The stricken US mortgage market is set to suffer further setbacks in the next two years as $96bn of risky home loans sold with initial flexible payment options switch to more stringent terms. These will raise borrowers’ monthly payments by about 60%. The changing terms could more than double the number of borrowers falling behind on so-called “option adjustable rate mortgages” issued between 2004 and 2007, according to research by Fitch Ratings. At the five-year mark, these optional ARMs are “recast” and the monthly payment is increased – by a potential average 63%. Late payments and defaults on such mortgages are already running as high as 24% in some areas, said Fitch, which expects roughly $29bn of option ARMs to recast to higher monthly payments by the end of 2009 and an additional $67bn to recast in 2010.
