Pay Option ARMs Next Wave of Foreclosures?

While analysts are tabulating and predicting default rates on less-credit worthy subprime portfolios there may be another specter lurking in the shadows of many good credit (prime) mortgage portfolios--payment option ARMs.

Payment option ARMs are mortgages, typically given to higher creditworthy borrowers, with a low monthly rate and the opportunity to select various payment options. One popular option is a minimum payment that does not even cover the interest due, which steadily increases the loan amount over time--in many cases to a level that exceeds the value of the home. This effect, also known as negative amortization, places home owners in a no win predicament--a dramatic adjustment to the monthly payment after the introductory period and no options to refinance because the loan substantially exceeds the value of the home.

With many of these loans, to good credit borrowers, set to increase their monthly payments as much as 60% higher and with loan amounts that have ballooned to 110%-125% of the homes value the market may be in for another wave of foreclosures, this time from prime borrowers.