Why Mortgages Blew Up

In fact, the percentage of option-arm loans issued has ballooned to the current level of about 7% in the first quarter of 2007, up from less than 0.25% of loans originated in the first quarter of 2002, according to estimates by TheStreet.com made using data from the Mortgage Bankers Association in Washington, D.C., and First American Loan Performance, a San Francisco-based mortgage research firm.

When negative amortization loans are grouped together with interest-only loans, the growth is slower, but still the number is still up sharply over the same period.

The reason? "It became an affordability tool rather than a financing tool," Fishbein says, allowing borrowers to buy more house than they could actually afford when their adjustable rate was reset to a higher level after a certain number of years.

Also exacerbating the problem: Some real estate developers looking to sell houses and apartments teamed up with mortgage brokers who would then use aggressive sales techniques to help get customers into apartments and houses.

By highlighting the lowest of the monthly loan payment alternatives, a home once viewed as too expensive now seem affordable. A $522,000 loan that would likely have a $3,299 monthly payment using a standard 30-year amortization, for instance, would seem much more appealing when presented as a $1,962 "minimum" payment of an option ARM.

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