Unwary borrowers snared in U.S. housing "bloodbath"

By Emily Kaiser

CHICAGO (Reuters) - Renae Gorney sees the human side of the slumping U.S. housing market, the people whose homes are part of the $1 trillion worth of unconventional mortgages that are about to get more expensive.

Gorney, director of loss mitigation at Freedom Foreclosure Prevention Services in Mesa, Arizona, receives more than 300 applications a month from people facing foreclosure, and has little faith in forecasters who say the worst of the housing market downturn is over.

"It's going to be a bloodbath this year," she said.

Many of her clients -- homeowners who come for help renegotiating mortgage terms or to work out deals to avoid foreclosure -- have adjustable-rate mortgages that initially carried lower interest rates but will soon spike up.

The Mortgage Bankers Association estimates that between $1 trillion and $1.5 trillion in adjustable-rate mortgages face an interest rate reset this year.

As the housing market cools and homeowners have trouble refinancing or selling, more people are falling behind on mortgage payments. The delinquency rate for all types of mortgages rose to 4.67 percent in the third quarter of 2006 from 4.39 percent in the prior three months, a gain of 6 percent, according to the Mortgage Bankers Association.

Foreclosures last year were up 42 percent from 2005 levels, and will likely rise another 20 percent to 25 percent this year, real estate information service RealtyTrac Inc. says.

NEW CENTURY, NEW PAIN

A jittery Wall Street has focused on the subprime mortgage sector, which lends money to people with poor credit histories. One such mortgage company, New Century Financial Corp., has said its lenders plan to halt the financing it may need to fund its operations, as bad loans keep piling up.

While subprime mortgages have spread credit more widely and helped more people buy their own homes, critics contend a hot real estate market encouraged lenders to get more aggressive and offer increasingly complicated terms that borrowers did not always fully understand.

Housing has always been an integral part of the U.S. economy, but it has taken on greater significance in recent years as many consumers took out home equity loans and ramped up their spending.

Some economists worry that as house prices fall and lenders tighten credit terms, consumers will curb spending and drag down the U.S. economy.

Christopher Cagan, director of research and analytics at First American CoreLogic, estimates that adjustable-rate mortgage resets will trigger some 1.1 million foreclosures over the next 5 or 6 years, wiping out $110 billion in equity.

That may sound like a lot, but Cagan does not believe the fallout will tank the $13 trillion U.S. economy or even the mortgage industry.

"It's less than we spend on alcoholic beverages," he said.