American Dream's Harsh New Reality

As the housing boom of the early part of this decade unwinds, the U.S. is facing a harsh new reality: Annual home foreclosures may surpass new-home sales from builders.

Nearly 2 million homeowners are expected to lose their houses this year and next as the mortgage mess becomes a painful experience for condo-flipping gamblers and struggling families alike.

The latest data from the Mortgage Bankers Association Thursday showed that the nation's foreclosure situation continues to worsen. A record number of mortgage holders -- 0.65% of all borrowers -- entered the foreclosure process in the second quarter. Loans already in the foreclosure process accounted for 1.4% of all mortgage loans outstanding at the end of the second quarter, slightly lower than the recent high in 2002.

Most of the foreclosure problems are stemming from homeowner payment shock tied to the trillions of dollars in adjustable-rate mortgages that are having their rates reset for the first time in 2007 and 2008.

As adjustable-rate mortgages reset to require much higher payments, many homeowners can only escape the blow by selling the home or refinancing the loan. But with housing prices falling, homeowners could face negative equity in their homes and may find foreclosure to be the only option.

The federal government has taken small steps to help ease the pain. President Bush last week outlined tax breaks and the federal government's guarantee of certain loans for low- and moderate-income borrowers who are behind on payments. The Federal Reserve has urged loan companies to work with homeowners to renegotiate loan terms or allow payments to be deferred.