VIRGINIA

Less than a year ago, Amy Womble refinanced her mortgage in a move that the widowed mother-of-two believed would lower her monthly outgoings and raise additional cash to pay off other debts. What she got instead were monthly payments more than double what she had initially been promised, and the prospect of eventually paying back more than $1m for less than $232,000 in initial finance.

Her new loan, a hybrid adjustable rate mortgage (ARM), takes up more than three-quarters of Womble's monthly income. If she is not able to make new financial arrangements, her payments in years to come will only go higher.

"Since I took this loan, I have had to access my equity line, pulling even more equity out of my home to meet this monthly payment," the North Carolina resident recently told a group of US Senators.

"There are times when I can't afford to buy food, so my teenage boys have cereal for dinner. I am lucky it is winter, because otherwise the power company would have already cut us off."

The debate continues about whether the subprime crisis will spill over into the broader US economy, leaving global markets to speculate on what impact this could have elsewhere. The wild swings seen across world bourses last month in response to rising foreclosures on US subprime mortgages clearly illustrates the potentially disruptive potential to the financial sector.

Amid these market jitters, Womble and millions like her are facing the prospect of losing their homes and having their finances left in tatters.

The Center for Responsible Lending (CRL), a consumer advocacy group dedicated to eliminating abusive financial practices, estimates that 2.2 million subprime mortgage holders have either already lost or will lose their homes to foreclosure within the next few years.

The CRL says it will take these people an average of a decade or more to repair their credit histories and re-enter the housing market, while the total cost of these foreclosures could reach $164bn, primarily in lost home equity.

"Borrowers are not choosing these products," said Kim Warden, who is based in Washington DC in her role as co-ordinator of federal lobbying for the CRL. "Nobody who understands what they are getting into would choose these products."

I will end up out on the street if something doesn’t change soon

Warden was on hand when Womble and others gave personal testimony to the Senate Committee on Banking, Housing and Urban Affairs earlier this year.

She points out that 83% of all subprime loans are hybrid ARMS - also known as "exploding ARMS" - such as that taken out by Womble.

Typically referred to as "2/28s" or "3/27s", these mortgages offer low rates of interest for an initial period of either two or three years. After that, rates are then reset every six or 12 months, leading to an explosion in the levels of monthly payments.

"Traditional ARMs go down when interest rates go down," Warden said.

"In the case of hybrid ARMs, your interest rate goes up regardless of whether interest rates have gone down. It is just a matter of how much your rate is going to go up."

Delores King, a retired office administrator living in Chicago, refinanced her mortgage in 2005 in response to a cold call from a mortgage brokerage.

Prior to refinancing, she was paying $798 a month on an outstanding balance of $140,000.

She told the Senate committee that payments on her new mortgage started at $832 per month, but had increased to $1488 by the beginning of this year.

Although she gave the mortgage broker a full and honest account of her financial details, her payments are now more than her monthly income.

"I have been scraping by with the help of family and friends to get my mortgage paid every month, but I am now at the point where it is just impossible to continue," said King, who has owned her current home for nearly 36 years.

"Last month, I could only send in $1200. I will end up out on the street if something doesn't change soon."

Although still a niche market, the number of mortgage loans to "subprime" borrowers - those with little cash for down payments, or a botched credit history - has boomed in the US during the last several years. In recent testimony before the Joint Economic Committee, US Federal Reserve chairman Ben Bernanke estimated that variable rate loans to subprime borrowers accounted for nearly 10% of all mortgages outstanding.

This shift has allowed some people who would otherwise find it impossible to buy their own home to get a foothold on the property ladder.

However, the housing boom and an accompanying weakening in lending standards also led to a surge in the number of mortgage brokers, who receive higher bonuses for selling loans with higher interest rates.

Unlike banks, these brokers are not subject to federal law, and they do not hold their mortgages on a long-term basis. The vast majority of these loans are packaged together as bonds and sold on to Wall Street investment firms, making it irrelevant to the brokers whether individual borrowers can afford their mortgage payments after the initial low rate of interest expires.

"All of this has created tremendous pressure for higher and higher volumes of loans, because the money for them is out there," said Warden.

For borrowers holding hybrid ARMs where interest rates have already reset, or are about to reset, this week's decision by Bernanke and the rest of the Fed board on whether to raise the US benchmark rate is moot.

"Once it gets to that reset, rates on these loans are so high that whether it is 12% or 14%, it doesn't matter," Warden said. "You are still talking about all of these people's take-home pay." The CRL and others are working to prevent the worst abuses within the system from being repeated. The US Joint Economic Committee has issued guidelines encouraging lenders to find ways of restructuring unsustainable mortgages, rather than foreclosing on these families.

There is also talk of a bill being introduced to create a foreclosure rescue fund, and there has been discussion of changes to bankruptcy laws.

"We have made great strides for future borrowers, but for those already in these loans, not much has happened yet to help them," Warden said.