U.S. 'not prepared' for option ARM flood

Billions in loan 'recasts' expected in 2010-11

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).