The housing boom here and nationwide was fueled in part by easy credit - too easy, some economists say. Now signs of financing troubles are cropping up at a time when the tenuous housing market can least afford them.
Delinquencies and foreclosures are rising, particularly among "subprime" loans for borrowers with less-than-perfect credit. An increasing number of subprime lenders have admitted that they have dangerously overextended themselves, such as New Century Financial Corp., a major provider that stopped taking new loan applications last week and faces federal investigations. Maryland regulators said yesterday that state residents who have loans pending with New Century should not expect them to close and warned that the market for subprime loans "has changed dramatically in the past few days."
Other lenders are tightening rules about who can qualify for financing, leaving some potential buyers in the lurch.
The result, say housing economists, is a domino effect that increases the probability of an extended housing slump. When credit is harder to get, fewer people can buy. When foreclosures increase, more homes hit the market as banks search for new buyers.
"So you've got increased supply and reduced demand, and that's not a good combination," said Paul Kasriel, chief economist with Northern Trust Corp. in Chicago. "I think the housing recession is not over, that the subprime issues will prolong it, and that it's going to have some major ... negative multiplier effects on the rest of the economy."
The number of new subprime loans in the Baltimore metropolitan area has risen rapidly, from less than 5 percent of the market in 2003 to nearly a third last year, according to estimates by First American LoanPerformance. That's higher than the share nationwide, which the company estimates at about one in four loans. Baltimore has a particularly high concentration - a Reinvestment Fund study estimates that half of new mortgages made in the city in recent years are subprime.
Borrowers who opt for such loans run a greater risk of foreclosure than consumers with lower-cost prime loans.
Housing advocates, concerned about the potential of a crisis, have banded together to educate consumers about their options and to call for government assistance.
"In the last few years, because credit has become so much more available and irresponsibly lent, it was really just a bubble waiting to burst," said Carol Gilbert, co-chairwoman of the Baltimore Homeownership Preservation Coalition. "I think we'll see that foreclosures will be increasing for some time, even with the extra resources."
Foreclosure filings rose only slightly in the city last year, to about 3,250, but Gilbert sees it as an early-warning signal after a five-year downward trend.
The Mortgage Bankers Association, noting that most loans in Maryland and the nation are prime, does not expect significant problems from subprime fallout.
"Our belief is it is not going to have a major impact on the housing market, and it is not going to have a major impact on most borrowers who are applying for credit," said Michael Fratantoni, senior economist with the trade group.
But new subprime borrowers - those who still qualify - will face higher costs because rates are going up to reflect greater-than-expected risks, he said.
And more people who have already bought homes with subprime loans are in trouble.
In Maryland, the percentage of subprime loans with late payments rose more than 30 percent from the end of 2005 to the end of 2006, the biggest year-over-year jump since the mortgage bankers began tracking such loans in 1998. About one in eight subprime loans was delinquent.
The signs of increasing trouble come at a time when the local housing market, which has seen sales fall in 16 of the past 17 months, could easily go either way. Home prices continued to rise last month in the Baltimore metro area, but sales - after notching up in January - resumed their decline, and the inventory of unsold properties remains much higher than normal.
Celia Chen, director of housing economics at Moody's Economy.com, said that "the seeming implosion of the subprime market" will only add to the downward pressures here and nationwide. "We could see another year of declining rather than flattening home sales," she said.
Subprime loans aren't the only risk factor, economists say. As home prices skyrocketed during the boom, middle-class buyers stretched their finances to afford a home - further contributing to the rapid appreciation, Kasriel said. Nearly a quarter of loans made in the metro area last year were interest-only, according to First American LoanPerformance. Such mortgages allow homebuyers to have lower payments for a set period - five years, for instance - that then increase sharply.
During the housing boom, people who got behind on their mortgage payments could refinance or quickly sell for a profit, Gilbert said. But with tightening credit standards and sluggish home sales, it's harder to do either.
Both Chen and Kasriel said they believe these housing problems will ripple through the economy at large. Home equity loans have helped bankroll consumer spending, but now there's less equity to tap. Also, housing-related industries were responsible for about a third of U.S. job growth from the end of 2001 to the end of 2005, but now they're more likely to lay off than hire, Kasriel said.
Therein lie the seeds for a vicious cycle, because job loss is one of the key causes of foreclosure.
But economists are generally optimistic about Maryland's economy, which is benefiting from federal spending on defense and security. Unemployment is low at 3.8 percent, and businesses complain about worker shortages.
Charles J. DiPino Jr., president of the Maryland Association of Mortgage Brokers, said he thinks people shouldn't panic. He calls the pullback in credit availability a return to the post-boom standard. Borrowers who would have qualified last year, but no longer do, are getting the advice that such hopeful buyers always got, he said: Clean up your credit, and come back.
"It's just going back to the way it was before," said DiPino, who handles subprime and prime loans for Universal Trust Mortgage in Columbia. "It's basically a correction back to normalcy."
Subprime loans are made to borrowers who don't qualify for the best rates because they have less-than-perfect credit, a short credit history or high levels of debt compared with income. They are charged higher rates and fees as a result. Here are a few of the reasons a borrower might be considered subprime:
A recent history of late payments.
A recent bankruptcy.
A recent foreclosure or repossession. [Source: Federal Reserve]
Maryland regulators warned yesterday that state residents who have applied for loans from subprime lender New Century Financial Corp. - about 475 people - should not expect to see any money. The customers, who are mostly trying to refinance, range from those who have just put in an application to those who are in the process of closing but have not received funding.
The state Department of Labor, Licensing and Regulation said it has ordered New Century to fund all approved applications but does not believe the troubled company will be able to comply. Consumers with complaints can call the agency at 410-230-6097 or 1-888-784-0136.