Lately, it is common to find financial experts debate whether America is heading into a slow down, near recession or recession, much the same way that others debate whether certain physical symptoms are those of the flu or a cold. While it is helpful to correctly diagnose the physical malady, the bottom line is that regardless of the problem, the patient feels bad and needs a cure or, at the very least, some form of medication that will help him recover. Much like these ailing patients, many homeowners holding various types of adjustable rate mortgages (ARMs) are facing their own problematic symptoms including job losses, declining home values, rising interest rates, and the possibilities of default and foreclosure. Regardless of their different symptoms, unless they have sufficient income and their homes' values exceed the outstanding principal balances on their mortgages, they cannot continue to pay off their ARMs once their loans adjust to a higher rate. These loans are what I refer to as "Broken ARMs," and we need to fix them FAST.

One type of Broken ARM is the subprime ARM, which typically starts with a fixed rate of interest for two or three years and then adjusts thereafter every six months or so. Borrowers holding these mortgages saw a first adjustment that raised their rates up to 3% over their initial rate, and additional adjustments thereafter.

Another type of Broken ARM, the "pay option ARM," allowed borrowers to pay interest rates lower than the rates required under the terms of the promissory notes securing their mortgages, while the mortgage balances swelled to absorb the difference between the note rates and the pay rates. In many cases, these borrowers' loans increased to 115% of the original principal balance. To make matters worse, the:

- Original principal balances on both subprime and pay option ARMs were equal to or approaching 100% of the appraised values of the homes at the time the loans were made.

- Creditworthiness of these borrowers (their likelihood of paying back the loans) was such that they could have qualified for conventional loan products (as opposed to subprime or pay option ARMs) at the time the loans were made.

- Creditworthiness of the borrowers (their financial ability to pay back the loans) was accepted "as stated" rather than verified using traditional underwriting practices.

- And home values have since fallen 20% or more in many areas of the country.

This situation, often dubbed the subprime crisis, will continue for three or four years as various Broken ARMs come of age, and the loans will likely end up either in foreclosures, short sales or bankruptcies. That is, unless a solution is found that will completely address the issues once and for all without regard to default status of the borrower, capabilities of the servicer, and uncertainty as to its applicability. The plan must be for all homeowners who financed after 2003 into any one of the Broken ARM products and it may need to be extended to address some unsettling news in the conventional arena. Absolutely essential to the success of any program is to realize that we have until the end of 2008 to address the relatively large loans endemic in California, Florida, New York and other locales thanks to the increased loan limits in the Economic Stimulus Act recently passed. To date, we have tried FHA Secure, Hope Now Alliance, Project Lifeline and a few small scale programs. Read the papers, talk to industry experts, ask your neighbors. All nice tries, but they aren't doing the job. Nor will they ever.

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