[GodGunsGuts]

PS There may be a simple confusion here. For instance, negative amortization loans and reverse mortgage loans are two totally different kinds of loans. One allows you to temporarily save money on mortgage payments, whereas the other is primarily designed for retirees who want to use the equity in their homes to supplement their retirement. The first kind of loan is a big problem. I suppose the second could be a problem for the banks if housing severely tanks, but these are not the loans that I keep hearing everybody worry about.

[JasonC]

No, there really isn't much confusion, and a reverse mortgage is just a variety of negative amortization loan. Negative amortization simply means the principle flow is to note holder (the bank) rather than note writer (the homeowner). Whether that is justified by the writer not wanting to have any equity when they die, or by not needed as thick a cushion of equity as rapid price appreciation has handed them, is irrelevant. Either way, the risk taken by the bank does not decline with time as rapidly as it does with a standard amortization loan, and if prices are flat it rises. Whether the risk taken by the writer increases with time depends on whether the house price appreciates faster than the rate of principle flow.

Mortgagers are always on the hook the more leveraged they are, in the event prices decline. They also benefit more the more they are leveraged, if prices rise faster than their loan interest rate. The only relevant measure of risk is the portion of the home value covered by the note. If you expect prices to be mean reverting or the high end of the market to be more volatile or both, you might add in some desire for the equity position to be higher at higher prices.

Mortgage books always contain a mix of more seasoned and more recent loans, and the most recent ones are always riskier than the more seasoned. They haven't had as much time to build equity from price appreciation, or for the owner's wages or other income to grow since the loan was taken out, etc. The primary risk control over the effect of recent loans on the whole book comes simply from the low volume of current activity (the yearly flow) compared to the whole market or stock.

Very aggressive lenders or speculators can artificially "goose" that risk level, by selling off their seasoned loans in securitizations, keeping the recent stuff. And can write dodgier loans to lower tier borrowers, tolerate higher loan to value averages, forgo mortgage insurance, etc. Typically they are willing to do all but the last, expecting mortgage insurance to cover their other "sins". If leveraged enough, that can bite a lender. Any leveraged bet in an asset that can go both ways can blow up and some will.

But none of that has anything to do with the basic soundness of the total mortgage book of the whole banking system, or the position of the average American household. It is ordinary cycle stuff. Recessions are also ordinary cycle stuff. We aren't in one - unemployment is under 5% and so are interest rates etc. The construction industry is flat, as single family homes decline and commercial building is rising enough to offset that.

Every screaming commentator wants to pretend the world is ending and the sky will fall. Never happens. Prices drop as well as rise, speculators are burned for being too aggressive, and the ship sails on majestic. Our prosperity is a result of our work and our trading bravery, not a flimflam, and it isn't going anywhere. (Absent nuclear attack).