During the first part of this decade, the housing market in many areas boomed. Sales on new homes went up as the prices were cheap and lenders were not as stringent with their requirement. Many people took advantage of non-traditional loan types, mostly Adjustable Rate Mortgages (ARMs) and Interest Only (IO) loans, to qualify for homes that may not have been in their price range. Many lenders approved individuals for subprime loans, meaning they have had some credit problems in the past. The loose lending requirements, and tapping into the subprime market, lead to housing prices rising rapidly in many parts of the country. The rise in home values allowed many individuals to draw upon their newfound home equity. People across the country rushed to refinance their homes and use the funds to payoff unsecured debts, such as credit cards, or upgrade into even bigger homes. What was the cost?

In 1994, less than 5 percent of all new home loans were subprime loans. Meaning you had to have great credit to buy a house. Most of these mortgages were 30-year fixed rate mortgages. This allowed the homeowner to know what their mortgage rate was going to be year after year. By the year 2006, 20 percent of home loans were subprime loans and they know represent $1.2 trillion dollars of outstanding loan mortgages. In 2006, 80% of the subprime home loans were 2/28 ARMs. They are called 2/28 ARMs because the first two years are set at a specific rate. Normally, this is a teaser rate and can be much lower than the normal market rate. After the first two years, the interest rate is reset to a new rate based on the current LIBOR rate. This causes the mortgage payment to significantly increase. The interest rate continues to be reset every 6 months. Most of these mortgages also have clauses in them stating that the rate cannot drop even if the LIBOR rate goes down. This means that those individuals with ARMs are going to keep paying more and more for their house.

When a majority of these subprime loans reset, homeowners found themselves in a very difficult situation. They now had a mortgage payment that is several hundred dollars more than where it began. This has caused many individuals to fall behind on their mortgage payments. According to estimates by the Center for Responsible Lending, they estimate that one out of every five subprime mortgages made in the years 2005-2006, will end in foreclosure. In total, they estimate that 2.2 million homes will be foreclosed from subprime loans originated between the years 1998-2006. Nationally, there were 246,000 foreclosures in August. This was a 36 percent increase versus July and a 115 percent increase over August of last year.

Many of the homeowners who got subprime loans in the years 1998-2004 were able to refinance their mortgages because of the significant appreciation in the value of their homes. Now the market has cooled and homes are not appreciating nearly as fast as they were several years ago. This leaves many homeowners who got in towards the end of the recent housing boom with little equity and little chance to refinance their homes. If they are able to refinance their home, it is usually in the same type or high-risk loan, which will only delay the inevitable. So what should homeowners do if they find that they can no longer afford their mortgage payment?

First, homeowners should contact their lender. In approximately 50 percent of cases, homeowners do not contact their lender when they begin to have financial difficulties. Lenders do not want to be property owners. Foreclosures are expensive to lenders because they lose money. Many lenders are willing to work with the homeowner in order to help them stay in the home. Many lenders will offer different types of loan modifications such as temporary or permanent interest rate adjustments, relaxing or extending loan terms, converting the loan from an ARM to a fixed mortgage, setting up repayment plans, or completing a short refinance or short sale.

Another option may be to seek housing counseling. There are many organizations, often times non-profit organizations, that assist individuals who find themselves facing a hardship because of their mortgage payment. They may be able to work with your lender on your behalf to find a solution to your situation. Often times they are able to help you reevaluate your budget and spending habits to see if there are other lifestyle changes that you can make. This would allow you to free up funds that can be used to pay your mortgage. Homeowners can also seek out credit counseling if they have unsecured debt on top of the mortgage payments. Credit counseling cannot help you lower your mortgage payments and they do not focus on your problem with the house, but they can work with you and any creditors that you may have unsecured debts with by placing you on a Debt Management plan. Debt Management can often times help you with your credit card debt, which in turn, can free up money to pay your mortgage. As a last resort, you may need to seek legal options.