More than a million payment-option adjustable-rate mortgages will reset to higher rates in the next four years. For some homeowners, payments could jump from $98 a month to $3,500 a month, sparking a new round of foreclosures and threatening the housing recovery.

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Shirley Breitmaier’s mortgage payment started out at $98 when she refinanced her three-bedroom home in Galt, Calif., in 2007. The 73-year-old widow may see it jump to $3,500 a month in two years.

Breitmaier took out a payment-option adjustable-rate mortgage, or “option ARM,” a loan popular during the housing boom for their initially low minimum payments.

About 1 million option ARMs are estimated to reset higher in the next four years, according to real-estate data firm First American CoreLogic of Santa Ana, Calif. About three-quarters of those loans will adjust either next year or in 2011, with the peak coming in August 2011, when about 54,000 loans recast, the data show.

Recovery threat

Option ARM borrowers hit with unaffordable monthly payments are another threat to the housing recovery and the economy, said Susan Wachter, a professor of real-estate finance at the University of Pennsylvania’s Wharton School in Philadelphia. Owners may surrender properties to the bank rather than make higher payments for homes that have plummeted in value, she said.

“The option ARM recasts will drive up the foreclosure supply, undermining the recovery in the housing market,” Wachter said. “The option ARMs will be part of the reason that the path to recovery will be long and slow.”

Option ARM recasts will mean more pain for California, the state with the most foreclosures in the U.S.

More than $750 billion of option ARMs were originated in the U.S. between 2004 and 2008, according to data from First American and Inside Mortgage Finance of Bethesda, Md. California accounted for 58 percent of option ARMs, according to a report by T2 Partners, citing data from Amherst Securities and Loan Performance.

Breitmaier took out a $315,000 option ARM to refinance a previous loan on her house.

Foreclosure epicenter

Her payments started at 3/8 of 1 percent, or less than $100 a month, according to Cameron Pannabecker, the owner of Cal-Pro Mortgage and the Mortgage Modification Center in the foreclosure epicenter of Stockton, Calif., who is working with Breitmaier.

The loan allowed her to forgo higher payments by adding the unpaid balance to the principal. She’ll be required to start paying principal and interest to amortize the debt when the loan reaches 145 percent of the original amount borrowed.

Such terms aren’t typical for option ARMs, which were also known as “pick-a-pay” mortgages.

Interest rates on many payment option ARMS are “typically very low in the first one to three months” and can be as little as 2 percent, according to Federal Reserve data.

Breitmaier, who has been in the home for 45 years and lives with her daughter, now fears she will lose the house that’s a hub for her family.

“I wish the government would bail us out like the banks and the car businesses,” she said. “I’d like to go from here to the grave next to my husband.”

Paul Financial originated the loan and it was sold to GMAC, Pannabecker said.

“This loan is a perfect example front to back, bottom to top, of everything that has gone wrong over the last five to seven years,” Pannabecker said.

“The consumer had a product pushed on them that they had no hope of understanding.”

GMAC is working with Breitmaier and will review all of her options, said Jeannine Bruin, a spokeswoman for the company. Bruin declined to be more specific, citing the firm’s customer confidentiality policy.

Peter Paul, of Paul Financial, based in San Rafael, Calif., said he wasn’t familiar with Breitmaier’s agreement but disagreed with Pannabecker’s characterization.

“The problem is, real-estate values went down,” he said. Paul said he’s winding down the company and hasn’t made any loans since the fall of 2007.

Option ARMs typically recast after five years and the lower payments can end before that time if the loan balance increases to 110 percent or 125 percent of the original mortgage, according to the Federal Reserve.

These home loans were primarily marketed to people with good credit scores, said Dirk van Dijk, director of research at Zacks Investment Research in Chicago.

They were also sold to the elderly and immigrants who were lured by inexpensive payments, said Maeve Elise Brown, executive director of Housing and Economic Rights Advocates in Oakland, Calif.

Refinancing is impossible in many states given the nationwide drop in prices. Mortgage rates are also rising.

The average 30-year rate jumped to 5.6 percent in the week ended June 11 from 5.3 percent a week earlier, according to Freddie Mac.

In California, the median existing single-family home price dropped 37 percent in April to $256,700 from a year earlier, according to the state Association of Realtors.

“Once you start amortizing that loan, the payment is going to shoot up,” said David Watts, a London strategist with research firm CreditSights.