Fitch: Pay-Option Adjustable-Rate Mortgages Face Dramatically Increasing Defaults

Of the $200 billion of option ARMs outstanding, Fitch expects $29 billion to recast by the end of 2009 and another $67 billion to recast in 2010. The potential average payment increase on those recasting loans is 63%, or an extra $1,053 a month, on top of the current payment, reports WSJ.

A feature of the loans, the negative amortization cap, causes the recasts to occur before the five years are up - once the balance of the mortgage grows by more than a certain percentage. This is especially expected to affect loans originated in 2005 and 2006.