So far, most of the attention has been on sub-prime mortgages, liar loans, etc. Now comes the problem of Option Arms (Adjustable Rate Mortgages). They are so awful that nobody offers them any more. They came in four flavors;
1) Make a payment that doesn't even cover the interest, let alone pay down the principle.
2) Pay just the interest.
3) The equivalent of a 30 year fixed rate mortgage.
4) The equivalent of a 15 year fixed rate mortgage.
Three quarters (75%) of the Option Arms were written as #1 with the borrower picking a monthly payment they liked regardless of the financial reality. But after some period of time, the interest rate is "re-set", and the payments can double.
Barclay's Capital says they expect 81% of the Option Arms written in 2007 to default, and it is beginning to happen now. Although fewer Option Arms were written compared to sub-prime mortgages, Option Arms are now defaulting at a rate twice as high as sub-prime defaults.
Get ready for more foreclosures and for more people to lose their homes.