Subprime-mortgage lenders nationwide are in the midst of a meltdown, and the effects are starting to ripple through Ohio.Mortgage lenders are closing offices and getting pickier about who can qualify for a loan, while regional banks are facing deflating bottom lines and selling their subprime-mortgage divisions.

It’s clear that the subprime-loan market, which often involves lending money to those with questionable credit and has been blamed for Ohio’s skyrocketing foreclosure rate, is shrinking.

“The mortgage industry is experiencing a significant contraction,” said Brendan McDonagh, CEO of HSBC Finance Corp, in testimony to the Senate Banking Committee.

“The subprime market has lost 20 percent of its origination capacity” just from lenders going out of business, he said. That doesn’t include loss from stricter underwriting, banker-speak for lenders getting pickier about who qualifies for a loan.

New Century Financial Corp., the company that’s become the poster child for questionable lending practices, closed its four Columbus offices recently and laid off 60 employees in Ohio, mostly in Columbus and Akron. The company said it plans to lay off 3,200 employees nationwide, or about 54 percent of its work force.

New Century was the nation’s second-largest subprime lender by volume last year. In March, Ohio authorities secured a temporary court order to stop New Century from making loans or foreclosing on homeowners in the state.

Other lenders also are scaling back.

Ace Mortgage Funding, a mortgage company based in Indianapolis, closed its Dublin office March 1, telling employees in a memo that the move was because of “tough market conditions in the Columbus area and very restrictive regulation” of mortgage brokers.

Last month, National City wrote off $11 million in losses related to its $8 billion portfolio of subprime mortgages. The Cleveland-based bank is considering adding $50 million to reserves to cover additional losses. The problems stem from loans originated by First Franklin, National City’s subprime-mortgage unit, which the company sold to Morgan Stanley in December for $1.3 billion.

National City kept some First Franklin loans and is having trouble collecting the mortgage insurance on those that have defaulted. It also can’t sell about $1.6 billion worth of the loans, as it originally had anticipated.

Subprime mortgages have less favorable terms than traditional, fixed-rate mortgages. Many “exotic” loans, including adjustable-rate, interest-only or payment-option adjustable-rate mortgages fall into this category.

These loans were in big demand as the housing market boomed for much of this decade.

Brokers and finance companies such as New Century were the source of about 75 percent of Ohio’s subprime loans, said Mike Van Buskirk, president of the Ohio Bankers League.

They aren’t subject to the same regulations as banks, and until Ohio’s predatory lending law went into effect this year, there was little to stop companies from pushing buyers into subprime mortgages, even if they qualified for cheaper, prime loans.

To shady lenders, the message was “Ohio was open for business,” said Bill Faith, executive director of the Coalition on Homelessness and Housing in Ohio. Some of the “subprime industry’s worst offenders did a lot of business in Ohio” before the meltdown.

Ohio has a higher percentage of subprime loans than the nation as a whole, said Richard DeKaser, chief economist with National City. Nationally, it’s 13.7 percent. In Ohio, it’s about 15 percent.

“Lack of job growth and lower income growth compared to the rest of the country created more demand in Ohio for subprime loans,” he said.

Subprime mortgages accounted for 28 percent of new home loans in Ohio in 2005, up from 16 percent in 2004. Ohioans owe about $24 billion on those mortgages, according to the Center for Responsible Lending.

Even though Ohio banks are responsible for only about 25 percent of these loans, they’re being squeezed.

Subprime problems are deflating the bottom lines of Ohio banks, DeKaser said. “Loan losses are increasing, and it’s getting tougher for them to recover money on foreclosed properties.”

In its annual report, Huntington Bank said a decline in home values in Ohio could hurt business, causing higher loan losses as more homeowners default on their home-equity loans and mortgages.

Lower home values are a side effect of foreclosures. Each foreclosure in a neighborhood lowers the property value of nearby homes by about 1 percent, according to the Center for Responsible Lending.

About 18 percent of all outstanding mortgages in Ohio are subprime, yet they account for 63 percent of all new foreclosure filings statewide, according to the Coalition on Homelessness and Housing in Ohio.

Despite foreclosures and an already tight banking market, the problems in the subprime sector won’t be devastating to local banks, DeKaser said. Banks sell most of their mortgages to investors in the form of mortgage-backed securities, which insulates them from financial meltdowns

Homeowners probably won’t fare as well. Until the predatory-lending law went into effect, “it was the Wild West” in the mortgage business, Faith said. “Exotic mortgages became mainstream offerings during the housing boom.”

Adjustable-rate mortgages with low teaser rates that expire after two or three years are the most common subprime loans in Ohio.

Many borrowers didn’t fully understand these loans or that their payments would go up steeply when the interest rates reset. Lenders “preyed on people’s inexperience,” said Dan DeLawder, CEO of Park National Bank. “Too many people decide if they can afford something based on the monthly payment” without reading the contract’s fine print.

The often deeply discounted introductory interest rates made some of those loans seem too good to be true, he said.

Adjustable-rate mortgages were a quick-fix to the affordability gap, because housing prices in the past few years have outstripped income growth, making houses less affordable, said Sandor Samuels, executive managing director of Countrywide Financial.

It put homeownership into reach, he said. Countrywide was the nation’s largest subprime lender by volume last year.

But when the housing market began to slow and housing prices flattened, lenders eased up even more on credit guidelines, allowing more “fringe” buyers to qualify for loans, to grab more business in a shrinking market.

Fringe borrowers typically are those who are young or have bad credit, bankruptcies or fluctuating income.

“Lenders were making too much money, and they thought the bubble was never going to pop, that home prices would keep increasing,” said Paul Bellamy, a fair-housing advocate in Cleveland. “A lot of homeowners were underwater before the ink dried on their paperwork.”

Rapidly increasing home prices were a life raft for people who couldn’t afford their mortgages. They gave them the equity to refinance into a better loan. But that life raft deflated. House prices in Ohio appreciated about 2 percent last year, compared with 10 percent nationally. “For those with 0 (percent) to 5 percent equity, it’s a bad situation,” Bellamy said.

For many Ohioans, reality is setting in, DeLawder said.

Ohio ranked No. 1 in the nation in foreclosures in 2006, clocking a 24 percent increase, according to a recent report by Policy Matters Ohio, a public-interest group in Cleveland. Affluent Delaware County had the fastest-growing foreclosure rate in the state, at 49 percent.

There will be more foreclosures down the road.

“A tremendous number of adjustable-rate loans were written in Ohio after 2004,” Bellamy said. “Since the payments on most subprime adjustable-rate loans reset after two or three years, we’re in store for a flood of new foreclosures” this year.

“I wouldn’t be surprised if the 79,000 foreclosures in 2006 looks good compared to the end of 2007 and 2008,” Faith said.