Negative Amortization Loan Disclosure.

Borderline consumers with low FICOs, No Doc Stated Income Loans etc, who are in need of a loan to make a mortgage loan work, are likely to be approached with a negative amortization loan.

Why? It’s simple: the lender is about to make a huge profit from higher interest rates, while the consumer makes payments that are doing nothing to reduce the debt. The rate payed to the bank can be 2-3 percent higher than a conservative 30-year fixed-rate loan at 6 percent. The consumer is allowed to make a lower payment due to the higher interest rate. As the consumer continues on the road into more debt, the banks pile up the profit.

Assemblyman Alberto Torrico from San Francisco, earlier this year has proposed bill AB 941, which would require loan advertisements to include a disclosure c.c. the actual interest rates vis-a-vis the payment rates. It will state that should the borrower choose to pay the advertised rate, the principle balance of the loan will increase. Also, the disclosure will not be in fine print, and ‘not smaller than the prevailing font in the printed advertisement.

The commission to brokers on these loans comes from the higher interest rate being charged, typically between 7.5-9 percent. In the meantime, the banks only pay taxes on the minimum portion of the gross assets received. Billions of dollars of these loans are generated by banks.

Consumers often do not see, realize or quite often, even care about this higher interest rate. And all the while, these over-market interest rates are what cause debt to multiply.

These loan practices have created losses and foreclosures. The economy has been dependant on a booming real estate market, with unfortunately some loan procedures creating false benefits.

If the new law passess, consumers will have valuable disclosures to keep them from
the pitfalls of short-term benefits that leave them with long-term headaches. Real estate is in the process of stabilizing and becoming a healthier, more realistic market environment.

In Addition: Interagency Guidance on High Loan-to-Value Residential Real Estate Lending