Mortgage Payment Shock

...has been associated with subprime borrowers. Nothing could be further from the truth. Many middle-class borrowers (especially California borrowers) have also taken out risky ARMs in recent years. Studies show that between 1998 through 2006 (keep in mind that is before the current crisis) over 2.4 million families lost their homes to foreclosure due to ARM mortgages.

Understanding Payment Explosion

The problem is that all of these mortgages have a built in payment explosion. Borrowers simply cannot absorb a mortgage payment increase 30% to 100% or more.

You might be asking how the current problem got so out of control? The primary reason these risky loans were made by lenders is that they didn't have to worry about the loans actually going bad. The loans are pooled together into securities (MBS or Mortgage Backed Securities) and sold on a secondary market. Mortgages typically change hands numerous times during the life of the mortgage.

Meanwhile, homeowners strapped with ARM mortgages face payment shock. Unfortunately, due to the tightening of the loan market and the general collapse of housing prices, borrowers have few options.