WASHINGTON — Don't count option adjustable-rate mortgages out yet, despite warnings about the loans from federal regulators because of their risk in the upward moving rate environment.
A study by LoanPerformance, a subsidiary of First American Real Estate Solutions, shows option ARMs accounted for 12.3% of loan volume through May, up from 8.4% for all of 2005. The study looked at loans packaged into mortgage-backed securities.
Option ARMs are considered riskier because of the negative amortization potential. One of the payment options is a minimum payment, which doesn't cover the accrued interest for the period. The unpaid interest is then tacked on to the principal to be repaid later, consequently increasing the amount the borrower owes. Once borrowers reach a threshold, often set at 110% of the original mortgage, the loan resets, requiring borrowers to make payments based on a fully amortized loan.
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According to LoanPerformance, this can push monthly payments as much as 80% more than the minimum payment.
The company said there are already early signs turning up indicating some option ARMs borrowers are running into trouble quickly. A report by Credit Suisse showed foreclosure rates are increasing quickly on option ARMs–borrowers on this mortgage product are entering the foreclosure period about 10 months after origination, which is earlier than for other types of mortgage products.
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