The subprime loan debacle that has roiled global financial markets could lead to a rise in home foreclosures in Hawai'i and a possible decline in home prices, experts say.

About 1,600 subprime loans issued last year in Hawai'i could wind up in foreclosure, according to a recent study. What's more, the collapse of subprime lending could lead to fewer buyers in the market.

The combination of more supply and less demand would put downward pressure on home prices, although local real estate experts are split on that point.

Subprime loans, or loans made to borrowers who do not qualify for traditional mortgages, were popular as home prices were rising rapidly in the first half of this decade. They often involved loans which start with low monthly payments but soon balloon into payments the borrowers could not afford.

The Durham, N.C.-based Center for Responsible Lending estimated that 20.6 percent of the 8,300 subprime loans made in Hawai'i last year could result in foreclosures during the life of the loan.

That's more than double the 7.9 percent default rate for subprime loans in Hawai'i during the 1998 to 2001 period. It's also more than the projected national failure rate of 19.5 percent for subprime loans issued last year.

"The projected rate for failure in Hawai'i is higher than the national average and ... is increasing rapidly," said Carol Hammerstein, spokeswoman for the Center for Responsible Lending.

Rising defaults on subprime loans on the Mainland have sent several lenders into bankruptcy in recent months while others have gotten out of the subprime market. The meltdown has rippled through the nation's financial markets, sending stock prices tumbling.

Even though they don't make subprime loans, shares of Bank of Hawaii and the parents of Central Pacific Bank and American Savings Bank fell to 52-week lows last week due in part to investor fears about the negative impact of subprime lending.

Local lenders say that the fallout from the subprime downturn will be felt less here than on the Mainland since the subprime sector represents a small part of Hawai'i's $33.8 billion-a-year mortgage industry. Subprime loans account for about 19 percent of the 43,000 single-family mortgages issued in Hawai'i last year.

Bankers added that Hawai'i's real estate market remains strong and foreclosures have been falling, not rising.

Last year, 673 homes went into foreclosure, which was down 79 percent from the year-earlier, according to RealtyTrac, an Irvine, Calif.-based real-estate research firm.

"We have a solid economy, low unemployment, stable population growth and continued personal income growth," said Allan Landon, Chief Executive Officer of Bank of Hawaii.

LOW TEASER RATES

Subprime loans include interest-only loans or no-money-down loans. Many come in the form of adjustable rate mortgages with low teaser rates that balloon after two to five years. Some adjust after a year.

The higher interest rate adds hundreds of dollars to the already cash-strapped borrowers' monthly mortgage payments.

Problems arise when real estate prices decline, making it difficult for borrowers to sell their home or refinance at better terms.

"People are stretched as far as they can just to make the initial loan payments," said Paul Leonard, director of the Center's Oakland, Calif., office. "When (real estate) prices decline, it leads to a sharp increase in defaults, delinquencies and ultimately foreclosures."

Wendy Burkholder, executive director of the Consumer Credit Counseling Service of Hawaii, said a growing number of her clients are homeowners struggling to make interest payments on their subprime loans.

Burkholder said one of her clients is a real estate agent who obtained a 100 percent loan on a home that he intended to flip.

But as the number of home sales has fallen, the real estate agent has had to hold on to the property much longer than he anticipated. Burkholder said the interest rate on the loan recently adjusted to a higher rate, squeezing the real estate agent's finances.

Another client was able to obtain mortgages on four homes totaling $1.7 million, even though her only income came from her $9.72-a-hour job as a Wal-Mart cashier, Burkholder said.

Burkholder said the borrower took out a form of subprime mortgage known as a stated-income loan, where no financial documentation was needed to obtain the mortgage.

According to Burkholder, a mortgage broker had told the borrower that she could rent out the properties and use the rental income to cover her loan payments.

However, rents have fallen during the past year, making it difficult for the borrower to make her mortgage payments, Burkholder said. One of the properties is in foreclosure and two are heading into foreclosure, Burkholder said.

"These people are being crushed by mortgages that they should have never gotten into," Burkholder said.

"This is absolutely catastrophic for these families. It turns the families upside down."

FEWER BUYERS

Mark James, longtime local mortgage executive and former regional vice president for American Home Mortgage, believes that problems in the subprime market could affect local home prices.

The demise of the subprime market could mean fewer buyers in the real estate market, said James, whose former employer, American Home Mortgage of Melville, N.Y., filed for bankruptcy last week and closed its local office due to losses from subprime loans.

"I don't think it's going to be a disaster but there's no way it's not going to affect Hawai'i," James said. "It's a bigger issue here than people think."

Tom Zimmerman, president of Central Pacific Home Loans, disagrees.

Zimmerman believes that the local real estate market will remain strong.

About 80 percent of all home loans by local lenders are in the form of traditional, 30-year fixed mortgages, he said.

By contrast, in states such as Georgia where the foreclosure rates have been high, as much as 50 percent of the home loans last year were in the form of interest-only loans or various forms of adjustable rate subprime mortgages, he said, adding that "local lenders have been very prudent in their lending practices."

Reach Rick Daysog at rdaysog@honoluluadvertiser.com.