I think that what you’ve described is already happening. The LA Times had an article back on Dec 11th with this interesting statistic on option arms:
“In 2003, only about 8 of every 1,000 people buying a home or refinancing a mortgage in California got a pay option loan, according to San Francisco-based data tracking company First American Loan Performance”.
“Last year, 1 in 5 loan applicants got one.”
“In the first eight months of 2006…Nearly 1 in 3 California loan applicants are now choosing them.”
My hypothesis is that lenders are finding a way to refinance FBs with ARM resets into new option ARMs to delay defaults/foreclosures for another one to three years and hope that the boom years return to bail everyone out.
