Why is it unlikely that this loan type will be originated in the future?
What will be an ideal response?
The 2007 subprime mortgage crisis, it is not likely that this loan type will continue due to the risks that were brought out with this crisis. This is explained below.
While the flexibility built into option ARM loans come with risks. First, investors cannot increase their equity unless the make the larger amortizing payments. Most investors choose smaller payments where you end of owing more at the end of each month. Thus, the option ARM loan becomes a negative amortization loan. Additionally, the smaller payments do not continue. Eventually the lending bank will want to put you back on track to pay the loan off and will recast the loan with your "guaranteed minimum payment" increasing sharply making your monthly payment difficult. The end result is that you may have to sell your house in lieu of trying to make monthly house payments you can ill afford. Here lies the major problem: you mayhave to write a check at closing because your loan balance is greater than the market value of your house.
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