Mortgage One Million Option Arms to Reset in Next Four Years

An estimated one million option arms are expected to reset higher over the next four years, according to a Bloomberg report.

About three quarters of these loans will adjust next year and in 2011, with resets peaking in August 2011 when 54,000 loans are set to lose their negative amortization feature.

More than $750 billion in option arms were originated between 2004 and 2008, with hard-hit California accounting for roughly 58 percent of them.

One borrower cited in the Bloomberg report received one of the most toxic option arms I’ve never heard of, with a start rate of just 0.375 percent and a negative amortization ceiling of 145 percent.

That particular borrower will experience massive payment shock, with the monthly mortgage payment rising to $3,500 from just $98.

Of course, you have to wonder where the borrower has been stashing all that extra cash, and with most mortgage indexes at record lows, the reset rate may not be as bad as many think.

Most option arms typically recast after five years or when the loan balance reaches 125 percent of the original mortgage amount; at that time, the borrower must make at least the interest-only payment.

Unfortunately, many of these borrowers are likely unable to refinance because the loans essentially allow you to be underwater on your mortgage, designed so during times when home price appreciation was practically guaranteed.