One idea that is fairly widespread in the blogosphere is that a slew of interest rate resets on option Adjustable Rate Mortgages in 2010 and 2011 will trigger another round of writeoffs and possibly a double-dip recession (see here and here). Recent news indicates these losses could be imminent.
Fitch Ratings stated in a report that 88% of securitized option-ARMs are yet to be reset. Considering that 94% of option-ARM debtors chose the lowest payment option and 75% of option-ARMs were made in California, Florida, Arizona, and Nevada (where housing prices are down 48%), the future doesn't look good. Loan-to-Value ratios have gone from 79% to 126% today. That means the average option-ARM homeowner is underwater by more than 25% of their homes value. For a $300,000 home, that is $75,000.
Furthermore, only 3.5% of these loans have been modified. These loan modification doesn't seem to help much anyway. 24% of modified option-ARMs default in 90 days, while 37% of untouched loans default after 90 days. The most interesting thing about the numbers, however, is that the outlook is worse than was expected less that a year ago. Loss severities on MBS have risen from 40% a year ago to 60% today. Considering that vast amount of option-ARMs that still have to reset, these losses should continue to increase. (read more here)
Personally, I don't think that the option-ARM resets will cause the armageddon some have predicted. As long as regulators remain foreberant in regards to recognizing fair value, banks will be able to spread out losses over the next five years, similarly to the early 80's Latin American debt crisis. One possible consequence of this is less lending as banks have to hold capital against these assets. This could actually benefit investment banks because it forces companies to raise capital through the capital markets.
