Q: Isn’t this just a small part of the mortgage market? A: Although most home loans don’t fall into this category, subprime mortgages have proliferated in recent years as rising real estate values emboldened lenders to take more risks. Wall Street encouraged this behavior, too, by bundling the loans into securities that were sold to pension funds and other institutional investors seeking higher returns. Subprime mortgages totaled $600 billion last year, accounting for about one-fifth of the U.S. home loan market. An estimated $1.3 trillion in subprime mortgages are currently outstanding. That’s nearly as large as the entire California economy. Q: Who are the nation’s major subprime lenders? A: Irvine-based New Century Financial Corp., which has been cut off from its funding sources, is the major one. Other important players include Countrywide Financial Corp., Ameriquest Mortgage Co., HSBC Holdings Corp. and Fremont General Corp. All have acknowledged significant problems in their subprime portfolios, with New Century and Fremont General in the greatest distress. While New Century grapples with a liquidity crisis and probe into its accounting practices, Fremont General is trying to sell its subprime business. Investors have punished both companies. New Century’s stock price has plunged by 95 percent so far this year, while Fremont General shares have plummeted by 58 percent. Q: What went wrong? A: Subprime lenders made too many loans to borrowers who couldn’t afford the monthly payments. In some cases, lenders didn’t even bother to verify incomes. It took awhile for the problems to surface because many of the subprime mortgages carried artificially low interest rates during the first few years of the loan. The delinquency rate on subprime mortgages recently reached 12.6 percent. Some of this trouble might have been avoided if home prices had continued to climb like they did between 2000 and 2005. As a home appreciates, even borrowers who aren’t paying the principal loan amount build up more equity. That, in turn, would have made it easier for subprime borrowers to refinance into yet another loan with a low interest rate.160Want local news?Sign up for the Localist and stay informed Something went wrong. Please try again.subscribeCongratulations! You’re all set! SAN FRANCISCO – The hangover from the lending spree that fed the real estate boom earlier this decade keeps getting worse, with the most acute pain tormenting the mortgage niche catering to high-risk, or “subprime,” borrowers. More than two dozen lenders already have evaporated in a subprime mortgage meltdown that began late last year. Here’s a look at some of the key questions raised by the turmoil. Q: What’s a subprime mortgage? A: Generally speaking, these are home loans made to borrowers with poor credit ratings.
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