U.S. ‘not prepared’ for option ARM flood

Billions in loan 'recasts' expected in 2010-11

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At the end of last summer, I was being interviewed by a radio commentator who at some point in the long Q-and-A asked me whether we should expect another wave of residential foreclosures -- or was the onslaught of busted mortgages over? Confidently, I assured him and my radio audience that the worst was over. As it turned out, I wasn't completely in the right. There is one grouping of mortgage products that as early as next year will begin to wash through the lending markets in a second wave of damage. Although it's not a large sector, as we learned from the subprime blowout, even mortgage products that are just a small percentage of the total market can create havoc far beyond their initial volume. This time the problem will come from option adjustable-rate mortgages (ARMs). Here's the situation: Most option ARMs were written over the years 2005 and 2006 with five-year resets. That means in 2010 and 2011 these mortgages will reprice beyond the introductory bargain rates a...