Florida Home Loan Lenders in Trouble as Subprime Market Tumbles

When a certain $126,000 subprime loan on a $696,000 house on the West Coast failed to produce a single mortgage payment, alarm bells went off at Clayton Holdings, a company that monitors credit risk.

Closer scrutiny revealed other red flags. The borrower’s previous rent payment had been $1,000, compared to the $4,482 she was supposed to be shelling out for both the primary loan and the $126,000 piggyback mortgage. And her stated income was $84,000 even though she was an hourly worker at Target.

“We do an autopsy to find out what caused the loss of blood,” says Keith Johnson, Clayton’s COO. “It’s a CSI subprime.”

In the past few weeks, the bodies have been piling up fast and furiously. Fallout from subprime mortgages - that is, Florida home loans to borrowers with a blemished credit history - gone bad has wreaked havoc on the industry.

Big names Washington Mutual (Charts) and HSBC have reported hits tied to their subprime business and there has been a nonstop barrage of bad news for major subprime lenders, including New Century Financial (Charts) and NovaStar Financial (Charts).

Now the worry is what happens to the economy if enough homeowners go into default and to the financial markets if enough investors take a bath on mortgage-related securities.

The market may want to brace itself for more surprises. “To one degree or another, all of these lenders are facing the same kind of difficulty,” says Mark Zandi, chief economist with Moody’s Economy.com.

Last year, 13.5 percent of mortgages originated in the U.S. were subprime, according to the Mortgage Bankers Association, compared to 2.4 percent in 2000.

By the end of 2006, subprime delinquencies more than 60 days late jumped to almost 13 percent, compared to 8 percent a year earlier, according to LoanPerformance.

How real estate investors are handling the downturn

As for foreclosures, they’re currently running 25 percent higher than they were this time last year, according to RealtyTrac.

“We don’t have high unemployment, high interest rates or a slowing economy, but we’re seeing the number of foreclosure filings pushed above historic averages,” says Rick Sharga, a marketing exec for RealtyTrac. “You can’t underestimate the effect of higher risk loans.”

Adding to the problem are jittery lenders who have suddenly begun to tighten their Florida mortgage loan standards.

“You’re seeing credit score requirements being increased. You’re seeing documentation firming up,” says Bob Walters, chief economist with Quicken Loans. “Fewer people will get loans and maybe rightly so.”