Option ARM Horror Stories

Two Option ARM horror stories - one with a good ending and one with a bad ending. The first story comes from the Wall Street Journal -

Some borrowers say they weren't suited for these loans or that the terms were poorly disclosed. Edward Marini, a 63-year-old disabled Vietnam veteran, took out a $280,000 option ARM from Countrywide Financial when he refinanced the mortgage on his 2,000-square-foot home in Little Egg Harbor, N.J., in 2005, pulling out cash to pay off some debts. "The way I understood it was that I would have a really low payment for five years," says Mr. Marini.

Mr. Marini recently received a note from Countrywide that his payment, now about $1,300 a month, would jump to about $3,800 next year, well above his $3,250 a month in disability payments. Mr. Marini, who owes more than his home is worth, says he was turned down by Countrywide for a refinance and, more recently, for a loan modification. "I didn't think they would even pull this kind of stuff on someone who is on a fixed income," he says.

In a lawsuit seeking class-action status filed in U.S. District Court in Los Angeles, Mr. Marini and other borrowers allege that Countrywide put them into option ARMs that were "inappropriate and unsuitable." Mr. Marini wasn't told that his loan balance would rise if he made the minimum payment, says his attorney, Joe Whatley Jr. A Countrywide spokeswoman said the company's policy doesn't comment on pending litigation.

This loan is already underwater. With the fixed income there is no possible way the owner could afford the payments. Either the owner did not understand or did not want to understand the terms of the loans. The loans are very new and conventional. Many people just hear the how much they will owe every month in the near-term.

Now to the CNN Money horror story with a bit of a movie-type happy ending.

Take Trish Phillips, an office manager for an AM radio station in Florida, who bought her Ft. Lauderdale home in early 2007. She had a FICO score of 780 and a very stable work history, with 14 years at the same job. Less than a year later, however, she was in danger of losing her home.

...For Phillips, the problem was the she ended up with an exotic loan called an option adjustable rate mortgage (ARM).

... Trish Phillips had enough income to pay about $1,300, perhaps $1,400 a month for her home, which cost $279,900. The minimum payment on her option ARM was $1,276, but she was incurring interest of more than $2,000 a month. The difference of about $800 was added to her mortgage balance every month.

... According to Phillips, who was making the minimum payments, that meant her monthly bill would jump to $2,300 after just a couple of years and then to more than $3,000 a year after that She knew she couldn't afford it and went for help.

Phillips admits that she didn't clearly understand the loan terms before she closed on the house and says her mortgage broker didn't explain them. She had misgivings but, "I was afraid of losing the down payment," she said.

... Phillips, she managed to get her loan modified, with [a foreclosure prevention counselor, Michael] Sichenzia's help. Her payment is now frozen for three years at $1,281 a month and her balance will not increase during that time. She hopes to refinance into a fixed rate loan before those three years are up. And, since she succeeded in getting her mortgage modified before she even fell behind on her payments, her FICO score is still a healthy 775.

In three years this may or may not turn into a truly happy ending. Hopefully the housing prices in the owner's area will level off and she will be able to refinance into a payment plan where she can start paying off some principal at a term that she can afford.