by Calculated Risk on 8/05/2008 10:32:00 PM

From the WSJ: FirstFed Grapples With Fallout From Payment Option Mortgages

Like many mortgage lenders, FirstFed Financial Corp. is struggling with rising losses. ... Forty percent of its borrowers became at least 30 days delinquent after the payments on their adjustable-rate mortgages were recast. The number of foreclosed homes held by the bank doubled in the second quarter from the first quarter.

But FirstFed isn't another bank grappling with the fallout from subprime mortgages that went to less-creditworthy borrowers. ... [T]he Los Angeles bank is on the front lines of what could be the next big mortgage debacle: payment option mortgages.

It seems like Tanta and I have been writing about the coming wave of Option ARM defaults forever, but it's only been since 2005!

Barclays Capital estimates that as many as 45% of option ARMs, as they are often called, originated in 2006 and 2007 could wind up in default. Another analysis, by UBS AG, suggests that defaults on option ARMs originated in 2006 could be as high as 48%, slightly higher than its estimate for defaults on subprime loans.

The key here, for the housing market, is that the next wave of defaults will be hitting middle to upper middle class neighborhoods.

We're all subprime now! (a classic Tanta phrase)