As the three-year-long real estate boom wound down, mortgage lenders such as New Century Financial Corp. came up with a bad idea: Instead of tightening lending criteria as the markets became less liquid, they loosened them in order to keep the party rolling.
It did, at least for a time.
As late as 2006, many subprime lenders were making loans with little or no cash-down requirements to credit-challenged borrowers.
Those decisions are now coming home to roost across the nation.
"Not only are we going to see massive foreclosures in the market, but as you can see, the subprime lenders are falling out like flies," said Priscilla Gratton, a 20-year Sarasota mortgage banking veteran who recently left AmSouth to open her own shop, the Gratton Mortgage Group, in downtown Sarasota.
"There are so many mortgage originators out there whose only goal was closing a transaction."
Too often, businesses making loans inflated incomes, fudged application data or simply did not tell customers the truth about the real costs, over time, of the loans they were being sold.
Particularly popular was the adjustable-rate mortgage, or ARM, which allowed some marginal buyers to get into a home for a couple of years before the rates reset, many times to unsustainable levels.
In the last six months, more than two-dozen subprime lenders have shut their doors.
The biggest player, New Century, filed for bankruptcy protection from its creditors last week.
It issued $51.6 billion worth of subprime mortgages last year, second only to HSBC.
During the past 10 years, New Century underwrote as many as 4,000 loans locally, property records show.
Some portion of those and other subprime defaults could eventually wind up among already bloated real estate inventories.
"It appears that as subprime and FHA (Federal Housing Assistance) loans default at higher than anticipated rates, and lenders tighten their underwriting standards, we're going to continue to see a spike in the number of homeowners facing foreclosure," said James J. Saccacio, RealtyTrac's chief executive.
Fall-out from subprime
Some experts watching the unraveling of the subprime market think that lenders might foreclose on up to 2 million more homes in the next two years as defaults climb to about $225 billion.
Within that time, about $1 trillion in adjustable-rate mortgages will reset at higher rates. Of those, $650 billion, or 65 percent, are in the subprime category, meaning that as many as one-third of subprime borrowers could default if predictions hold.
The likely fallout will be that the lending industry will tighten its standards, and that will prevent many without sterling credit from buying a home. That, in turn, would boost inventory levels at a time when Southwest Florida already has an unusually high number of homes for sale.
A crunch is something that Zandi, the Moody's economist, worries about, too. A scenario where prime borrowers are less able to buy property might be the greatest threat right now to the economy, he said.
Add to that problem the reality that many investors, particularly hedge funds and foreign banks and governments -- the traditional secondary buyers of mortgage-backed securities -- are increasingly out of the game, Zandi said.
Intervention and hot lines
In a sign of the times, a Miami-based nonprofit entity called the Florida Foreclosure Prevention Hotline was launched recently as a resource for homeowners facing the prospect of losing their homes.
Damara Cohn, a real estate agent who works with the hot line, considers herself a foreclosure workout expert.
If after all avenues have been explored and tried, from refinancing to forbearance, Cohn steps in to "help those people who are upside down in their loans or have no chance to sell their property.
"I take the most aggressive position possible with lenders and work with them in order to create a win-win situation for everyone involved."
What Cohn is talking about is called a "short sale," where a lender agrees to take less money than it is owed.
With the softness in the market, many banks and lenders are likely to be more amenable to that kind of arrangement.
"Most borrowers have no idea the alternatives they have available to them," Cohn said. "For some, however, they are in a position where the sale of the property is the only choice.
"Act quickly," she advises. "Once you know you are in an impossible situation with regard to paying the loan, take action.
"This will protect not only your financial interests, but can keep that foreclosure off of your credit report."
Some of the nation's largest banks also are trying to help borrowers avoid foreclosures.
CitiMortgage is contacting ARM borrowers months ahead of reset dates.
Bank of America is using predictive computer models to identify and reach out to potential problem borrowers.
The bank will work with borrowers, even to the extent of "re-underwriting" the mortgage at reduced interest rates, said Bob Caruso, Bank of America's national mortgage servicing executive.
"We want to keep customers in their homes."
Staff writers Maurice Tamman and Cindy Allegretto contributed to this report
Last modified: April 08. 2007 4:58AM
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