California official warns of loan resets

Lenders can defuse pay-option ARM 'time bombs'

Homeowners with pay-option adjustable-rate mortgage (ARM) loans are sitting on "ticking time bombs that the lending industry has the power to defuse," California’s attorney general said in asking 10 lenders and loan servicers for information that would make clear the extent of the problem and what they intend to do about it.

Economists estimate that about 1 million pay-option ARMs will reset in the next four years, "dramatically worsening the foreclosure crisis," the attorney general’s office said in a letter to lenders. With 58 percent of all pay-option ARMs originated between 2004 and 2008, California will be the "epicenter of this crisis," the letter said.