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"Old industrial cities like Philadelphia have a poverty problem, and that's why people had to use subprime loans," says Kevin Gillen, a research fellow at the Wharton School of University of Pennsylvania. But in pricey areas such as Miami, where the high-rate market share jumped 25 percentage points from 2004 to 2006, subprime loans didn't have a downscale reputation. They were seen as the answer to sky-high housing costs. "They are different groups, but subprime served both of them," Mr. Gillen says.
It used to be that high-rate borrowers weren't allowed to stretch as much as conventional borrowers on loan amounts, a reflection of their higher credit risk. But as home prices rose throughout the U.S. in the early 2000s, lenders grew more willing to let high-rate borrowers get bigger loans as measured against their annual incomes. In 2005, borrowers who got high-rate mortgages to buy one- to four-family homes were loaned 2.1 times their reported annual income, on average, according to the data. That was 4% higher than regular borrowers.
Kristine McMahon has a six-figure income as a mortgage broker and lives in a four-bedroom home in East Hampton, N.Y., valued at more than $2.7 million. Yet Ms. McMahon, who works for Manhattan Mortgage, chose a subprime loan for herself when she refinanced last year to turn some of her home equity into cash. Ms. McMahon says that at the time of the refinancing, a conventional lender would not allow her to take out as much cash during the refinancing as her subprime lender, New Century Financial Corp., which is now operating under bankruptcy-court protection. Ms. McMahon chose a subprime loan that carried a fixed-rate of 6.45% for the first two years before turning into an adjustable rate. She plans to sell the house before the higher adjustable rates kick in.Lenders also extended more "second-lien" mortgages -- many of them "piggyback" second loans that borrowers used to cover down payments. Such second-lien loans climbed to 22% of all mortgages last year, up from 12% in 2004. Piggybacks are considered far more likely to default than a standard mortgage.
Lenders did little to discourage speculation by real-estate investors, which contributed to rising home prices. Last year, 13% of all high-rate home loans were for properties not occupied by owners, up from about 9% in 2004, the data show. Experts say such properties are higher foreclosure risks than homes lived in by their owners.
Who will be left holding the bag for mortgages that go sour? Wall Street bought lots of subprime loans and packaged them into securities for sale to investors. The data show that lenders shifted even more of their riskiest loans to investors as the boom began to fizzle.
About 63% of high-rate mortgages originated in 2004 were sold that same year, compared with 68% of all home loans, the data indicate. Last year, about 73% of new high-rate loans were sold, compared with 67% of all home loans. Last year, the average high-rate loan carried an interest rate that was 5.6 percentage points higher than a Treasury security of comparable maturity -- up from 5.3 points in 2005 and 4.8 points in 2004.
In the hardest-hit areas, the numbers could batter borrowers, lenders and builders for years to come. This year, through July, the rate of mortgage-default and foreclosure-auction filings in Lee County, Fla., where Fort Myers is located, was second-highest in the U.S., according to ForeclosureS.com. The inventory of unsold homes has swelled to about 15,000, and some investors who had hoped to flip houses at a profit are walking away from sales contracts for purchases they don't want anymore or can't afford.
"We view Fort Myers as likely the worst housing market in the country," J. Larry Sorsby, executive vice president and chief financial officer of Hovnanian Enterprises Inc., complained last month. In March, the Red Bank, N.J., company took a $93 million pretax charge because of the mess in Fort Myers. Last month, it slashed prices on certain homes there as part of a three-day, nationwide "Deal of the Century" sale.
Next week, foreclosure auctioneer Hudson & Marshall of Texas Inc. will try to unload about 70 houses in or near Fort Myers that were taken back by lenders. Low-ball bidders who miss out will have plenty of second chances: More than 300 other foreclosed homes in Florida are for sale in the auction.
--James R. Hagerty contributed to this article
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