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‘Option ARM’ mortgages expected to worsen credit crunch

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About 1.4 million households nationwide have “option ARM” mortgages, which allow borrowers to pay less interest than the formal rate for a limited period, with the unpaid interest added to the original loan. Many of these homeowners now owe more than their properties are worth. Write-offs for option ARM at Washington Mutual have risen from 0.49 percent in the last quarter of 2007 to 3.91 percent in the second quarter of 2008. The real crunch is expected in 2010 and 2011 when a large number of low-rate periods end and borrowers have to make full payments. Some borrowers’ monthly payments will jump 60 to 80 percent.