The Fallacy Within Housing
OptionArmageddon is seeking to open consumers eyes to lender’s questionable actions. They write:
Remember: negative amortization is the amount of interest due on a mortgage that the borrower defers to future periods. Accounting rules allow banks to count these “deferred payments” as current income. But if borrowers default on their loans, if they never make payments in cash, then “income” previously recognized has to be reversed.
Say I’m carrying a balance on my credit card; I owe interest on that balance. If I’m not paying my bill on time–if I’m making the minimum payment each month, for instance–then I’m “deferring” interest payments to the future. Wouldn’t it seem foolish for the credit card company to treat my “deferred” payments as income today? Banks that sold option ARMs are doing exactly this: watching the unpaid balance on their mortgage loans rise while counting nonpayments as income today.
If home values are increasing and borrowers can refinance, then there’s little risk to the bank that the loan amount won’t be paid back. But home prices are now falling across the nation. And defaults are rising…….
The concept behind reporting invisible (read:nonexistent) payments from homes about to be foreclosed as income seems idiotic. No wonder investors are shying away from large lenders. The borrowers will not payoff mortgage debts, and these companies are simply delaying the inevitable.
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