Fitch forecasts new wave of home loan defaults

The credit rating firm analyzed a crop of option adjustable-rate mortgages taken out between 2004 and 2007 and concluded that most will recast to higher payments in 2009 and 2010.

Option adjustable-rate mortgages, also known as pay-option loans, let borrowers make a lower payment but can result in the unpaid portion being added to the principal balance.

With housing prices in many markets in downward trajectory, some borrowers with such loans have ended up owing more on their home than it is worth.

Fitch said many of these loans are going to reach their maximum allowable debt limits and recast to a higher payment sooner than borrowers might have anticipated.

The firm expects that about $29 billion in loans will recast to higher monthly payments by the end of next year, while some $67 billion in loans will do so in 2010.

Fitch said roughly $53 billion in loans would recast earlier than the expected five-year mark because a majority of borrowers have elected to make only minimum monthly payments the past 24 months.

The firm estimates loans that end up recasting will translate on average into an additional $1,053 monthly payment for borrowers.

"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," Group Managing Director and U.S. RMBS group head Huxley Somerville said in a statement.