"Mortgages usually default over three to five years," said Zach Gast, an analyst at the Center for Financial Research and Analysis. "We are talking about six months in a lot of these loans. We're not in the end game right now, we are at the very beginning."
A study released in March by First American CoreLogic estimated that 1.1 million adjustable rate mortgages will end in foreclosure over the next six to seven years as monthly payments increase -- in some cases doubling. This represents 13 percent of all ARMs issued from 2004 to 2006 and includes both prime and subprime loans.
Trying to refinance will be difficult, especially for homeowners who had risky credit to start with and obtained subprime loans or loans that required little to no documentation.
"Because interest rates are higher and underwriting standards are tighter, people who got themselves into problems with a mortgage, a home, won't be easy to remedy," said Guy Cecala, publisher of Inside Mortgage Finance, a trade publication. "In many cases, the home is worth less than the mortgage, or lenders are not willing to make loans that they may feel are even riskier than the ones they have on the books."
Congress has considered taking steps to help distressed homeowners and to protect future borrowers from getting into trouble with home loans.
Additionally, the Federal Reserve and other federal agencies that oversee the lending industry are considering revising standards to strengthen underwriting and increase financial disclosures to consumers.
The Federal Reserve held a hearing Thursday to gather information on whether it should use its rule-making authority to stop certain lending practices deemed unfair or deceptive.