Fitch Sees Option-ARM Problems Mushrooming Next Year

Pay-option adjustable-rate mortgages will default at dramatically higher rates in 2009 and beyond as large volumes of loans reset to the full payment after the payment option period expires, according to Fitch Ratings. Most option-ARM loans gave borrowers the choice to make a minimum monthly payment for a period of time, typically five years, before the loan terms recast to require full monthly payments to ensure full amortization over the loan term. Of the approximately $200 billion of option-ARM loans outstanding, Fitch estimates that $29 billion are scheduled to recast by the end of 2009 and an additional $67 billion will recast in 2010. The "potential average" monthly payment increase, according to Fitch, will add $1,053 to the monthly bill of those homeowners, on top of a current monthly average payment of $1,672. Fitch says the large payment increases will cause defaults to "more than double" after the loan terms recast.