Option Arms resets and a double dip recession

Option Arms resets wll start to accelerate some time in the Spring of 2010,
most likely causing another leg of the credit crisis in the Fall of 2011.

Credit Suisse (CS) estimates that the resets will begin to accelerate next
spring, rising from about $4 billion resetting in March 2010 to a peak of $14 billion in
September 2011. The current level is about $1 billion. About $500 billion of option
ARM loans are outstanding, according to the bank. “Things have gotten pushed out,”
says Chandrajit Bhattacharya, director in U.S. Mortgage Strategy for Credit Suisse.
“Right now it looks like the big increase is probably going to be somewhere toward the
middle of next year.”

Option ARMs typically reset after five years, at which point the monthly bill increases
65% or more. About 37.5% of option ARMs originated in 2005 are still outstanding, 63%
of the 2006 vintage are outstanding, and 82% of the 2007 loans remain, according to
Barclays Capital (BCS). And about a third of the outstanding loans in these years are
deeply delinquent.

In a given month, between 4% and 5% of borrowers who are current on their option
ARMs taken out in 2006 and 2007 default in the following month, says Sandeep Bordia,
Barclays’ head of residential credit strategy, who also expects resets to be delayed until
next year. “These things have been performing horrendously,” Bordia said. “I don’t know
how much of it will last into the recast.”