Option ARM time bomb set to explode in SF and LA

1 in 5 mortgages in the SF metro area from 2004 – 2008 were Option ARMs, twice the national average. The SF Bay area ranks second nationally in these risky mortgages with LA being first (by a wide margin.) In 2010 these mortgages will reset to a much higher level and trigger huge pain and a cascade of foreclosures.

Option ARMs let borrowers choose to make very low payments for the first five years.

94 percent of borrowers elected to make minimum payments only. The shortfall gets added to their loan balance, which is called negative amortization. The amount they owe can grow substantially.

But after five years or if the balance owed reaches a certain limit, the mortgage resets to a much higher interest rate and never goes back. This while the house has almost certainly dropped in value.

Because Option ARMs were used mainly on high end homes, that’s where the forclosures will happen. In the metro SF area, a staggering 27% of option ARMs are already 60 days late or in foreclosure. And most of them haven’t reset yet.