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From Reuters - Thu Sep 17, 2009 7:49pm: "Option" mortgages to explode, officials warn

The federal government and states are girding themselves for the next foreclosure crisis in the country's housing downturn: payment option adjustable rate mortgages that are beginning to reset.
"Payment option ARMs are about to explode," Iowa Attorney General Tom Miller said after a Thursday meeting with members of President Barack Obama's administration to discuss ways to combat mortgage scams.
In Arizona, 128,000 of those mortgages will reset over the the next year and many have started to adjust this month, the state's attorney general, Terry Goddard, told Reuters after the meeting.

"It's the other shoe," he said. "I can't say it's waiting to drop. It's dropping now."

Rewind the blog's database 8 and a half months:

Option ARMs: The Banking Backdrop of 2009 (January 04, 2009)

The problem ahead: According to Fitch, of the nearly $200 bn of option ARMs outstanding, roughly $29 bn of loans are expected to recast by 2009. Of this $6.6 bn constitute 2004 vintage (that would be recast as a result of completion of the end of five-year term in 2009) and $23 bn constitute 2005 and 2006 vintage loans that would recast early due to the 110% balance cap limit.
Further an additional $67 bn is expected to recast in 2010, of which $37 bn belong to 2005 vintage (that would be recast as a result of completion of the end of five-year term in 2010) and the balance $30 bn consist of 2006 and 2007 vintage loans that would be recast early due to the 110% balance limit cap

 Who are the current option ARM kings due to acquisition?

JP Morgan (see the latest public document - An Independent Look into JP Morgan and Wells Fargo through Wachovia Bank - subscribers, see WFC Note 22 May 09 - Pro and WFC Note 22 May 09 - Retail - both of which may be updated to reflect recent events and findingsnon-subscribers can see my warnings from over a year ago: Doo-Doo bank drill down, part 1 - Wells Fargo and  Doo Doo 32 Bank Drill Down 1.5: The Forensic Analysis of Wells Fargo). For those who haven't heard, Wells was recently allegedly busted with Wachovia legacy CDS in its portfolio that insured buyers of their MBS against junior tranche (the riskiest stuff) default. They are set up to take losses twice on the same event if this is true. I am on the case and will have a re-worked model by next week for subscribers. If the exposure is significant, I doubt Wells will have the capital to fund this dual exposure, and you will end up seeing AIG, part deux. I also doubt very seriously if Wells/WaMu are by themselves in this set up, either.

An Independent Look into JP Morgan actually has a focus on the systemic risk of derivatives on bank's balance sheets. How timely!