The US subprime mortgage crisis is to worsen in the coming year with the number of foreclosures and home-loan defaults set to spike because of automatic interest rate rises, The Wall Street Journal reported Saturday.
Interest rates are set to rise - or "reset" - on some 362 billion dollars' worth of subprime mortgages in 2008, the report said, citing data from Bank of America Corp, prompting further pressure on borrowers, banks and markets.
Many US lenders entice borrowers with low initial interest rates, which automatically rise after a set period, increasing monthly mortgage repayments.
The majority of mortgages to reset next year are loans, which carry a fixed rate for two years, then adjust annually thereafter. A typical mortgage of this type starts at an interest rate of 7 per cent before jumping to 9.5 per cent after two years.
For a typical borrower, that would add 350 dollars to the monthly payment, The Wall Street Journal said. Sinking house prices mean that many facing a financial crunch no longer have the option of refinancing or selling their home. Some borrowers have little or no equity in their home, making it tougher for them to get out from under their loans.
Experts estimate that 1.35 million US homes will enter the foreclosure process this year and another 1.44 million in 2008, up from 705,000 in 2005, the report said. The crisis has prompted calls for government intervention, with many also urging lenders to freeze interest rates or modify terms in order to avoid the reset peak.