Option ARMs To Wreak More Havoc

Lately the housing market is looking a lot better -- at least compared to what it looked like last winter. But option ARMs (adjustable-rate mortgages) may again soon be flexing their muscles and deliver a fresh sucker-punch to the mortgage market. (Sorry, I couldn't resist the terrible pun-induced metaphor.) A new set of ARMs are beginning to reset, and with them a new wave of foreclosures is likely to follow.

These ARMs provide borrowers with the opportunity make very low payments at first, often just interest, but then ramp those payments up significantly when they adjust or "reset." They were one of the major causes of the mortgage market's problems.

Reuters reports:

"Payment option ARMs are about to explode," Iowa Attorney General Tom Miller said after a Thursday meeting with members of President Barack Obama's administration to discuss ways to combat mortgage scams.


In Arizona, 128,000 of those mortgages will reset over the the next year and many have started to adjust this month, the state's attorney general, Terry Goddard, told Reuters after the meeting.

In the past I wrote about how dangerous ARMs can be, and I really should have specifically highlighted option ARMs at that time, because they're the really messy ones. With these products payments are very low at first, only to increase substantially once the reset occurs. The new payments are sometimes even several times as great as the old ones.

It will be interesting to see how this new wave of underwater homeowners affects the Obama administration's mortgage modification program. I've noted that the program has found modifying as many mortgages as it would like to be challenging. With a new flood of applicants, I doubt it will get any easier for banks and servicers to handle the workload.

Presented by

Daniel Indiviglio was an associate editor at The Atlantic from 2009 through 2011. He is now the Washington, D.C.-based columnist for Reuters Breakingviews. He is also a 2011 Robert Novak Journalism Fellow through the Phillips Foundation. More

Indiviglio has also written for Forbes. Prior to becoming a journalist, he spent several years working as an investment banker and a consultant.

A New York City Minute, Frozen in Time

This wildly inventive short film takes you on a whirling, spinning tour of the Big Apple

Join the Discussion

After you comment, click Post. If you’re not already logged in you will be asked to log in or register with Disqus.

Please note that The Atlantic's account system is separate from our commenting system. To log in or register with The Atlantic, use the Sign In button at the top of every page.

blog comments powered by Disqus

Video

A New York City Minute, Frozen in Time

This short film takes you on a whirling tour of the Big Apple

Video

What Happened to the Milky Way?

Light pollution has taken away our ability to see the stars. Can we save the night sky?

Video

The Faces of #BlackLivesMatter

Scenes from a recent protest in New York City

Video

Ruth Bader Ginsburg on Life

The Supreme Court justice talks gender equality and marriage.

Video

The Pentagon's $1.5 Trillion Mistake

The F-35 fighter jet was supposed to do everything. Instead, it can barely do anything.

More in Business

Just In