In the next 24 hours, Dave Washburn has a decision to make about the dream home he and his wife built on a barrier island off the Florida coast: Deplete his retirement savings by nearly one-third, or face foreclosure.
To come current on his mortgage payments, Washburn will likely cash in about $18,000 from the $60,000 in his 401(k) account and pay a significant penalty for withdrawing that money early.
If he doesn't, the bank that holds the mortgage will start foreclosure proceedings.
It's a difficult decision to stomach.
"It's no easy job to boost yourself out of $18,000 in debt," said Washburn, 49. "But we built the house, and we want to live in it."
The Washburns fell behind on mortgage payments last summer after a series of unforeseen financial problems -- family emergencies that required extra money and the shutdown of the trucking company where Washburn earned $55,000 a year working as a manager.
He went nearly four months without a paycheck before the company went under.
Many cash-strapped American homeowners have had similar problems this year.
Nationwide, delinquent mortgage payments and foreclosures are far above the levels they were at a year ago.
More than 115,000 U.S. properties entered some stage of foreclosure during October, according to RealtyTrac, which tracks real estate foreclosures.
October's numbers represent a 3-percent increase from September and, more significantly, a 42-percent jump from October 2005.
For the year, more than 1 million properties have entered foreclosure, up 27 percent from last year.
The Rise of Subprime Mortgages
Industry experts say ballooning interest rates, often the product of adjustable-rate and subprime mortgages, have left many budgets too tight to make payments.
Subprime mortgages, usually offered to borrowers like Washburn who are considered higher risk, carry much higher rates than traditional mortgages.
Washburn, who also owes about $40,000 in credit card debt, was told that refinancing with a subprime mortgage would push the interest rate to 10.25 percent, up from his current rate of 6.25 percent.
For Washburn, the subprime plan was a nonstarter.
"That would just about double my monthly mortgage payment. I don't have a degree in economics, but I can work a calculator," he said.
Taking a Chance on Risky Borrowers
For many buyers looking to break into the housing market, however, subprime mortgages became a viable option during the last two years.
Subprime mortgages make up a relatively small percentage of the total mortgage debt in America -- about 12 percent to 14 percent of the total outstanding mortgage debt in the United States, according to the Mortgage Bankers Association.
An increased number of subprime borrowers, though, have led to many of the delinquencies and foreclosures.
One reason for the spike in subprime mortgages may actually be a product of the red-hot real estate boom of several years ago.
Many Americans entered the housing market as real estate values soared and interest rates were at historically low levels -- leading to an all-time high in American homeownership.
The influx of buyers led to a rate war within the subprime mortgage industry as companies offered lower interest rates to attract the highest possible number of buyers.
Subprime lenders signed up a record number of new mortgages -- known in the mortgage industry as "origination."
"The subprime lenders engaged in a battle for market share, so they offered lower rates to better-quality borrowers," said Michael Youngblood, managing director of asset-backed securities research at the investment bank Friedman, Billings & Ramsey.
Record Numbers, but Profits Take a Hit
On average, the mortgage industry issued $50 billion worth of subprime loans per month in 2005 -- an all-time record, according to Youngblood.
The lower interest rate mortgages were not as profitable, though, and many mortgage lenders lost money despite the increase in new business.
"The stocks got hammered," Youngblood said.
The industry solution was to adjust interest rate pricing and discontinue many of the low-interest mortgages they had offered in 2004 and 2005.
Subprime loans at higher interest rates increased as mortgage companies looked for a better return on their investments.
"But the mistake seems to have been that while the industry moved to more rational pricing, it attempted to keep the same pace of origination," Youngblood said. "Many of them made exceptions to qualify lower-quality borrowers."
A lot of those borrowers have had trouble keeping up their payments, hence the delinquencies and foreclosures.
Mortgage bankers point out that they have little incentive to sell mortgages to people who can't pay and eventually become delinquent or default.
"The mortgage company who services the loan has to absorb the cost of the delinquency or process or the foreclosure process, and that's a pricey undertaking," said Doug Duncan, chief economist for the Mortgage Bankers Association.
In fact, some subprime lenders have had a hard time returning to profitability, leading to a rash of sales of subprime mortgage companies.
Duncan said the increased use of new mortgage products had led to some of the delinquencies.
Lenders offering products like interest-only loans or "stated income" loans, in which the borrower need only state his or her income without documentation, are constantly evaluating their performance.
"A lot of these new products have no performance history, so the market will evaluate and adjust," Duncan said. "The mortgage companies will adjust the criteria they use to qualify borrowers."
Experts say the key for borrowers is to make sure they have enough extra cash on hand to continue making mortgage payments even if financial emergencies occur.
While homes can be a great financial investment, falling behind can lead to financial disaster.
"Of course hindsight is 20/20 for sure," Washburn said. "We've never been late on payments for anything, so we didn't intend to have any late payments on this house either."