It may be tempting to think that the mortgage crisis is behind us. However, our analysis shows that there are still a substantial number of mortgages at risk of distress or foreclosure. One particularly troubling area concerns a type of product known as the payment-option adjustable-rate mortgage (option ARM).
These loans are about to make a splash in mortgage delinquency numbers. They were issued en masse during the peak housing bubble years, approximately 2005 through 2007, and many of them are due to recast in the next several years, resulting in higher—often significantly higher—payments for borrowers. Given the widely held belief that these loans were largely issued to borrowers wanting to buy more house than they could have otherwise afforded, the higher payments will be out of reach for many. Because of recent home price trends and the negative amortization characteristics of these loans, the familiar result will likely be an increase in delinquencies, distressed sales and foreclosures.
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