ARMs Aren't Always Behind Foreclosures

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About 75% of borrowers are opting for the minimum payment, according to Standard & Poor's (which, like BusinessWeek, is a division of the The McGraw-Hill Companies (MHP)).

Calabasas (Calif.)-based Countrywide Financial (CFC), Seattle-based Washington Mutual (WM), and Pasadena (Calif.)-based IndyMac Bancorp (IMB) are among the lenders with exposure to option ARMs.

"It is certainly not out of the realm of possibility that even without resets some of the borrowers who took out these loans are ill-prescribed for homeownership," said Keith Gumbinger, vice-president of mortgage-research firm HSH Associates. "They may have taken them because they're stretched."

Adjustable-rate mortgages typically start with a low introductory rate and then reset at a much higher rate. But subprime borrowers not only started with higher rates than prime buyers, they sometimes were approved for loans they couldn't afford even at the teaser rate once taxes and insurance costs were factored in, Gumbinger said. For homeowners already in financial stress, job losses and other unexpected life changes can tip them over the edge.

When the Bubble Bursts

"There's a connection between regions with high appreciation rates during the boom and ARMs and foreclosures," said Rick Sharga, RealtyTrac's vice-president for marketing. "If you're in a market where there was rapid price appreciation and people were only able to afford homes by taking out adjustable-rate mortgages, that's where you see trouble when they reset."

The share of variable-rate mortgages reflects the level of speculation in markets where property values are falling. But the foreclosure problems are only arising in places where home prices are down; slumping prices are a necessary ingredient in the foreclosure mix. In states such as Washington and Hawaii, where home prices are stable, foreclosures are under control despite their large shares of ARMs and high-cost housing.

"Adjustables are a piece of the story," said Douglas Duncan, chief economist for the Mortgage Bankers Assn. "In states like Ohio and Michigan…when the economy started to slide, prices started to slide."

Job losses and other economic troubles have pushed down home prices in some Midwestern states where few people needed ARMs to finance the relatively cheap real estate. Buyers are losing their homes to banks in these states because of old-fashioned economic hardship.

See the BusinessWeek.com slide show to find out which states have the highest and lowest exposure to ARMs.

Gopal writes about real estate for BusinessWeek.com in New York .