Option ARM Defaults - The Next Wave of the Tsunami Begins

From Calculated Risk we see at the WSJ : "FirstFed Grapples With Payment-Option Mortgages"

Forty percent of its borrowers became at least 30 days delinquent after the payments on their adjustable-rate mortgages were recast. The number of foreclosed homes held by the bank doubled in the second quarter from the first quarter.
...
[T]he Los Angeles bank is on the front lines of what could be the next big mortgage debacle: payment option mortgages.

Well, Option ARM will have to duke it out with Alt-A (mostly "liar loans" and no money down deals). Thy are all in trouble, though Option ARMs come with the especially toxic exploding payment "feature".

The key word is "recast" This is not just in increase in interest rate. This is the conversion from negative-amortization to fully amortizing payments.

Option ARMs typically carry a low introductory rate and give borrowers multiple payment choices, including a minimum payment that may not even cover the interest due. Borrowers who make the minimum payment on a regular basis -- as many do -- can see their loan balance rise, known as negative amortization. Monthly payments can increase by 60% or more once borrowers begin making payments of principal and full interest. That typically happens after five years or earlier if the amount owed reaches a preset amount, typically 110% to 125% of the original loan balance.

Esitmates of borrowers making the minimum "negative amortization" - prior to recast - range as high as 80%. This is because this minimum payment is all they could afford - the Option ARM was a gimmick to allow reporting of an acceptable DTI, back when securitzation was the rage and anybody who could fog a mirror and lie up a reasonable DTI could get a loan.