Basically, the homeowner picks a payment they feel comfortable with, then they just pay it; it’s as easy as that. You get a low payment, increasing house value, and big biceps (see picture) . . . well, not really.
What happens most of the time is that the homeowner is actually paying less than the interest! So the principal, instead of going down with every payment, actually GOES UP! You are essentially borrowing more money monthly. This was all well and good (though still not smart) while home values were rising. You can guess what happens when the house starts falling.
In May 2008, a San Francisco news station did a segment spotlighting the training videos that the company used (video here). It shows a scene where the homeowner asks the loan officer to clarify that he won’t actually be paying down principal with this loan and the recommended response is “it’s optional”.
(Note: The company shown in the video was bought by another bank, which was bought by another bank, which then suspended the pick-a-pay program and then got bought by yet another bank.)