To Avoid Reset Shock, Plan Ahead

Call it the reset jitters.

Lenders, mortgage investors and financial regulators are concerned about the ability of millions of homeowners to handle the potentially painful payment spikes coming on loans they took out during the height of the housing boom.

Although estimates vary, some industry experts say that at least half a trillion dollars' worth of loans with reduced initial payment terms are scheduled to reset this year.

Many of these mortgages carry "negative amortization" features that permit borrowers to pile on additional debt beyond their original balance by making minimal payments for the first several years. Once the initial period is over, however, payments could double as the loan resets.

Other programs allow interest-only payments with no reduction in the original loan balance until the reset point. Then payments can jump by 50 percent or more to amortize the debt balance over a compressed number of years.

Federal and state financial regulators are expected to issue mildly restrictive guidelines for lenders making new loans this fall. But tightened rules won't help homeowners who are heading for payment resets in the coming year but may be unaware of the financial shocks they face.

John G. Walsh, a senior official at the federal Office of the Comptroller of the Currency, recently described his agency's concerns about poorly informed borrowers who don't realize that their artificially low monthly payments won't continue indefinitely.

"We've had consumers tell us they didn't know that after making 60 minimum payments on [a payment-option loan], they would owe more than they did when the loan was brand-new. They should certainly understand the basic bargain: the price of a low payment now is a much higher payment later," his statement said.

"I think it goes without saying," Walsh added, "that someone, at some point, should have explained this" to borrowers with these loans.

Lenders active in nontraditional mortgages carrying negative-amortization and interest-only features say they have taken care to ensure that their customers comprehend the mechanisms of their reduced-payment loans. They also insist that they have reserved these high-risk programs for borrowers with solid credit scores, large down payments and excellent employment histories.

Wall Street analysts have questioned those confident assurances, however. Standard & Poor's Corp. warned last year that it was observing disturbing numbers of minimum-payment loans being extended to borrowers with sub-par credit profiles. Other Wall Street firms noted that given the option to make minimum payments, more than seven out of 10 borrowers did so. In the process, those borrowers are racking up heavy additional debt balances and could be heading for payment shocks -- or worse -- without always understanding the consequences.

To head off potential problems, the largest mortgage originator in the United States, Countrywide Home Loans, quietly has begun sending letters to thousands of borrowers who have been making only the minimum payments on the company's popular PayOption adjustable-rate mortgages.