Defaults are scheduled to escalate because about $50 billion (U.S.) in option adjustable-rate mortgages (ARMs) will be resetting at higher rates in 2009 and 2010. Fitch Ratings “estimates payments will rise some 63% on these mortgages – increasing the average borrower’s outgoings by more than $1,000 a month.”

So here is another reason why the Federal Reserve is not likely to raise interest rates to fight inflation — in addition to other possible reasons cited. Rates are already being raised by financial institutions for a major portion of their customers, and by substantial increments. Why should the Fed pour fuel on the fire?

Institutions with big exposure to option ARMs are going to be pressured for some time, notes Cass on the breakingviews.com site. Two cases with high exposure are Wachovia and Washington Mutual.