Subprime Florida Mortgage Fallout Affects Borrowers and Lenders Alike

If the rising price of real estate didn’t do enough to discourage homeownership, then future tighter lending restrictions will certainly place it out of reach for many.

What some are calling a meltdown in the subprime Florida mortgage industry will affect more than just the companies issuing these type of loans.

The surviving subprime lenders are changing their policies and making it harder for people with lower credit scores to receive approval on such bad credit home loans, says Nate Morris, past president of the Mortgage Bankers Association of Central Florida.

“I would say home ownership is going to get more difficult.”

A key factor in the meltdown is skyrocketing foreclosures, says Morris, who is also branch manager at First Horizon Home Loans in Longwood. “Industrywide, credit restrictions are getting stricter,” he says.

The subprime lenders, who specialize in loans for people who have lower credit scores and unverified income, became overzealous with “exotic” loans. When those short-term low home mortgage rates hit their limits, borrowers’ payments rose, and mortgage payment delinquency and foreclosures ensued, Morris explains.

At least one Orlando housing market company already has been affected: Ivanhoe Mortgage suddenly shut down last month when parent company Central Pacific Mortgage went out of business, as previously reported in Orlando Business Journal.

Now, subprime lenders are dropping like flies, and others in the industry are feeling the aftershocks, he says.

Foreclosures abound
A recent report by the Mortgage Bankers Association notes a nearly 5 percent delinquency rate on all outstanding home loans in the fourth quarter of 2006. About 1.2 percent of outstanding loans were in the foreclosure process at the end of 2006, the study says.

Meanwhile, Florida was No. 2 in the nation for foreclosures at the end of 2006, according to foreclosures.com.

For the first quarter of this year, the four-county region of Orange, Osceola, Lake and Seminole reported 1,692 foreclosures, down slightly when compared with 1,833 in the same period last year, says the California-based real estate investment advisory firm. Statewide, however, 19,076 defaults were reported in the first quarter of this year, up from 18,439 in the same period in 2006.

“A lot of risky loans had been made to people with very little down payments,” says Stanley Smith, professor of finance at the University of Central Florida. “The less equity in the house, the more the incentive for them to default.”

Until practices and approval standards are changed, this may be a pattern the Sunshine State is stuck with for awhile.