Option ARMs are the next wave in foreclosures?

Credit Suisse has reported that a second wave in the foreclosure crisis may be on the horizon. Option ARMs, which I've probably ranted about enough (see Wachovia Reigns In Pick-A-Pay Parts I and II), are scheduled to start resetting en masse around 2009, with the most reset volume coming in 2010-2011. A particularly onerous feature of these loans is that even if your first scheduled reset is five years, the loan can reset sooner once your negative amortization reaches a certain point.

The payment shock is expected to be much more severe for option ARMs than for subprime ARMs. You think a 10% increase in your payment was bad, wait til you see the projected 80% increase that will happen with some option ARMs. According to an article at BusinessWeek's website, the good news is that a combination of action by the lending industry and the government could help prevent some of the damage.

Tom Kelly has also posted a good article over at Inman News explaining how the negative amortization reset works.