We’ve been talking about the next wave of the mortgage crisis for quite some time now, and it seems that, as predicted, it’s cresting and about to hit. We are, of course, speaking of Option-ARM loans — considered the riskiest of all mortgages due to their ability to grow rather than shrink. Yes, there actually exists a mortgage that allows the borrower to pay less than the interest that is accruing on the loan.

Here is a lovely graph from Credit Suisse that should scare you. As you can see, the subprime resets are now mostly behind us, and the next wave of resets are Option-Arm and Alt-A.

These loans were often issued to borrowers with good credit who were speculating on the housing market or who lacked the proper documentation of income to qualify for a traditional mortgage.

Option-ARM or “pay option” loans are so risky that they are illegal in some states. Option-ARM mortgages allow the borrower to pay little or nothing at first – and any unpaid interest is added to the principal due on the loan. This results in a mortgage that grows over time. Eventually, when the borrower owes 10-15% more than the original loan, the payments increase rapidly. By rapidly, we are talking about 5 to 10 times as much as the borrower was used to paying. These loans tend to be “jumbo” which makes them even more difficult to refinance than regular loans.

Iowa AG Tom Miller is sounding the alarm:

“Pay option ARMs are about to explode,” he announced, “That’s the next round of potential foreclosures in our country.”

Meanwhile in Arizona, where, according to Reuters, 128,000 pay option mortgages are scheduled to reset within the next year, AG Terry Goddard seems sort of depressed:

“It’s the other shoe,” he said. “I can’t say it’s waiting to drop. It’s dropping now.” Right on time.

“Option” mortgages to explode, officials warn [Reuters]
(Photo:rappensuncle)

PREVIOUSLY: Monthly Mortgage Rate Resets, 2007-2016
The Subprime Meltdown Will Be Nothing Compared To The Prime Meltdown

Want more consumer news? Visit our parent organization, Consumer Reports, for the latest on scams, recalls, and other consumer issues.