Acton Institute Powerblog

Toxic Mortgages and Personal Responsibility

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Mortgage foreclosure rates soared 53 percent in August, compared with a year earlier, and many people who were eager to buy a house with low “teaser” interest rates and creative financing are in trouble. Acton Senior Fellow in Economics Jennifer Roback Morse expects new calls for goverment oversight of the mortgage industry, which is already highly regulated. A better idea, she suggests, would be for buyers to examine their motives for acquiring real estate with gimmicky loans and take some responsibility for their actions.

Read the full commentary here.

Jonathan Spalink


  • Roger McKinney

    Interesting article. We should have predicted this when mortgage companies were talking people out of making a downpayment and choosing a loan that not only covered 100%% of the price of the house but the closing costs as well. Borrowers should take some of the blaim, but so should lenders.

  • Scott Larson

    Thank you for some refreshing honesty. I have been in the mortgage industry for 17 years, and the negative amortization loan is one of the tools that I use to help borrowers in particular financial situations where cash flow is the primary issue.

    If a borrower is educated in how the loan works, and the advantages and disadvantages of each of their options, then they can make a choice of what works for them. I hear no cries about people that are put into a 30 year fixed rate loan – the MOST expensive option in most cases.

    So much has to do with how the tool is used. I had one customer who used the cash flow savings (and yes – negative amortization) to fund her 401K at her employer, Her employer matched her contribution, so she not only made 100%% on her money initially, but started that money growing tax deferred. Is that a good use of the money? Of course.

    A neg am loan is a tool, and just as we should not blame the neg am for foreclosures any more than we blame the stock market for "losing money". It is a tool to be used – for good or for ill.

    Similarly, the 100%% financing is a tool that allows people to get out of paying rent sooner than otherwise be possible. Saving 5, 10, or 20%% down comes at the cost of renting for most people so when ALL of the costs are compared, including rent and tax benefits it may make sense. Add in some of the opportunity costs (locking in the value, and potential appreciation) and the transaction can then be fairly compared.

  • Sales Sam

    I’m withholding my name for soon-to-be obvious reasons.

    I’m a mortgage broker. I’m also a big fan of

    One of the items that makes a market work is transparency; that is, for two parties to enter into an agreement, they need to understand the terms of said agreement, and they need to use that understanding to arrive at that crucial point where both parties benefit. That’s a simple feature that powers markets of all kinds.

    Unfortunately for supporters of, you’re arguing the wrong side of the issue. Mortgage companies (like the one who supplies my commission checks) are so deeply in bed with those in power that Lord Acton’s most famous of edicts could not be more tailored. To be sure, the market has not failed. It simply has not been allowed to work. The dealings that have made the lending industry what it is today have been stilted toward preventing that essential element of transparency that markets require. While more legislation is not the answer, your article is a little too niave for those of us that actually see how this stuff gets marketed and sold. Joe and Sally Hardluck should be able to read the documents, but those contracts are written in a way expressly designed to prevent common understanding of terms and conditions of a loan. (For instance, typically an ARM doesn’t have a "teaser" rate; the rate is clearly spelled out in the documents and adjusts after a set period of time, usually a period of 1 to 5 years. Your article is reffering to a home equity line of credit, which does, in fact, have what is called a "teaser" a rate that changes after a very short period of time, ot typically spelled out specifically in the documents. Interestingly, your piece does not mention that an ARM may have its interest calculated in one way and a HELOC another, a further complication not made apparent to either brother or consumer.)

    To think that the lending industry is hiding behind a huge "caveat emptor" flag is ridiculous; the contracts are intentionally complicated and designed to trick consumers. And it’s all set up through existing legislation.

    The notion that a negative amortizing loan is a tool is true. Much like hemlock tea or crack cocaine. Caveat emptor, indeed.

  • james kay

    The media loves to latch onto any forecast predicting doom and misfortune. No recent stories have been as ubiquitous in the media as the ones discussing the supposed ‘bursting’ of the housing bubble and so-called toxic, exotic mortgages. Let’s face it, these stories keep appearing because they’re sensational and scary – and let’s not forget, scary reports sell.
    A September 2006 issue of Business Week asks: “How Toxic Is Your Mortgage?” It goes on to talk about deceptive loans, phantom profits and an oncoming wave of defaults. At the center of this discussion in the media is the ‘negative amortization adjustable rate mortgage’. The truth is that no single entity can be blamed for the negative impact this loan has had. A blistering hot housing market, greedy brokers and misinformed home owners have all contributed to what now amounts to a growing epidemic of loan defaults. It doesn’t help that FHA insured financing, with its antiquated requirements and procedures, has forced low income consumers to look for alternative financing. It didn’t take the mortgage market long to meet that need. That’s how the ‘negative amortization adjustable rate mortgage,’ originally intended for high income borrowers with highly liquid assets looking for financing with high cash flow, morphed into a loan being sold to the general public as an affordable loan. Despite all the negative attention this loan receives from the media, we must not forget that a mortgage product is a financial tool that must be applied correctly to serve its purpose.
    From my point of view, from within the mortgage industry, lenders could definitely be doing more to market these loans in a more responsible way. However, consumers need to know that they are putting themselves at risk when they bargain shop or attempt to use online lenders. They’re picking a mortgage based on a set of criteria that may have nothing to do with their overall financial picture. Remember, you get what you pay for. You wouldn’t bargain shop for a doctor if you had a specific malady, you would seek out a professional. So why would you entrust your mortgage (which happens to be the largest financial transaction in most of our lives) to anyone less than a true professional. It is vitally important for the consumer to work with a trusted advisor. Look for an experienced professional who puts advice before price. Consumers should also take it upon themselves to gain a basic understanding of the mortgage process. You can find free reports on everything mortgage related at

  • Karl

    Yeah, I would agree that those loans are based on greed.I hope most of us get a fair chance at homeownership sometime in this lifetime.I see a lot of people doing drastic things to keep up,and most are embarrassed to say.Some even try undermining each other to cover greed.