It's amazing that banks can get away with offering these "option ARM" mortgages that let people buy way more house than they can afford, and then give them the option of actually making no mortgage payments so that the interest owed is added to the principal, in a cascade of compound-debt that will rapidly mount.
The only question I have is whether the banks will be able to cash in on all those repossessed houses after the real-estate tumble, or will prices be so low that they also lose their shirts?
In order to get the $800,000 house he bought early last year in California's Silicon Valley, Joe got an "option ARM," an adjustable-rate loan that lets him choose from a variety of payments every month. The smallest payment included no principal and less than 100 percent of the interest due. The unpaid interest was tacked onto the principal, creating "negative amortization…"
The [lender's warning] letters contain hypothetical examples of what lay ahead. One is a California homeowner making only minimum payments on a $402,000 loan. The current full interest rate on the loan is 7.6 percent, but the borrower has been paying just $1,348.47, far less than what's needed to fully amortize the mortgage over its 30-year term. If the loan reset at today's rates, the full payment required would be $2,887.50 – more than double what the homeowner is currently paying.