GAO: Option ARM Delinquencies to Get Worse

About 30% of payment option adjustable rate mortgages are already seriously delinquent and a congressional watchdog agency expects defaults and foreclosures will only get worse next year. "We are particularly concerned about payment-option ARMs because so many are recasting and becoming less affordable to those homeowners," said William Shear, a director at the General Accountability Office. Mr. Shear testified before the Joint Economic Committee on a just-released GAO report that shows that 44% of the 837,000 POAs originated from 2000 and 2007 have prepaid and only 30% or 250,000 loans are current. The terms of POAs generally recast after five years but the recast can be moved up because of negative amortization. Louisiana State University finance professor Joseph Mason warned the committee defaults on POA could cause foreclosures to peak in 2010 and keep the foreclosure rate elevated into 2011. Meanwhile, option ARMs are difficult to modify because the borrowers already enjoy very low payments (due to the minimum payment option). However, the re-default rate on option ARMs is "much lower" than modifications on other alt-A mortgages, according to a Bank of America/Merrill Lynch Research report.