He cautions that while homeowners can stay in their homes, paying into a negative equity mortgage won't really help them get out of the debt from a house worth half the loan amount.
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.
Underwater, or negative equity, mortgages continued to be heavily concentrated in certain states.
Negative equity mortgages allow people to move house despite owing more than their current home is worth.
Negative equity mortgages are slowly creeping into the Irish property market to try and help families unable to sell up to move house.
With the so-called negative-amortization mortgage, which offers an introductory rate lower than the average, the borrower actually winds up paying more.
"Negative equity mortgages are being considered in Ireland because there have been such significant falls in house prices that many homeowners are finding themselves in negative equity – and therefore trapped in their homes," says Melanie Bien of mortgage broker Private Finance.
Lenders in Ireland are planning to launch "negative equity" mortgages for homeowners, it was announced last week, prompting speculation that there could be a return to such lending in the UK.
"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.
There were even negative-amortizing mortgages where buyers paid only a portion of the interest owed, so the debt balance climbed.
