I sometimes think that the stock market, many economists and policy makers forget that a huge problem still exists despite about $12 trillion of Fed/Treasury grease job. The huge problem is the housing sector and more specifically home mortgages. The huge problem is a reality and reality has a way of kicking us right in the face. There was another warning issued today. Is this warning and the warning by midtowng last week being heard?

The warning is about Option ARM. Here is the example from the Bloomberg article:

Shirley Breitmaier’s mortgage payment started out at $98 when she refinanced her three-bedroom home in Galt, California, in 2007. The 73-year-old widow may see it jump to $3,500 a month in two years.

Shirley Breitmaier took out a $315,000 option ARM to refinance a previous loan on her house.

Her payments started at 3/8 of 1 percent, or less than $100 a month, according to Cameron Pannabecker, the owner of Cal-Pro Mortgage and the Mortgage Modification Center in Stockton, California, who is working with Breitmaier. The loan allowed her to forgo higher payments by adding the unpaid balance to the principal. She’ll be required to start paying principal and interest to amortize the debt when the loan reaches 145 percent of the original amount borrowed.

And here is the warning:

About 1 million option ARMs are estimated to reset higher in the next four years, according to real estate data firm First American CoreLogic of Santa Ana, California. About three quarters of those loans will adjust next year and in 2011, with the peak coming in August 2011 when about 54,000 loans recast, the data show.

Option ARM borrowers hit with unaffordable monthly payments are another threat to the housing recovery and the economy, said Susan Wachter, a professor of real estate finance at the University of Pennsylvania’s Wharton School in Philadelphia. Owners who surrender properties to the bank rather than make higher payments for homes that have plummeted in value will further depress real estate prices and add to the inventory of properties on the market, she said.

“The option ARM recasts will drive up the foreclosure supply, undermining the recovery in the housing market,” Wachter said in an interview. “The option ARMs will be part of the reason that the path to recovery will be long and slow.”

This mortgage crisis will continue to be a drag on the economy. But there is an added dimension: the financial conglomerates. Three financial conglomerates have significant Option ARM exposure: Bank of America, JP Morgan Chase and Wells Fargo through their acquisitions of Countrywide Financial, Washington Mutual and Wachovia, respectively.

Sorry, we are not out of the woods yet.