Option ARM Loans Turn into Nightmares

Entrepreneur Michael Bissell worries about losing his business, his house, or both. His 10-year-old Web design firm in Portland, Ore., is struggling as customers fall behind on their bills. To cover salary and other expenses, Bissell tapped into his home last year for extra cash, relying on his exotic mortgage, which gives him the option to pay less than the monthly interest and principal for a while. But that source of money is running dry: The payment on his home loan will soon jump significantly. "I have no padding," says Bissell.

Small business owners are at the epicenter of two dangerous forces: the housing bust and the recession. During the boom, many entrepreneurs pulled money out of their homes to start businesses or fund existing operations. Some, like Bissell, relied on an especially pernicious type of loan, the option adjustable-rate mortgage, which allowed borrowers to determine the size of their monthly payment. When the businesses ran into trouble, many homeowners started paying the minimum, tacking the extra interest and principal onto the loan.

Many mortgages are resetting and triggering higher payments