The latest developments in the subprime lending market should have the entire real estate industry up in arms (figuratively and literally). The problem has gone far beyond the $1 trillion worth of so-called “exotic” adjustable rate loans resetting in each of the next two years. Borrowers began feeling the effects of those resets during the second half of 2006.

Now the problem has dug down to the very roots of the lending industry and is shaking loose some of the largest subprime lenders, who are now falling into the abyss. The latest victim of its own success is New Century Financial Inc. which just last month was boasting an increase in loan production for January 2007 over numbers reported for the same month a year earlier.

Well, last Friday the Irvine, Calif.-based lender announced that it was the subject of a federal investigation into charges of accounting errors and stock trading, according to a Reuters report published Monday. As a result, the lender’s stock on the New York Stock Exchange (Symbol = NEW) plummeted almost 70 percent.

The Orange County Business Journal reported Monday that Wall Street analysts are now predicting possible liquidation or bankruptcy for the once high flying subprime lender.

And bankrupt mortgage lender ResMae Mortgage Corp. of Brea, Calif., which was being courted for a buyout by Credit Suisse Group, is now being sold to Citadel Investment Group LLC, which won the right to purchase the lending institution for $180 million in a last minute auction, according to Bloomberg News.

This latest news comes right on the heels of a joint request by federal regulators Friday for comments on proposed tightening regulations for the subprime mortgage lending industry. The Mortgage Bankers Association released a response Friday calling for federal regulators to “avoid an overreaction to an evolving marketplace or current economic conditions.”

More shakeout is likely yet to come from this story as subprime lenders fall into an abyss of their own making, leaving legitimate lenders behind who themselves are hurting right now due to the downturn in the real estate cycle.

As this story continues to unfold, real estate investors, homebuyers and industry professionals are some of the legitimate sources of salvation for homeowners who may now be facing not only higher mortgage payments, but the sale of their loan servicing contract to a totally different lender who acquires it in bankruptcy. And RealtyTrac will continue to provide updated online information that will assist in identifying and locating these homeowners in distress.