... as option ARMs, face dramatically increasing defaults in the coming year and beyond. Option ARMs allow the borrower to make a low monthly minimum payment, typically for five years. The difference between this minimum payment and the full pa yment is added to the mortgage balance. At the five-year mark, the loan terms recast and the mortgage payment is increased to ensure full amortization of the loan by maturity. The payment increase could potentially be very high, depending on interest rates and the terms of the loan. While the large volume of option ARMs originated in the past few years are still only one to three years old, another feature of these loan s, the negative amortization (NegAm) cap, can cause recast to occur much earlier. The NegAm cap is reached when the balance of the mortgage grows by more than a certain percentage, typically 110% -125% of the original balance. Of the $200 billion of op tion ARMs outstanding,...
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