justin.schneider@heraldbulletin.com

Home ownership is the cornerstone of the American dream.

But subprime lending has put that dream in jeopardy for millions of Americans.

The first quarter of 2007 saw mortgage delinquency rates hit an all-time high, according to data compiled by Equifax and analyzed by Moody’s Economy.com. Default rates on mortgages rose to 2.87 percent, the worst levels since the 2001 recession.

The Center for Responsible Lending projects that one-fifth (19.4 percent) of borrowers who entered subprime loans over the past two years may enter foreclosure soon, causing 2.2 million consumers to lose their homes and resulting in a loss of up to $164 billion in wealth.

Randall Woodruff, bankruptcy trustee for Madison County, serves on a panel of bankruptcy trustees for the southern district of Indiana. He said subprime lending has been a main culprit in the massive foreclosure rate sweeping Anderson and other Central Indiana communities.

“If you are in foreclosure, there aren’t many ways to get out of that problem other than to file for bankruptcy,” said Woodruff, who sees every bankruptcy filed in Madison County. “Whether it’s subprime lending, my gut instinct is that it certainly is one of the problems. The fact that we have so many folks buying homes that they really can’t afford and obtaining mortgages that are going to adjust is clearly one of the main causes of bankruptcies.”

The Wall Street effect

Subprime loans have been part of the mortgage industry since 1995, when the housing market was booming. They provide loans at higher-than-average rates for borrowers with bad credit.

Investors generally agree that home ownership is among the best paths to building wealth, and adjustable rate mortgages, or ARMs, a calling card of subprime lending, have helped some consumers do just that. ARMs usually provide a low introductory interest rate for a period of around two years before the rate increases, taking payments with it. In a hot real estate market, a first-time homebuyer could theoretically take out an ARM, pay the mortgage for two years and sell the home for a profit.

But the housing market has suffered in recent years, and that is one reason subprime loans have garnered headlines of late.

Joseph Clark is a certified financial planner and managing partner at Financial Enhancement Group LLC of Anderson.

“When housing prices were climbing and interest rates were lower, it was easier for homeowners to pay for existing loans by selling their home or refinancing with easier terms,” Clark told The Herald Bulletin. “Now that housing prices are flat or even falling in some markets and interest rates have increased, some borrowers are falling behind.”

Some analysts say the crisis surrounding subprime lending has been exacerbated by Wall Street investors, who used to have little to do with the housing market.