From Housing Wire:

Fitch Ratings on Tuesday released a wide-ranging look at option ARMs that paints a decidedly negative picture for the mortgage markets over the next 36 months. In fact, the picture is a downright scary one: the bottom line is that most outstanding neg-am mortgages won’t get out of 2011 alive, thanks to forced recasts.

Fitch analysts said they now expect roughly $29 billion in option ARMs to recast to higher monthly payments by the end of 2009, and an additional $67 billion to recast in 2010; of this, approximately $53 billion is attributed to early recasts.

“Though recent declines in the 12-month Treasury average rates have mitigated some risks, the majority of option ARM borrowers have elected to make the monthly minimum payment over the past 24 months,” Fitch said in the report. “As a result, a large number of these loans, especially those with 40-year amortization and 110% principal caps are expected to reach their recasts before the end of the five-year mark.”

Option ARMs were particularly popular in areas such as California and Florida, which have seen home values drop off a cliff. As borrowers stuck in these loans find that their payments are ratcheting upwards at the same time that the worth of the home is dropping like a rock, more and more will simply make the rational choice to walk away. 

Make no bones about it: this is a serious problem facing the real estate market, and not one to which many are paying attention. But if these loans start going bad in the numbers that Fitch is expecting, it could make the subprime crisis of the past year look like a walk in the park.

Spiral, originally uploaded by An Gobán Saor.