Adjustable Rate Mortgage

Adjustable Rate Mortgage (ARM) is a mortgage loan where the interest rate on the note is periodically adjusted based on a variety of indices.[1] Among the most common indices are the rates on 1-year constant-maturity Treasury (CMT) securities, the Cost of Funds Index (COFI), and the London Interbank Offered Rate (LIBOR).

Option ARMs were marketed to borrowers via low introductory rates and included various payment options. Those loans often included the option to pay only interest, which caused the borrowers debt to grow with each payment, becoming negative amortization loans.

When housing prices began to fall just at the time rates were adjusting higher on those loans, borrowers began defaulting at alarming rates, leading to big losses for WaMu and others who had extended the credit or purchased securities based on the credits.

Negative amortization an amortization schedule where the loan amount actually increases through not paying the full interest. In other words "whenever the loan payment (loan amount) for any period is less than the interest charged over that period so that the outstanding balance of the loan increases"