Option ARM Loan Modification Outlook Dismal

Those nasty pick-a-pay mortgages, the ones that allowed borrowers to pay less than interest thereby adding to principal balances every month, continue to be among the most worrisome mortgages still going bad.

And modification efforts are going nowhere. Lots of folks, including The Motley Fool and a Mortgage Law Network blog continue to lament the failure of modifications so far. The problems seem to be particularly acute with option ARMS. About 40% of the option adjustable rate mortgages that were underwritten in 2006 and 2007 are already delinquent. But less than 10% of those loans, which have accumulated higher balances because borrowers were allowed to defer more than just interest, have been modified. The worry is that when the interest rates and payments eventually recast to higher payments (as the loan contract calls for) yet even more borrowers will throw in the towel and go delinquent.