For example, following lengthy comment periods, in 2006, the federal banking supervisors issued formal guidance on underwriting and managing the risks of nontraditional mortgages, such as interest-only and negative amortization mortgages, as well as guidance warning banks against excessive concentrations in commercial real estate lending.
Using an extension of classical immunization theory, this paper demonstrates that systemic risk of long amortization mortgage contracts is reduced when term to maturity of the contract at origination is significantly less than the amortization period.
With the so-called negative-amortization mortgage, which offers an introductory rate lower than the average, the borrower actually winds up paying more.
"And specifically, does the drastic increase in the use of risky financing schemes, including interest-only and even negative amortization mortgages, concern you?" Mr. Bernanke replied that the Fed was reviewing its guidelines for these loans and planned to issue new ones soon.
Then in the 1930s strong traditions emerged supporting amortization of mortgage loans; by 1934-1939 69% of commercial bank mortgage loans were amortized.
Of course, the most creative and talented financiers in American and European banks are the ones that brought us the no-doc, reverse amortization adjustable-rate mortgage, the mortgage-backed security and the credit default swap.
HSBC resisted some of the worst innovations, sticking mostly to fixed-rate mortgages rather than negative amortization loans with exploding interest rates.
At the same time, Mr. Shmulewitz said, other co-ops choose to have mortgages that provide for amortization of principal -- notwithstanding the higher monthly payments -- out of a desire to reduce the amount of the principal that will ultimately have to be refinanced.
Golden West, the king of option mortgages that permit negative amortization (that is, your principal grows), timed its recent sale to Wachovia brilliantly.
