In the September report, the OCC and OTS reported performance data on Payment Option Adjustable Rate Mortgages (ARMs), which allow borrowers to choose from a variety of payment options each month, including payments that reduce principal, cover interest only, or result in unpaid interest being added to the balance of the loan, resulting in an increased amount owed. The risks of these loans and geographical concentration caused them to perform significantly worse than the overall portfolio. In the second quarter, 15.2 percent of the more than 900,000 Payment Option ARMs in the portfolio were seriously delinquent, compared with 5.3 percent of all mortgages, and 10 percent were in the process of foreclosure, more than triple the 2.9 percent rate for all mortgages.
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