The Wall Street Journal has this report on mortgage loan resets. "Millions of Americans who stretched themselves financially to buy homes face a painful adjustment, some could even lose their houses, as monthly payments on adjustable-rate mortgages are reset higher. More than $2 trillion of U.S. mortgage debt, or about a quarter of all mortgage loans outstanding, comes up for interest-rate resets in 2006 and 2007."

"A recent study projects that about one in eight households with adjustable-rate mortgages that originated in 2004 and 2005 will default on those loans."

"A barrage of negative trends is making things tougher for already-strained borrowers. Interest rates are rising, which can increase the size of each mortgage reset and make refinancing more expensive. The housing market is cooling, making it harder to sell homes or build up a cushion of home equity. Regulators are pressing lenders to tighten their lending standards, which probably will make it more difficult for some people to qualify for refinancing."

"One couple that faces a reset this summer is Ruth and Magdi Fadlalla, who two years ago bought a three-bedroom house for about $294,000 in the New York borough of Queens. Their loan carries an interest rate of 7.46% for the first two years. This summer, at the first reset, the rate will jump to 9.46%, they have been advised, and the rate could rise further in the future unless interest rates generally decline. Already, the Fadlallas have fallen behind on their monthly payments of about $1,950 and have been put on notice that their home could soon be lost to foreclosure."

"Mrs. Fadlalla, a special-education teacher, says her property taxes have risen sharply and other costs of home ownership proved higher than she expected. 'This is killing me,' Mrs. Fadlalla says, though she adds that 'I'm going to work it out.'"

"The Fadlallas got their loan through a branch of Southern Star Mortgage Corp, acting as a broker. Like most mortgages, the loan later was sold to a financial firm that put it into a pool of loans that back mortgage securities owned by a variety of investors. Gary Shusterhoff, president of Southern Star, says the Fadlallas qualified for the loan when they applied. A unit of Wells Fargo & Co., acting as a trustee for the investors that now own the loan, has initiated legal action to collect overdue payments."

"Debt counselors are bracing for many more such cases. 'We have just begun to see what I fear is going to be quite a flood' of people seeking help in coping with resets, says Sarah Gerecke."

"Lenders and the economy as a whole could easily cope with such losses, Christopher Cagan says, though it would be devastating for some families and painful for some investors who bought securities backed by the riskiest loans. 'It won't happen all at once,' Dr. Cagan says. 'It will be spread out over several years.'"

"Rather than face those big jumps, many borrowers will refinance into new 2/28 loans, Grant Bailey, a director at Fitch Ratings believes. Currently, they could get an initial rate of about 8% to 8.5% on a new loan. But that won't be possible for some borrowers who have taken on lots more credit-card debt and whose homes haven't appreciated as much as expected. Because their debt costs would be so high in relation to their income and because they can't extract cash from their home equity, they may not qualify for refinancing. That means meeting the higher payments on the original loan or facing foreclosure."

"'The ones who get stuck are probably going to be the ones who needed to refinance the most,' Mr. Bailey says."

"Even those who do refinance into a new 2/28 loan won't necessarily be in the clear because they still face an eventual reset, and refinancing typically costs thousands of dollars in fees, which often are rolled into the new loan. A common sales pitch for 2/28 loans is that the borrower can use those first two years before the reset to improve his or her credit score and then qualify for a cheaper prime loan."

"'But that goal is rarely realized,' says (mortgage broker) Daniel H. Jacobs. As the housing market cools, it probably will get harder for marginal borrowers to refinance on attractive terms, he notes, adding: 'At some point, people are going to have to pay the piper.'"