Take a look at the graph above and tell me if you see anything of interest.  Subprime loans are not the only irresponsible loans that have been made, often overlooked is the Option Adjustable Rate mortgage.  As you can see we are going through the subprime reset period. Look ahead a couple years and you find the option-ARM reset period.

Opt-ARMS are for people who couldn’t even afford the already low rates ARMs had.  In other words, this is another set of mortgages the Democrats including Jimmy Carter, Barney Frank and Barack Obama forced banks to make so people could realize their "American Dream."  An option-ARM works like this.  All you have to pay is the minimum payment which typically doesn’t even cover the interest owed.  This means while you are making your minimum payments you are building negative equity .  So essentially flash forward a year or two ahead from when you got the loan, you have made all your payments but, you now owe 115% of the original balance.  Typically option-ARMS reset 5 years after the loan originated, but there is a catch.  You are only allowed to have so much negative equity, this is often between 110 - 125% of the original.  Once you reach this level a reset rate takes place and you suddenly owe higher monthly payments based on the higher total balance you now have from not covering the interest with your minimum payments.

This isn’t all however.  Lower interest rates won’t lessen the blow to these people when their rates reset like it did for sub-prime loans.  With an option-ARM your rate doesn’t just reset, it recasts.  This means that home owners suddenly have a 30-year amortized schedule on which they must make full payments.  Essentially you go from making a minimum payment so low you are not even covering the interest to making full payments on a loan with a higher balance.  One number thrown out there is an average monthly payment increase of over 60%.  Yikes.

Of course you weren’t forced to only make the minimum payment but what do you think people did?  Countrywide says that 72% of the people with these types of mortgages were not making full interest payments.  All in all this doesn’t look good.

Much of the information used here was taken from the Motley Fool .