Option ARMS Borrowers Facing Resets

About 93 percent of option-ARM buyers chose to pay a minimum amount less than the interest due, according to a report released last week by Standard & Poors.

That means that nearly all of the 350,000 option-ARM borrowers now owe more than they owed when they first purchased their homes.

Many of these loans were written in 2004 and are close to their five-year reset when the loans convert to a standard amortization. Some more recent loans will reset early if the accumulated interest has pushed the loan-to-value ratio above 110 percent.I

n one example outlined in the S&P report, the payment on a $400,000 mortgage goes from $1,287 to $2,593.The authors of the report say that many ARM borrowers aren’t good candidates for refinancing or modification because their loan-to-value ratios are too high for the government’s Making Home Affordable program.

Also, about 80 percent of option-ARM loans were stated-income loans and borrowers could be held legally liable for deliberate inaccuracies on their original applications.

Source: CNNMoney.com, Les Christie (11/26/2009)