Jeff Kaller

Wall Street is solid on surviving that once eagerly packaged rising mortgages into securities and encouraged lax lending standards and 100% financing are pressing lenders to tighten up. In response, lenders now require larger down payments or more fairness, higher credit scores and closer scrutiny of appraisals.

Even though the vast preponderance of borrowers still make their payments on time, mortgage bankers report record rates of delinquency and foreclosure. A few high-profile subprime lenders--firms that awarded loans to people with blemished credit or undocumented earnings--have declared bankruptcy. Even homeowners with the best credit feel the clutch from falling home prices and rising rates. Toward the end of the boom, the amount of adjustable-rate mortgages with cheap initial rates surged as home buyers struggled to get a foot in the door of houses selling for bloated prices, thus having hard time stopping foreclosures.

Kevin Kempskie is not your typical investor. In Boston, investors had previously driven up prices and condo conversions were extensive, but Attleboro had escaped the rush and price run-up.

Following his mortgage broker's advice, he traded in his fixed-rate mortgage for an ARM with a rate of 5.97% for the initial year. The loan, known as an option ARM, offered four payment choices, including a minimum payment that didn't include all the interest due.

Like many other dangerous mortgages, the loan carried a prepayment penalty that would apply if he refinanced within three years. Often, to boost their commissions, brokers would push for the prepayment penalty because it increased a loan's appeal to investment firms issuing packages of mortgage-backed securities.

The couple bought a single-family residential property and began making two mortgage payments.

The $2,650 that Kevin collects in monthly rents is just enough to cover the loan's minimum payment of $2,370 and the building's operating expenses.

As investors and homeowners were overcome with speculators' fever, the mortgage industry fed Wall Street's hunger for high- yield securities by reselling packages of subprime loans. Says Charles Pope, one of the executive of Mortgage Authority, in Florida: "Mortgage companies were having such an easy time selling bad paper, they said, Let's get crazier. If you can fog a mirror, we've got a loan for you." Persuaded by the easeness of selling questionable loans to investors, lenders unwind their underwriting standards.

In that agitation of building and buying, Linda Steele and her spouse bought their first home in Port Saint Lucie which is the county seat. They paid $187,000 for a brand new built four-bedroom, three-bath single- family home on a quarter-acre. At $1,500, the mortgage payment was manageable with two incomes--although, as the family's primary breadwinner, Steele worked 14- to 16-hour days as a regional manager for a drugstore chain.

Because of the decline in household revenue, she had to refinance into a subprime mortgage. In middle of 2006, when the fixed-rate period on her mortgage ended, Steele refinanced into another 2/28 mortgage, this time with an interest rate of 9% because her credit score had fallen. Property taxes rose with home prices to give for new municipal infrastructure as new- home development mushroomed, and insurance costs soared in the wake of multiple hurricanes. Steele's mortgage payment rose to $2,800 a month.

Steele move toward her mortgage lender hoping for a forbearance—in short, she would be able to skip a few months' payments, which would be tacked on to the end of her loan. Instead, the lender told her that if she could pay her mortgage on time for three months it would deem adjusting the interest rate downward.

Steele still has equity in her home, but she isn't confident that she can sell it fast enough to stop foreclosure. Since the county's market peak, the number of homes for sale has more than doubled, time on the market has increased, and the median home price has fallen.

Even if you're a fiscally conservative homeowner, you may be feeling the pressure of high housing costs, particularly if you have an adjustable-rate mortgage with a rate that's headed up or if your income has taken a hit.

Rates on 30-year fixed-rate mortgages are still good-looking and are generally lower than fully indexed rates on adjustable-rate loans. If you can't refinance because your financial prospects are poor, you have no equity in the home or you're looking at a large prepayment penalty, you may want to try selling your home yourself.

Take lead of a mortgage relief, if it is available. In California, legislators have suggested creating a mortgage pool to assist first-time homeowners in trouble. Head off foreclosure. As soon as you think you will forget a mortgage payment, call your lender to discuss your options. Besides refinancing, those may include a self-control (you temporarily pay nothing or only a minimum amount, making up the payments either over time or at the end of the loan), or a loan modification (the lender temporarily adjusts the interest rate). In that case, the lender agrees to call off your debt in exchange for the proceeds from the sale of your home and to stop foreclosure.

Neil