A Bad Option: The Coming Threat of Option ARMs

Hold on to your Zoloft, yet another wave of bad real estate news is about to wash our already underwater housing market. This time, it's Option Adjustable-Rate Mortgage loans -- or Option ARMs, for short.

What the heck are Option ARMs, you say? Simply put, they are mortgage loans that give homeowners the option to make minimum payments that are so small, they don't even cover the interest, never mind that the principal. The teeny payments eventually reset, but at a much later date.

Option ARMs have been around since the 1980s, but really came into their own in that two year period between 2005 and 2007, when they were peddled by the likes of Countrywide Financial and Washington Mutual to hard-up homebuyers, and some well-to-do ones, too. Who could resist buying a big home for pocket change every month, even knowing that the monthly payments would someday increase? Of course, by that time, the balance would have ballooned as well.

Well, the time of reckoning has come.