National Mortgage News has a link to an American Banker story on option ARM's. "For home lenders, 2005 may go down as the year that disclosure of details on option ARMs began to achieve critical mass. Information on activity in the niche had long been elusive; among the biggest participants, Downey Financial Corp. was notable for the amount of information it had provided in past years."

"A survey of top option-ARM lenders' 10-K filings by American Banker shows that much more data is now available, including figures on topics to which regulators and investors are paying close attention: deferred interest and related negative amortization."

"All the leading lenders in this niche provided evidence that principal-balance growth on such loans surged last year as many borrowers made only minimum payments. In their 10-K filings released last month, Downey along with Washington Mutual Inc. led the pack in giving details about option ARMs."

"Salient figures in the Downey 10-K: Ninety-seven percent of the $133 million of deferred interest outstanding came from loans with balances above the original principal amounts, and the company generated 62% of its profits from noncash income from deferred interest."

"About $13.4 billion, or 91%, of Downey's one-to-four-family residential loan portfolio could experience negative amortization, up from 82% a year earlier. By balance, about 10% of the loans experienced negative amortization without exceeding their original balances, while 64% negatively amortized above them."

"By offering the average age of the loans with this breakdown, Downey revealed its older option ARMs were less likely to amortize negatively; those not using negative amortization were, on average, 21 months old, versus 15 months for those that were."

"This may be surprising, considering the common teaser periods, which generally preclude balance growth. But it could be taken to mean borrowers who took out the loans after the recent home price surge did so because they needed to rely on the minimum payments."

"As of July 31, 2005, Downey operated 173 branches, of which 169 were in California and 4 were in Arizona."