The outlook for bad credit mortgages has never been particularly rosy. But under today's gloomy circumstances, it's even harder to secure a loan if you have poor credit. The situation is expected to grow increasingly dire in coming months.

The Bush Administration recently announced its intention to encourage lenders to temporarily freeze rates on adjustable mortgages in an effort to curtail the avalanche of defaults and foreclosures. But investors who bought those mortgages in the secondary market on the promise of higher returns will surely protest, and could wind up filing lawsuits against banks that don't hike rates when the time comes.

Hope for beleaguered consumers

The implication for those holding current adjustable-rate mortgages (ARMS) is obvious. About two million homeowners face prohibitively high resets. Without a moratorium on rate hikes, it's predicted that many-if not most-will default. For others who hope to originate a new mortgage loan or a refinance mortgage, the challenges are also mounting.

Those with pristine credit will probably have no problem getting a loan, unless their home equity has plummeted and they're trying to refinance or get a home equity loan. In that case, they may get turned down for lack of substantial collateral. Home prices tanked during the third quarter of 2007. According to a report by S&P Case/Shiller, the third quarter decline was the largest in the index's 21-year history. Based on data such as that, many economists believe housing prices will continue to slide for the foreseeable future-and that could spell bad news, even for those with good credit.

Bad credit borrowers being squeezed

Consumers with bad credit are feeling the pinch the hardest. Today's troubles may be only the tip of the iceberg in this mortgage meltdown, and their problems will likely mount in the coming months. In the past, these consumers used to rely heavily on high risk, higher interest-rate loans, such as those categorized as subprime or Alt-A. In fact, such loans existed primarily to serve the particular demographic of Americans with sketchy credit, low credit scores, or a financial history that included catastrophic events like bankruptcy. Lately, investors and lenders have been severely burned by losses related to those types of loans. Now, they're reluctant to extend credit to anyone who might fail to repay a debt.

The full impact of all this negativity for borrowers with bad credit remains to be seen, but most analysts predict that it will get worse before it gets better. Even if lenders voluntarily freeze rates-which some have already begun to do-many homeowners will still not be able to get back on track. A moratorium would probably be limited to two to three years. If the nation is still suffering from mortgage problems then, the problems will only be postponed, but not alleviated. Meanwhile, bad credit consumers are advised to consider imposing their own moratorium on borrowing and spending, and hunker down for what appears to be a treacherous 2008.