New York When Domenico Colombo saw his monthly mortgage payment was about to balloon by 30 percent, he knew how bad it could get.
His payment was scheduled to surge by an extra $1,500 in December. With his daughter headed to college next fall, Colombo feared ending up like so many neighbors in Ft. Lauderdale, Fla., who defaulted on their mortgages and whose homes are now in foreclosure.
He did manage to renegotiate a new fixed interest rate loan with his bank - but the future is less certain for others.
Millions of other adjustable-rate mortgages like Colombo's will soon reset at a higher interest rate. Many homeowners will be unable to make payments. Soaring mortgage default rates this year already have shaken financial institutions. The fallout from more of them, experts say, could spiral into the nation's economy.
'Close to the zero line'
"We haven't faced a downturn like this since the Depression," said Bill Gross, chief investment officer of PIMCO, the world's biggest bond fund. "Its effect on consumption, its effect on future lending attitudes, could bring us close to the zero line in terms of economic growth."
Two million homeowners hold $600 billion of subprime adjustable-rate mortgage loans, or ARMs, due to reset at higher amounts in the next eight months. Subprime loans are made to people with poor credit. Not all mortgages are in trouble, but homeowners defaulting or behind on payments could cause an economic shock of a type never seen before.
The housing slump would be exacerbated by even more empty homes on the market, causing prices to plunge by up to 40 percent in once-hot real estate spots. The top 10 global banks, which repackage loans into exotic securities such as collateralized debt obligations, or CDOs, could suffer far greater write-offs than the $75 billion already this year.
Job losses would curtail consumer spending that drives two-thirds of the economy. The Labor Department estimates almost 100,000 financial services jobs related to credit and lending have already been lost. Thousands of Americans in the housing industry could be affected. And there's no telling how that would affect car dealers, retailers and others dependent on consumer paychecks.
Based on historical models, zero growth in the gross domestic product would take the unemployment rate to
6.4 percent, wiping out about 3 million jobs from the economy, according to the Economic Policy Institute. In the last downturn between 2001-03, 2 million jobs were lost, according to the Labor Department.
Evidence is increasing that another downturn has begun.
Borrowers who took out loans in the first six months of this year are falling behind on their payments faster than those in 2006, according to investment bank Friedman, Billings Ramsey. That's making it harder for getting new mortgages.
Meanwhile, the number of U.S. homes in foreclosure is expected to keep soaring to 446,726 homes nationwide, according to RealtyTrac Inc. That's one foreclosure filing for every 196 households.
Some homebuyers gambled on interest-only loans. But with the initial two-year term expiring, many homeowners find they can't make the payments.
"It's been said a lot of people have been using their homes as ATM machines," said Thomas Lawler, a former official at mortgage lender Fannie Mae who is now a private housing and finance consultant.
Many are unaware that a borrower defaulting on a loan can affect the nation's well-being. But Wall Street's series of plunges in past months prove today's financial system is interconnected: Mortgages are sold to investment firms, which then slice them up and package them as securities based on risk. Then hedge and pension funds buy up such investments.
The collapse in housing prices has set off a chain reaction: Lenders are tightening their standards, borrowers are having a harder time refinancing loans and the securities that underpin them are in jeopardy.
This has resulted in more than $500 billion of potentially worthless paper on the balance sheets of the biggest global banks. Those losses could spill into the huge pension and mutual funds that also invest in these securities and that the average worker or investor expects to depend on.
Searching for solutions
Sen. Charles Schumer, D-N.Y., said borrowers are the ones who need relief. Money could be funneled through nonprofit organizations to homeowners that need help, he said in an interview.
There's also talk of letting government-backed lenders like Fannie Mae and Freddie Mac buy mortgages of as much as $1 million from lenders, pay the government for guaranteeing them and then turn them into securities for investors.
The subprime wreckage could dwarf the nation's last big banking crisis - the failure of more than 1,000 savings and loans in the 1980s. But problems with S&Ls; were largely contained, and the government was able to rescue them through a $125 billion bailout.
"What really makes this a doomsday scenario," housing consultant Lawler said, "is where would you even start with a bailout?"