“Desperate maladies require desperate remedies.” — French Proverb

Here’s the sad story of the day. “We were having a hard time meeting bills at the time we refinanced. It seems once you get behind, you do desperate things to catch up, and you never do,” says Lorraine, trying to hold back tears. “At the time of the loan, they tell you, ‘Well, it may go up, but it’s probably going to go down.’ You want it to be so, so you believe it.”

That was a quote from Lorraine, 72, a retired nurse along with her husband, Robert, 78, both seeking work after the rate on their mortgage has jumped from 7% to 10.5%. This was from a story in the USA Today last week. The article continues…

“They feel alone, but they’re not. America’s five-year real estate boom was fueled partly by a tempting array of cut-rate mortgages that helped millions of Americans qualify for home or refinance loans. To afford soaring home prices, many turned to adjustable-rate and other, riskier loans with low initial payments. The homeownership rate hit a record 70%.”

“Now, the real estate market is cooling, interest rates are rising and tens of thousands more Americans are starting to have trouble paying their mortgages. Nearly 25% of mortgages – 10 million – carry adjustable interest rates. And most of them went to people with subpar credit ratings who accepted higher interest rates, according to the Mortgage Bankers Association.”

“Last week, the Federal Reserve raised interest rates for the 15th time since June 2004 and signaled that at least one more increase is likely. That trend is ominous for borrowers who were seduced by adjustable-rate loans that offered interest-only payment options or teaser rates below 2% or that let the borrower pay less than the interest owed. They will face bigger payment shock once their loans reset to higher rates.”

“The number of borrowers in trouble will rise this year and peak in 2007 and 2008 as the largest number of mortgages reset to higher rates, according to First American Real Estate Solutions, a real estate data provider.”

“What worries experts such as Christopher Cagan at First American Real Estate Solutions are the adjustable-rate loans made in 2004 and 2005, at the end of the housing boom. These loans were concentrated in the hottest markets, such as California, where about 60% of all loans last year were interest-only or payment-option ARMs. That’s the highest such rate in the country.”

“Of the 7.7 million households who took out ARMs over the past two years to buy or refinance, up to 1 million could lose their homes through foreclosure over the next five years because they won’t be able to afford their mortgage payments, and their homes will be worth less than they owe.”

In my opinion, this is the real issue with the “housing bubble” — its not about people being stuck in homes of depreciating value… it appears now that many will not even be able to afford to hang on to their homes through this next cycle. Does anyone else find the proverbial handwriting depressing? I don’t think the general population understands how this is going to impact the American economy in the next several years.