What Is the Alternative Mortgage Transaction Parity Act (AMTPA)

The Alternative Mortgage Transaction Parity Act (AMTPA) was an act of Congress in 1982 that overrode many state laws preventing banks from writing home loans other than conventional fixed-rate mortgages. The Act led to the availability of various new “exotic” mortgages such as adjustable rate mortgages (ARMs), option ARMs, interest-only mortgages, and balloon payment mortgages.

Understanding the Alternative Mortgage Transaction Parity Act (AMTPA)

AMPTA is often cited as a root cause of the sub-prime mortgage crisis of 2007, and a classic example of the cost of good intentions. Before AMPTA, most states had rules prohibiting banks from writing home loans other than conventional fixed-rate mortgages. These restrictions, along with the era’s double-digit inflation and interest rates, made it difficult if not impossible for low-income families to afford homes.

AMPTA was the second legislative initiative to address the housing affordability problem. In 1980 Congress passed the Depository Institutions Deregulation and Monetary Control Act (DIDMCA), which eliminated state usury laws. With banks then able to charge higher interest rates to borrowers with poor credit, the housing market expanded. But that law did not address state restrictions on the type of mortgages allowed. Two years later, AMPTA did just that. Together the two laws paved the way for new mortgage products.

The Unintended Consequence of AMPTA

But the unintended consequence of deregulation was that many borrowers in the early 21st century obtained mortgages they failed to understand. For example, ARMs have a low “teaser” interest rate that eventually floats with market rates, and can increase substantially after a few years. Balloon mortgages require a huge payment when the loan comes due. Interest-only mortgages have low monthly payments for the first few years, but when the rate eventually resets to include principal, the payments can skyrocket. Option ARMs allow the borrower to underpay for a few years, but the unpaid balance is tacked on to the loan principal, in some cases making it impossible for the borrower to build equity in the home. Moreover, banks underwrote loans based on a borrower’s ability to make the initial low monthly payments, without considering the later, higher payments.

New Laws Address AMPTA Problems

As borrowers began to lose their homes due to defaulting on their mortgages, house prices began to spiral downward, making it even more difficult for people to refinance their homes into more affordable mortgages. In 2007, Congress passed new legislation that required lenders to underwrite mortgages based on the fully-indexed rate. In 2010, the Dodd-Frank Act required even stricter standards and lender accountability, in effect negating AMPTA. The rollbacks of Dodd-Frank in 2018 related to bank “stress tests” and did not alter the Act’s mortgage rules.