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.