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Option ARM fallout to surpass subprime mess

Significant payment shock likely for many loans resetting in 2010-11

In a recent column, shortly after Washington Mutual announced it would no longer offer its option adjustable-rate mortgage (ARM) to home buyers, I noted that the program was a benefit to our family because it allowed us to adjust our monthly payments given the educational needs of our four growing children. I pointed out that three of the four payment options of the option ARM did not render negative amortization, yet too many consumers stayed with the minimum payment for far too long and owed more than they borrowed. Negative amortization occurs when the monthly loan payment is less than the principal and interest needed to pay off the loan in a specific period of time. The difference is added to the loan amount, so that the borrower owes more than the amount initially borrowed. What I absolutely underestimated was the percentage of borrowers who took out an option ARM to buy a house they could not afford, or who had no intention of ever leaving the minimum payment portion ...

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