Subprime meltdown means jump in foreclosures

Panic is spreading in the U.S. subprime mortgage market after the bankruptcy of at least 20 lenders in the last two months, triggering a mass liquidation of securities on Wall Street and an avalanche of foreclosure activity on Main Street. As more lenders go bankrupt and more Americans default on home loans, a jump in foreclosures is expected.

Growing trouble in the subprime mortgage industry could not come at a worse time for the battered housing sector, which has been in a yearlong tailspin of stagnant sales, rising inventories, plunging prices and growing defaults. The mortgage industry plunged deeper into distress this month as two of the biggest subprime lenders — London’s HSBC Holdings and Irvine-based New Century Financial Corp. — reported big losses from loan defaults due to sagging home prices and higher interest rates.

Further signs of stress in the mortgage sector were evident when another subprime lender, ResMae Mortgage Corp., filed for bankruptcy on Feb 7, sounding the alarm and bringing the total failure of subprime lenders to 20 since December, according to Bloomberg News. A blog titled — The Mortgage Lender Implode-O-Meter — posted 27 subprime lenders that have gone bankrupt in the last three months. And Doug Duncan, chief economist of the Mortgage Bankers Association in Washington, told Bloomberg News that more than 100 other lenders will go out of business this year.

Meanwhile, subprime jitters intensified on Feb. 27, as Freddie Mac, one of the largest buyers of mortgages, tightened its lending standards and said it would no longer buy high-risk home mortgages that it deems to be highly vulnerable to foreclosure.

As the lenders brace for more trouble, even solvent lenders — including Ameriquest, Countrywide, Novastar and H&R Block’s Option One Mortgage — are feeling the pain from rising loan defaults made to people with spotty credit. An estimated 2.2 million American homeowners will lose their homes to subprime foreclosures in the next few years, according to the Center for Responsible Lending.

If this scenario unfolds as predicted, mortgage lenders will look to real estate investors, home buyers and agents to bail them out. With the advent of Web-based real estate sites like RealtyTrac, real estate entrepreneurs can now accelerate the process for buying foreclosure properties. Never has there been an easier and better time to invest in foreclosures than now.