Today’s Wall Street Journal featured a very interesting article on how Bank of America is using reverse mortgages to save senior borrowers. The cases include situations where Bank of America has taken a significant write down to allow the borrowers to stay in their homes.  But not all borrowers may receive the same treatment as the borrowers highlighted in the article. As the story notes, most borrowers who received the modified reverse mortgage had taken out option ARMs.

Option ARMs (Option Adjustable Rate Mortgages) have become “the new subprime mortgages,” leading many borrowers into foreclosure. 32% of option ARM borrowers were delinquent or in foreclosure last month, compared with 48% of subprime mortgage borrowers.  Unlike subprime mortgages, option ARM mortgages generally went to borrowers with good credit, including seniors with significant equity in their homes looking to refinance. The option ARMs have also proved difficult to modify, since the low interest rates on the loan often cannot be lowered any further.   Lawsuits have been filed by borrowers claiming they were misinformed of the loan’s complicated structure, which in many cases can lead payments to balloon after a few years.

As a result of the lawsuits, as well as the settlement of a suit against Countrywide, which was since acquired by Bank of America, Bank of America has agreed to modify option ARMs and subprime mortgages where possible.  While it appears that Bank of America has so far only issued about 20 reverse mortgages to borrowers with option ARMs, it looks like a good start to fixing a significant problem. Borrowers with option ARMs from Bank of America may want to talk to their servicer or the bank about a modification, perhaps with a reverse mortgage.