Will Option ARMs Be the Next Big Crisis?

Option adjustable-rate mortgages, better known as option ARMS, are becoming a serious problem for banks – a problem that analysts say could ultimately rival the issues surrounding subprime loans. Both Bank of America and Wells Fargo announced this week that they were anticipating higher than previously expected losses from option ARM products. Option ARMs give borrowers the ability to pay less than the monthly interest due. As a result, with home prices falling, more than 55 percent of borrowers with option ARMs are underwater, according to J.P. Morgan Securities Inc. As of December, 28 percent of option ARMs were delinquent or in foreclosure, according to LPS Applied Analytics, a firm that analyzes mortgage data. Lenders have already foreclosed on 7 percent of option ARM properties. Goldman Sachs calculates that nearly 61 percent of option ARMs originated in 2007 will default. And more than 50 percent of all option ARMs outstanding will default.

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