Unscheduled Recast

An unscheduled recast involves the recalculation of the remaining amortization schedule for a loan. The recalculation happens when certain clauses in the contractual agreement are triggered. Also known as recast triggers, these loan contract clauses are what sets into motion an unplanned modification to the remaining balance on the amortization schedule, such as its repayment table. 

Unscheduled recasts of the mortgage occur when clauses included as part of the conditions outlined with payment option adjustable rate mortgages (ARMs) are triggered. An option ARM is a mortgage where the borrower can make payment to the lender in several different ways. In addition to paying interest and principal similar to that of a conventional mortgage, the borrower can make much smaller payments either by paying only the interest or the minimum on the principal.

These triggers speak to the negative amortization limit. By definition, a negative amortization occurs when the principal balance of a loan increases due to a borrower failing to make payments that cover the interest due. The remaining interest owed is added to the loan's principal. When the mortgage's outstanding principal balance rises to a certain percentage, typically between 110 percent and 125 percent of the mortgage's original principal balance, the trigger takes effect and the amortization schedule is recast.

When a payment option adjustable rate mortgage hits its negative amortization limit and triggers an unscheduled recast, the monthly payment is likely to increase substantially. The result could be payment shock for the borrower. The affordable payment that the borrower paid could turn into a significant financial burden if the rate on the ARM adjusts and requires a larger monthly payment. In an extreme scenario, the payment could increase to the point where the borrower is in financial distress and has no choice but to default on the debt.

Notably, even a modest rise in interest rates, depending on the level of the negative amortization limit of the mortgage, could cause an unscheduled recast several months before Month 61, which is typically the first scheduled recast on a payment option ARM. It is standard operating procedure for option ARM loans to recast every five or 10 years, so Month 61 is a significant marker along the way toward loan repayment. That is when a new minimum payment is calculated. It is to be paid upon Month 61 based on the fully indexed rate, the remaining term of the loan and the loan balance at that time.