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Foreclosures rising among high-risk US mortgages

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Housing advocates believe the regulators are reacting too late. "They're good positive steps but it's not close to being enough – the genie's already out of the bottle," says Mr. Rheingold. "What we're seeing now with the incredibly high foreclosure rates ... is a product of the complete deregulation of the mortgage industry over the last 10 to 15 years."

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The Mortgage Bankers Association (MBA), which represents the nation's major lenders, points out that deregulation has helped create record homeownership.

And the market is already correcting itself, says Kurt Pfotenhauer, the MBA's senior vice president for government affairs. Investors are now requiring stricter standards and mortgage companies are weeding out overly aggressive brokers.

"Government regulation of this market will result in fewer people having access to credit," he says. "If you care about people having access to credit you shouldn't regulate the market."

Rate hikes could cause more defaults

The catalyst for a lot of defaults will be a change in the interest rates many borrowers pay. This year, holders of some $250 billion in ARMs will see their interest rates rise – perhaps by as much as 1.5 percentage points.

Hugh Moore, an investment manager who runs Guerite Advisors in Greenville, S.C., estimates as many as 1.4 million subprime borrowers will face the prospect of higher interest rates. "I don't know if that constitutes a tidal wave, but you have to believe a number of those people don't have a lot of additional cushion," he says.

Take Mr. Silva's case. In 2004, he was paying 7.6 percent on his $139,000 ARM. Last summer, the two-year teaser interest rate ended and his mortgage jumped 2 percentage points to 9.6 percent. His payments went from $920 to more than $1,200.

The interest on his mortgage, along with his monthly payments, will increase every six months until it reaches a high of 13 percent – if interest rates continue to climb.

"I had wanted a 30-year fixed rate and they told me I'd qualify for one," he says. "Then when I got to the closing they told me I could only qualify for the adjustable rate."

Silva initially walked away. But he had some debts to pay that were due from a stint of unemployment after the dotcom crash in 2000. After two days, he returned and signed the new mortgage.

"I felt like it was a switch and bait," he says.

Ms. Myers is also coping with mortgage sticker shock. As sales director at a Colorado golf course, her commission-driven income depends on weather. When she got her no-down payment loan last spring, costing $2,200 a month, the weather was good and she was bringing home as much as $6,000 a month. When snow came early to Denver, the golf course closed, and her monthly income has plummeted to $2,200 – only enough to cover the mortgage and nothing else. She's maxed out her credit cards and borrowed from family to make payments over the last few months. Her March payment is now due and she only has $1,000 left in the bank.

"They won't take a partial payment, and they say they won't work with me until I've been 60 days late on my mortgage," she says. "I've never been late before, and I don't ever remember being in a financial situation like this before."

Ms. Smith nearly lost her St. Paul house to foreclosure. A retired social worker on a fixed income who is raising a grandson on her own, she had no intention of refinancing her 30-year fixed-rate mortgage. Then her insurance company said her old house needed structural repairs – and it wouldn't issue a policy until the work was done. That's when a mortgage broker came around. He told her he could get her an adjustable-rate mortgage that would allow her to take out equity to pay for the repairs without increasing her monthly payment too much – at least for the first two years. When she asked what would happen after the two-year "teaser rate" was up, the broker told her she could just refinance again.

"And voilà, at the end of the two years, I get this slap in the face – they start raising the interest rates every few months and said, 'No, we're not going to refinance,' " she says. Eventually, her payments doubled to more than $1,400 a month. "I told them I don't make $1,400 a month," she says. "'Tough,' they said, 'It's just too bad.' "

Eventually, the lender started foreclosure proceedings. Smith then contacted ACORN, the national housing organization, which negotiated a new fixed-rate loan for her. But her payments are still more than $1,300 a month and she's now working as many part-time jobs as she can find.

"I hate for anyone to find out that I was this stupid, that I could get caught up in something like this," she says. "The sad thing is that I'm not the only one. There are thousands of people that this is happening to."

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