Option ARMs Bring Pain to Borrowers and Mortgage Industry
by Mike Bevel, CollectionIndustry.com
In the annals of Bad Idea Jeans is a listing for Option ARMs – adjustable rate mortgage loans. Option ARMs allow borrowers to choose to make minimum payments, less than the actual interest on the mortgage, for up to 60 months. The portion of the interest not paid in the Option ARM is then added back to the principal of the mortgage, and the borrower’s total debt just gets bigger each month, resulting in negative amortization. Once the loans reach a certain amount, they automatically reset at a higher rate.
It’s estimated that 12.3 percent of all mortgages written through May of 2006 were Option ARMs.
Banks argue that they only offer Option ARMs to folks with solid credit histories, with no unpaid skeletons in the closet. However, Standard & Poor’s warned last year that disturbing numbers of minimum payment loans were given to borrowers with low credit scores.
Banks increasingly have to set aside larger amounts to cover borrowers who are behind in their payments. The trend now seems to be borrowers are paying off their debts more slowly.
Banks are not changing their attitudes toward the Option ARMs, BusinessWeek reports. Cindy Manzettie, chief credit officer for Fifth Third Bank in Cincinnati, said in a letter to regulators last spring, that it’s not the “lender’s responsibility to help the consumer determine the appropriate payment option each month. . . . Paternalistic regulations that underestimate the intelligence of the American public do not work.”
Yet, offering loan options seemingly designed to help borrowers fail also can’t be much of a help to the mortgage and banking industry, already suffering losses from defaulted loans and foreclosed property.
Be the First To Comment
(Please read our comments policy first.)
Tell us what topics you're interested in and we'll keep you posted. Enter your email address below.
Related Resources
News
Analysis
Publications
Research
