From Barron's ("The No-Money-Down-Disaster", by Lon Witter, Aug. 19, 2006):

"The following figures are from Washington Mutual's annual report: At the end of 2003, 1% of WaMu's option ARMS were in negative amortization ... At the end of 2004, the percentage jumped to 21%.

At the end of 2005, the percentage jumped again to 47%. By value of the loans, the percentage was 55%.

Every month, these borrower's debt increases; most of them probably don't know it. There is no strict disclosure requirement for negative amortization.

This financial system cannot work; houses are not credit cards. But WaMu's situation is the norm, not the exception. The financial rules encourage lenders to play this aggressive game by allowing them to book negative amortization as earnings. In January-March 2005, WaMu booked $25 million of negative amortization as earnings; in the same period for 2006 the number was $203 million."

Hmmmm... take questionable receivables, mark them to market immediately as profits, and watch as your stock soars. Reminds me of Enron (just a tad).

The numbers here are truly staggering, and the fact that negative amortization (even when legitimate) represents extremely long-run receivables that need to be heavily discounted for risk is extremely unsettling (i.e. the probability that a given dollar of negative amortizations-receivable will actually be collected is not 1 and will vary with macroeconomic conditions).

It is truly disgusting how all the financial companies are running around claiming that there is no risk anymore, and securitizing things that don't really exist and calling them wealth, assets, and revenue. They will get burned. We will get burned.

Unfortunately as this little revelation shows, it is all worse than most bearish commentators have thought. This kind of dishonest and deceptive disregard for risk bodes very poorly for the finance system. It also bodes very poorly for the stocks of mortgage financiers... which sounds like an opportunity to me.