required. Debt ratios (total house payment and monthly bills divided by monthly gross income) are maxed out at 52%, assuming the highest possible mortgage balance and payment after five years.

Here’s a payment comparison: A primary residence’s sales price is $1.7 million, with a minimum down payment of 40% or $680,000. The loan amount is $1,020,000 million. The mortgage note rate is 5.25% for the first five years. Property taxes, homeowners’ insurance and HOA are required, but not considered as part of this example.

A fully amortized principal and interest payment would be $5,632.

By comparison, if you make the minimum payment of $2,337 at a 2.75% deferral rate (which is the note rate minus 2.5%), the difference between this minimum payment and the fully amortized payment is $3,295.

That deferred payment would get added to the loan balance, according to Shoop. So, you’d have a new balance of $1,023,295 in the second month.

The deferred interest party

ends after five years, or 60 months. Should the borrower make the minimum payment for all 60 months, he or she could see a dramatic payment increase in month 61.

It’s difficult to calculate exactly what that increased payment would be since this is an adjustable-rate mortgage. Contractually, the mortgage note rate could increase as much as 5% over the start rate.

Negatively amortizing mortgages are not illegal, according to mortgage attorney Richard Horn, partner at Garris Horn. Horn worked at the Consumer Financial Protection Bureau leading its legal team and creating consumer disclosures based on the Dodd-Frank Act.

“You have to jump through extra hoops to prove the ability to repay (negatively amortizing mortgages),” said Horn.

But it’s similar to the types of exotic loans that led to the mortgage meltdown of 2007. More than half of all mortgages originated between 2005 and 2007 with exotic features defaulted within two years, according to the CFPB.

If you are seeking some type of reduced mortgage payment to hedge against inflation, you might consider an interest-only mortgage as an alternative.

I found a 30-year, adjustable-rate purchase mortgage with interest at 3.875% for the first five years. The interest-only payment is $3,294.

Compare that to Axos’ negative adjustable rate of 5.25% for borrowers making the minimum deferred interest payment.

Shoop said the deferred-interest payment might be good for anybody with fluctuations to income, such as lawyers, real estate pros and those with incomes based on commissions.

I suggest you carefully go over the terms of this program and the worst-case amortization schedule with your mortgage loan originator and your financial advisor to fully understand what you are getting into.

Full disclosure: I am a former Axos Bank mortgage broker customer when it was called Bank of Internet. I recently reapplied to be a customer.

Freddie Mac rate news: The 30-year fixed rate averaged 4.72%, 5 basis points higher than last week. The 15-year fixed rate averaged 3.91%, 8 basis points higher than last week.

The Mortgage Bankers Association reported a 6.3% decrease in mortgage application volume from the previous week.

Bottom line: Assuming a borrower gets the average 30-year fixed rate on a conforming $647,200 loan, last year’s payment was an astounding $590 less than this week’s payment of $3,364.

What I see: Locally, well-qualified borrowers can get the following fixed-rate mortgages without points: A 30-year FHA at 4.25%, a 15-year conventional at 4.125%, a 30-year conventional at 4.875%, a 15-year conventional high-balance ($647,201 to $970,800) at 4.675%, a 30-year conventional high-balance at 5.375% and a 30-year purchase jumbo at 4.5 %.

Eye catcher loan of the week: A 30-year adjustable mortgage, locked for the first 10 years at 3.75% with 1.25 points.

Jeff Lazerson is a mortgage broker. He can be reached at 949-334-2424 or [email protected]. His website is www.mortgagegrader.com.