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As foreclosure rates across the country rise and the number of new bankruptcy petitions is steadily climbing back toward pre-BAPCPA rates, local media blame everything from rising gas prices to mass layoffs to a leveling off of property values. Each of those factors likely impacts the foreclosure and bankruptcy rates we're seeing, but the proliferation of subprime lending, and in particular Adjustable Rate Mortgages (ARMs) in the early 2000s is surely a critical factor.

In 1995, fewer than 100,000 subprime mortgage loans originated, with only 21,000 ARMs among them. Over the next few years, however, those numbers escalated rapidly. From the early 1990s to the late 1990s, subprime mortgage lending grew from .74 % of the overall mortgage market to more than 8%. At their peak in the early 2000s, more than 1.5 million subprime mortgage loans were generated in a single year, including 866,000 ARMs.

Subprime loans provide access to home ownership to people whose credit would otherwise not support a mortgage, but there are heavy risks associated. ARMs typically carry a fixed interest rate for 3 or 5 years, and are then subject to adjustment. Many of these loans are "interest only" during the fixed period, creating an even more significant shock when the rate changes and principal payments commence simultaneously. Unfortunately, many ARMs-about 80% of those generated between 2000 and 2002-carry prepayment penalties that make refinancing difficult or prohibitive.

Consumer bankruptcy attorney O. Max Gardner III analyzed the impact of ARMs on consumer finances. Assuming a 3 year fixed rate with an adjustment up or down of no more than one point, originated in 2004 for a $300,000 home with a loan-to-value ratio of 95%, Gardner calculated that interest only payments for the first three years (2004, 2005, and 2006) would be approximately $1551. In 2007, however, when the principal payments and adjusted rate took effect, payments would jump to $2,482-a 61% increase. By 2009, the increase would be nearly 100%, for a monthly payment nearly double the initial monthly payments.

Many consumers are simply unable to absorb the increase, particularly since subprime lenders most often work with borrowers who have lower credit scores or down payments and may not qualify for traditional mortgages.

The ARM "boom" of the early 2000s is coming back to haunt us, as literally millions of ARMs originated during 2001-2003 are reaching their "shock" points simultaneously. The Mortgage Bankers Association reportedly estimates that approximately $330 billion in ARMs have adjusted or will adjust in 2006, with an addition $660 billion or more by the end of 2007. That $1 trillion in ARMs, at an average loan value of $300,000, represents more than three million homeowners nationwide now facing dramatically increased mortgage payments.