Negative amortization loans became extremely popular for several years prior to this housing and financial market crisis.

If you could point your fingers and toes in enough directions as to who and what was the cause of this mess you’d run out of digits. Negative amortization loans, wielded improperly, would have had at least a toe pointed in its direction.

How the negative amortization works is right in its name. Dictionary.com describes amortization as "To liquidate (a debt, such as a mortgage) by installment payments or payment into a sinking fund". So, we are simply talking about its opposite. In this case the borrower is not making payments thereby growing the total amount of debt.

During the real estate bubble mortgage companies lured many investors into loans using these loans. The neg-am feature kept the payment very low so the rent could carry the mortgage. Often times, these loans didn’t require much down payment and with a sinking real estate market in combination with an increasing loan amount it took no time at all for the amount owed on these mortgages to be greater than the actual value of the home.

The purest of all negative amortization mortgages is definitely the reverse mortgage. This is the quintessential neg-am mortgage. You won’t hear Robert Wagner call it this, but that is exactly the way it works.

Of course it is for the negative-am reason that reverse mortgage lenders are very careful about how much money they actually lend to borrowers. Their biggest fear is that more will be owed than the home is worth.

This is why they lend the most to the oldest home owners. These lenders are using actuarial tables just like insurance companies. Even at 85 years of age the most a lender dishes out is about 75% of the actual value.

Most of these loans have gone the way of the Do Do, but look for them again in a few years. They’ll show up again.