Abstract
We are able to confirm the intuition that Option ARMs with the minimum monthly payments is by far the most risky product regardless of which risk measure is used. Under stress economic scenarios, the relative riskiness of Option ARMs can increase to about six-fold from its level under the normal economy, much more severe than the increases observed for other products. Although they show similar level of willingness to pay problem, ARMs with caps and teaser rates show consistently higher probability of ability to pay problem than comparable ARMs without teaser rate.