In 2006 and 2007, Moody's Economy.com, an economic research firm based in West Chester, Pennsylvania, noted that more than $2 trillion of U.S. mortgage debt, equal to about 25 percent of all mortgage loans outstanding, would come up for interest resets. In October 2007 alone, more than $50 billion in ARMs were scheduled to reset off the teaser rates they had at origination in 2004 and 2005.

A very large chunk of those loans were in the subprime arena, where borrowers were stretched as far as they could go from the date they closed on their loans. Those “affordable” mortgage days were coming to an end. Depending on how their loans were structured, many of these borrowers on the subprime end were facing payment increases between 10 to 50 percent. In 2006, First American Real Estate Solutions, a unit of title insurer First American Corp., projected that about one in eight households with adjustable-rate mortgages that originated in 2004 and 2005 would default.

The hardest-hit areas were in the Rust Belt and the Southwestern United States. According to Moody's Economy, 75 percent of those subprime loans originated in California, Nevada, Arizona, Florida, and Massachusetts markets. Detroit and Cleveland were also hard hit.

At the time this book was published, lenders and real estate investors were bracing for the next wave of foreclosure filings. The sheer number of homes being repossessed by banks was expected to slow down the home market in many communities beyond the current slowdown buyers and sellers were facing in those markets.

While many states are attempting reforms on lending practices, at publication time, there was one major federal lending reform effort on the horizon. The Federal Housing Administration Modernization Act of 2007 would give the FHA more flexibility to insure mortgages for higher-risk borrowers and increase its role in solving the mortgage meltdown. The version of the legislation in October 2007 would provide for expanded counseling that would give families more advice and assistance to stay in their homes while working for a loan workout or refinance. At press time, only 1 percent of these subprime loans were being refinanced.