Schadenfreude is an Embarassing Emotion…

"It is becoming increasingly obvious that financial advisers, real estate experts and parents will someday point to what is happening in the mortgage market today and use it as a cautionary tale of what can go wrong when a buyer stretches to get too much house during a market that seems invincible."

'"People were gambling that their income would get to a point where it was high enough to pay for the home at some point," says Greg McBride, senior editor at Bankrate.com."

"So long as rates stayed low and housing prices continued to move up strongly, that strategy was a good one. And those things kept happening, so that homebuyers ignored the warnings issued by many mortgage experts about what would happen when times changed."

'"They also were gambling that the market would help them build enough equity that they could refinance if they needed to. Now they may need to, and those gambles aren't paying off."'

"Well, times have changed."

Some of those gamblers will become default statistics.

"The popularity of adjustable-rate mortgages means that nearly 25% of all outstanding U.S. mortgage debt is due for an interest-rate reset within the next two years, according to Economy.com, a Web site run by Moody's Corp. Some $400 billion in loans will get a new rate this year, and another $2 trillion are set to move in 2007."

"Those moves won't be pretty. Just two years ago, the prime rate stood around 4%; today, it is more than twice that. As a result, payments on some ARMs will double too. The current forecasts from a number of experts have defaults on those loans increasing by 10%."

"For someone who purchased a home using an ARM -- or taking advantage of some of the attractive teaser rates that were available over the last few years -- there is plenty of bad news if they need to refinance now."

"Obviously, that starts with current interest rates. Moving to a 30-year fixed-rate mortgage now means looking at rates north of 6.5%, and the longer a consumer waits, the bloodier that transition is likely to be."

'"People's choices are only going to get uglier, and plenty of people are on their way to trouble. ... For everyone who has avoided this trouble, they're going to look back someday -- when their kids are looking for a mortgage and are tempted to stretch too far by using an ARM -- and have stories to tell about how they saw a time when everything that could go wrong with that strategy did go wrong."'