By March, Steve Soriano could see the tsunami that the non-prime mortgage crisis was creating. Soriano is executive vice president of Robson Communities, which targets high-end active adult prospects who, he says, are having a harder time selling their homes because buyers can't secure financing from mortgage companies that are tightening eligibility requirements.

Non-prime mortgages designed for credit-impaired borrowers account for one-quarter of mortgages outstanding and two-fifths of those written in 2006. Lax lending standards over the past several years have led to a spike in subprime and Alt-A delinquencies. As lenders go bankrupt, stop issuing subprime loans, or impose tougher borrowing criteria, subprime buyers could be reduced by one-half and Alt-A borrowers by one-quarter, predicts Credit Suisse's housing analyst Ivy Zelman. The Center for Responsible Lending foresees foreclosed houses flooding into a market swamped with unsold inventory. First American Core-Logix's director of research Christopher Cagan expects stricter lending standards “will move into the prime [market],” which could exclude 500,000 borrowers.

Builders, understandably, are concerned. “It certainly has been part of our strategic thinking about how soon the market is likely to come back,” says Steve McFarland, CFO for Indianapolis-based C.P. Morgan Communities. “It's diminished the credibility of lenders in general,” says Sue Stewart, president of MHI Mortgage, Mercedes Homes' mortgage company, which has been steering qualified non-prime borrowers towards less-risky mortgages such as AmeriDream's down-payment gift program. Mortgage Funding Direct, which is Morrison Homes' joint-venture mortgage partner nationwide, won't write loans for hourly workers unless they produce income-tax documents or proof that they can make their mortgage payments, says CEO Tawn Kelley.

Lawmakers want to allow the FHA to refinance non-prime loans in default and increase its mortgage maximums. But the FHA might not be the panacea some people think it would be. A recent series in The Charlotte Observer on foreclosures in Mecklenburg County, N.C., reports that the FHA has paid more than $5 million to cover defaulted loans it issued to buyers in a subdivision called Southern Chase, where 77 of 406 homes have foreclosed. Those articles cast an unflattering light on the lending practices of Beazer Homes' mortgage company, which handled two-thirds of those loans. Beazer has stated that its mortgage company's procedures followed industry lending standards and were within the law.

Learn more about markets featured in this article: Charlotte, NC.