For subprime borrowers, there's no lifeline in sight

As many as half of the 450,000 subprime borrowers whose mortgage payments will rise in the next three months may lose their homes because they can't sell, refinance or qualify for help from the U.S. government.

"Short of the cavalry riding in over the hill, a lot of these people are just stuck," said Christopher Cagan, director of research and analytics at First American CoreLogic, the risk-management unit of the biggest U.S. title insurer.

The number of borrowers whose mortgage payments jump in the next three months will be the second-highest ever for a quarter, according to Credit Suisse Group. Twenty-seven percent have already missed a payment, said First American LoanPerformance, which owns the largest database of U.S. mortgages. That makes them ineligible for the Federal Housing Administration (FHA) bailout proposed last month by President Bush.

There's no lifeline in sight for subprime borrowers, who face an average increase of 26 percent, or $400 a month, according to CoreLogic.

Falling prices and a rising inventory of unsold homes make it difficult or impossible to sell or refinance without losing money and government programs aren't designed to aid the most desperate. That leaves foreclosure as the only alternative, and one that will prolong the worst housing downturn in at least 16 years.

Robert Murray, of Middletown, N.J., said he didn't pay enough attention when he took out a five-year adjustable-rate mortgage in 2002. This month, his payments ballooned to $1,800 from $1,300. Because he makes about $90,000 a year at his Newark Liberty International Airport maintenance job and hasn't missed a payment, he said he hoped he might be a good candidate to refinance.

If Murray were to apply for an FHA-insured refinance, he'd be out of luck. The value of his home has declined from the $265,000 he owes on two mortgages, and his equity has vanished, so he would have to write a check of at least $45,000 to refinance, and he doesn't have the cash.

"I'm way upside down," Murray said. "The payments will kill me now. I don't know what I'm going to do."

About 48 percent of subprime borrowers wouldn't qualify to refinance into a mortgage that conforms to the underwriting rules established by government-sponsored agencies Fannie Mae and Freddie Mac, according to a report by analysts for Swiss bank UBS.

"There are a number of people who have mortgage debt that's more than the value of their house, and a lot of those people are going to walk away," said David Olson, president of Wholesale Access Mortgage Research & Consulting. "That will put more homes on the market, which already has too many."

The Federal Reserve's half-point interest-rate cut on Tuesday will have little impact on borrowers whose mortgages are adjusting, said Ed Leamer, director of the UCLA Anderson Forecast in Los Angeles.

"It's not going to alter the housing situation, or clarify defaults and delinquencies," Leamer said.

U.S. home prices fell by a record 3.2 percent in the second quarter, according to the S&P/Case-Shiller Index. Lawrence Yun, chief economist for the National Association of Realtors, has warned that year-over-year prices will fall for the first time since the Great Depression of the 1930s.

It would take 9.6 months to sell off all the existing homes on the market, the longest amount of time in at least eight years, according to the Chicago-based Realtors.

The federal government has no "silver bullet" to keep home prices from falling further, said Andrew Laperriere, a managing director at research firm International Strategy & Investment Group.

The fact that more than a quarter of subprime borrowers default on their adjustable loans before the rates reset makes a political solution less likely, Laperriere said.

"The myth here is that the resets have been the driver of payment delinquencies, but the fact is if the borrower can't afford the teaser-rate payments, then they can't afford to ever pay back the loan," he said.

The new FHA program, called FHASecure, will let 120,000 homeowners in default take out loans from about 8,500 qualified lenders, paying an added insurance premium and using no taxpayer money, said Steve O'Halloran, spokesman for the Department of Housing and Urban Development.

In addition to not missing any payments before their mortgages reset and having at least 3 percent equity in their homes, eligible borrowers must have a job and the income to cover the payments, O'Halloran said.

For now, Murray will struggle to make his monthly payments, forgoing vacations and restaurants.

The Federal Reserve Bank pumped $62 billion into the banking system on Aug. 9 and 10 in an effort to soothe a credit crisis. Murray said the Fed should do the same for borrowers.

"If they gave us that money, we'd be able to be out of this predicament," he said.

Bloomberg News reporters Kathleen M. Howley in Boston, Dan Levy in San Francisco and Jody Shenn in New York contributed to this report.