The Option Arm Challenge

Analysts said that those families who had Option Arm mortgages would more than likely end up in default by the end of 2010, going into 2011. However, that hasn’t been the case thus far. While I understand how they work, and I think they are a dangerous product to offer, I can see why defaults were delayed.


Option Arm mortgages were designed to give consumers four different types of payments; a minimum due each month, an interest only payment, an amortized payment, and an accelerated amortized payment. The challenge with Option Arms, is that the consumer more often than not opted to make the interest only payment, which began to drive up the balance on the loan.

As balances are tacked onto the back of the loan, it means that there is potential for the borrower to become upside on their mortgage. However, in the state of California no one seemed to be concerned. Properties were accelerating in their equity each year, and so California seemed to be the exception to the rule.

Rates being low has slowed the explosion on this type of program, but let it be known that it can’t last forever. Rates are going up, and they will continue to do so as inflation increases by leaps and bounds. Once this happens, these loans will be a time bomb, and borrowers that know they are underwater like this are more likely to just quit paying.

While houses still exist, being empty no longer makes them a home. This is sad, and it was a horrible way to get homeowners to sign quickly, but this is where we are. Lenders and banks are looking at ways each day to tighten up so they don’t have greater losses, but where does this leave the Option Arm borrower who now has a balance out of control?

Some borrowers have received modifications to their loans, but it is minimal compared to the total number of people who have them. According to the Mortgage Bankers Association only 20% have been revised, but that is a very small percentage. So what’s next?

-Mayer Dallal