Defaults Rising Rapidly for 'Pick-a-Pay' Option Mortgages

Wall Street Journal (04/30/08) P. B4; Simon, Ruth
Default rates on "pick-a-pay" or payment-option adjustable-rate mortgages are on the rise. While the national subprime delinquency rate recorded at 28 percent for February by First American CoreLogic surpasses the delinquency rate for option ARMs, some experts warn that option ARMs could become a bigger problem. These loans were given to prime borrowers, and those who choose to pay only the minimum monthly payment are watching their mortgage balances rise at a time when home prices continue to decline. Countrywide Financial Corp.'s option ARM delinquency rate surged to 9.4 percent currently from 5.7 at the end of December, and these loans make up half of Washington Mutual Inc.'s prime mortgage portfolio and 70 percent of its prime nonperforming mortgages. A lawsuit that could become a class action recently was filed in U.S. District Court in Los Angeles against more than 50 companies that offered option ARMs, alleging that borrowers were given "inappropriate and unsuitable loans" and were not told that making the minimum payment would boost their balances.