Fitch: High Defaults Await U.S. Option ARMs as Loan Recasts Approach

NEW YORK--(Business Wire)--
Many borrowers of U.S. option adjustable rate mortgages (ARMs)
will soon have a substantially more difficult time making their
increased monthly mortgage payments, according to Fitch Ratings in a
special report. This is because many mortgages underlying recent
vintages will start reaching their maximum allowable debt limits and
will reset to a higher payment (recast) earlier than expected.

Fitch expects roughly $29 billion 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. At recast, the mortgage payment is increased to ensure full
amortization of the loan by maturity. Though recent declines in the
12-month Treasury average (MTA) rates have mitigated some risks, the
majority of option ARM borrowers have elected to make the monthly
minimum payment over the past 24 months. 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. This will likely cause levels of 90-day plus
delinquencies, currently ranging from 10% to 24%, to more than double
after recast for 2004-2007 vintage loans, according to Group Managing
Director and U.S. RMBS group head Huxley Somerville. Fitch estimates
that the potential average payment increase on the re-casting loans to
be 63%, representing on average an additional $1,053 due each month.

"The combined impact of payment shock, negative amortization,
declining home prices and restricted availability of mortgage credit
may leave many option ARMs' borrowers unwilling to continue paying
their mortgage," said Somerville. "Also, because of their use as an
affordability product, option ARM defaults will likely spread into
higher priced neighborhoods, as many borrowers leveraged the very low
minimum monthly payment to buy more expensive homes."

Fitch's rating criteria and base case loss expectations over the
past several years have reflected the substantial risk of a large
payment shock associated with the Option ARM product and also
accounted for the higher likelihood of default and loss due to the
negative amortization feature. As a result, Fitch has only rated
approximately 5% of option ARM RMBS since 2004 because of its more
stringent assumptions and recognition of the product's high risks.

'Option ARMs: It's Later Than it Seems' is available at
www.fitchratings.com under the following headers:

Structured Finance then RMBS then Special Reports

Fitch's rating definitions and the terms of use of such ratings
are available on the agency's public site, www.fitchratings.com.
Published ratings, criteria and methodologies are available from this
site, at all times. Fitch's code of conduct, confidentiality,
conflicts of interest, affiliate firewall, compliance and other
relevant policies and procedures are also available from the 'Code of
Conduct' section of this site.

Fitch Ratings, New York
Huxley Somerville, +1-212-908-0381
Alla T. Sirotic, +1-212-908-0732
Stefan Hilts, +1-212-908-9137 (RMBS)
Suzanne Mistretta, +1-212-908-0639 (Structured Finance
Portfolio Risk)
Media Relations:
Sandro Scenga, +1-212-908-0278

Copyright Business Wire 2008