Option ARMs are Called Ticking Bombs
Colorado has had the highest foreclosure rate of any state since March, 2006, according to RealtyTrac, a California company that tracks foreclosure listings. According to the Denver Post, some experts think that option ARM loans will trigger a future wave of foreclosures if home values remain the same or decline.
According to Herbert Sandler, chief executive of Oakland, California-based World Savings, which is one of the first and largest providers of option ARMs, if underwritten properly, the loans are good, low risk products. However, Sander also acknowledges that many lenders are not underwriting the loans properly.
Accordingly to Mark Fleming of CoreLogic, a Sacramento, California company that measures mortgage risk, option ARMs are ticking time bombs, and can become dangerous if used constantly.
Sandler argues that qualifying buyers for option ARMs should not be based on minimum-payment amounts, but rather on the actual rates behind the loan.
Among mortgages, option ARMs are among the most complex and confusing for consumers to grasp. According to William Klaess, a vice president with American Guaranty Mortgage in Greenwood Village, too many borrowers who take out option ARMs think they are getting a low fixed-rate loan and do not realize that their principal will grow. Klaess, who also oversees a mortgage help center on behalf of consumer advocate Tom Martino, said that option ARMs represent the biggest source of complaints he receives.
Consumer advocates say two types of borrowers should not take out the loans: (1) buyers stretching to afford a payment, and (2) seniors living on a modest fixed income. Unfortunately, such borrowers are the target for option ARMs.