US home foreclosures on the rise

In the short term, higher interest rates are the most direct source of strain on mortgage holders. There are several types of unconventional loans that proliferated in the late 1990s after lending standards were relaxed. These loans served to decrease initial mortgage payments, but at the expense of greater risk for much higher payments in the future. The most popular are interest-only and adjustable-rate mortgages (option ARMs).

Option ARMs have been attractive during the low-interest rate period of the past few years because with these loans mortgage payments follow the prevailing rates, varying from month to month. The introductory rates tended to be extremely low, sometimes half that of the traditional 30-year mortgage rate, which itself reached historic lows last year.

But when interest rates increase, as has been the case in the last quarter of 2005 and into this year, many homeowners are confronted with much higher mortgage payments.

Interest-only loans allow borrowers to pay only the interest for a set period, leaving the principal payments as optional. The most common type of interest-only loan is called a 2/28, with a two-year interest-only period on a 30-year mortgage. Millions of buyers relied on this type of loan in the last two years.

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http://wsws.org/articles/2006/mar2006/home-m28.shtml