What feature is regarded as toxic under the qualified mortgage (QM) rule?

Under the Qualified Mortgage (QM) rule, negative amortization is considered a toxic feature because it can lead borrowers to owe more on their mortgage than they originally borrowed over time. This occurs when the monthly payments do not cover the interest charged, causing the principal balance to increase rather than decrease.

The intention of the QM rule is to promote responsible lending by ensuring that borrowers can repay their loans without entering into further financial distress. Negative amortization poses a significant risk to both the borrower, as they may eventually face payment shock or be unable to refinance, and to the lender, as it increases the likelihood of default.

The qualities of qualified mortgages primarily focus on affordability and preventing borrower exploitation. Features like prepayment penalties, balloon payments, and interest-only payment options, while potentially risky, do not inherently lead to an increase in the principal balance owed over time in the same way that negative amortization does. Thus, negative amortization is singled out as particularly detrimental under the QM framework.