"But payments not made add to principal, and borrowers who can't afford normal monthly payments early on are hit later with above-normal monthly obligations."

Buffett calls it the "Scarlett O'Hara scenario."

"`I'll think about that tomorrow,'" Buffett wrote, paraphrasing the final line from "Gone with the Wind." "For many homeowners, `tomorrow' has now arrived."

From 1994 to 2006, the subprime industry's share of total mortgage originations climbed from less than 5 percent to 16 percent, according to the Mortgage Bankers Association.

Lenders "got carried away and had lending guidelines that were too lax, and it's coming home to roost," said Bill McNamee, president of the Illinois Mortgage Brokers Association. "And the housing market has slowed down, and that's making the problem worse for people who had gotten themselves in over their heads on their homes."

Malcolm Bush, president of the Woodstock Institute, a Chicago non-profit that studies housing, said developments in the subprime mortgage industry come as no surprise. In recent years, he said, there has been an explosion of "exotic mortgages with a variety of payment schemes that permit people with lesser resources and credit to buy homes."

Last year, "you began to see a softening in prices, and mortgage companies began to see a lot of mortgages move into defaults," Bush said. "The consequence is a much higher rate of late payments and defaults, and you have major mortgage providers who are doubling or tripling loan-loss reserves because of what has happened to subprime customers' payment patterns."

On Tuesday, home loan funds provider Freddie Mac said it would stop buying subprime mortgages with a "high likelihood" of default.

About 2 percent of subprime mortgages made last year were more than 60 days late after five months, nearly twice the rate for ones made in 2005 and the worst rate in at least seven years, according to a Feb. 22 report from Barclays Capital.

(c) 2007, Chicago Tribune.  Distributed by McClatchy-Tribune Information Services.

« Prev 1 [2]

Related Articles :

• Women Are More Likely To Receive Subprime Loans
  Women are more likely to receive subprime home mortgage than men and these higher rates of subprime lending make it harder for households headed by women to build wealth through homeownership. In 2005, about a third of women took out mortgages with interest rates over 7.66 percent (well above the average prime mortgage rate of 5.87 percent) compared to about a quarter of men, according to a new study released today by the Consumer Federation of America.
  
• Group Says 2.2 Million Borrowers Face Foreclosure on Subprime Loans
  A new study by an industry watch group claims that 2.2 million American households will lose their homes and as much as $164 billion due to foreclosures in the subprime mortgage market. The group goes on to claim that one in every five subprime loans outstanding will result in a foreclosure.
  
• Realtors Seek To Protect Borrowers From Predatory Lending
  The National Association of Realtors told a Senate panel that NAR supports stronger anti-predatory lending legislation and more consumer education on nontraditional mortgage products.
  
• New Century Financial Appears to be Circling the Drain
  New Century Financial appears to be the latest casualty in the constricting subprime market place. Effective Thursday, March 8th New Century announced they were no longer accepting new applications.
  
• How Britain Has Avoided the Subprime Blues
  Britain's housing market had its own meltdown about 15 years ago, so the troubles roiling the U.S. subprime-mortgage lenders have revived some painful memories on the other side of the pond. So far the U.K. housing market has been spared the pain currently being felt across the Atlantic, though experts have warned for years that the market could turn nasty very quickly.
  
• The American Dream and Subprime Loans
  A recent article published in the Philadelphia Inquirer sheds a refreshing view of the subprime market and why subprime loans play a necessary part in mortgage lending. The article also contains a warning that overreacting to the current situation by the government might just rob some potential homeowners of the "American Dream."