Option ARMs, next chapter in U.S. housing crisis

By Nick Carey

CHICAGO (Reuters) - The U.S. housing crisis has focused attention on adjustable rate mortgages (ARMs) and the danger posed by their spiking interest rates.

But mortgage bankers, industry experts and nonprofit officials say that the impact of one particularly nasty kind of ARM -- called the Option ARM -- involving hundreds of billions of dollars of loans has yet to be felt. And, they say, it will hit prime borrowers and subprime borrowers alike.

People like Bruce Rose, 53, who never should have got a loan.

Rose, 53, bought his home in Boston in 1986. After stress and depression forced him to retire as a state employee in April 2006 he "maxed out" his credit cards on his annual income of around $16,000.

On medication, he refinanced his debts through the largest U.S. mortgage lender, Countrywide Financial Corp CFC.N. The new loan totaled $439,000. Rose said he did not know his mortgage broker and Countrywide used a stated income loan -- also called a "liar loan" because no proof of income is required -- and that they claimed his monthly income was $12,166.

"If I had known what I was signing I would never have agreed to the loan," he said. "Now I may lose my home."

With an Option ARM, borrowers can make a minimum monthly payment like a credit card, but if they do the principal increases. Rose's minimum payment rose from $1,200 a month to $2,800 and his loan now totals more than $500,000. He is fighting foreclosure.

"No reasonable lender would have given him a loan like that," said Virginia Pratt, a foreclosure prevention counselor at ESAC, a Boston nonprofit group, who is seeking legal counsel for Rose.