"We are seeing a huge shift going on right now," said Evan Jones of GMAC Mortgage in Salt Lake City.

And it all boils down to credit scores.

Generally, borrowers who have credit scores 620 and below are considered subprime. Those with scores from 620 to 720 are in a midgrade category and are considered more favorable risks. The best rates and terms go to so-called prime borrowers with credit scores above 720 out of a possible 850. And they might be able to negotiate better rates than ever before.

Just two weeks ago, Jones said, he could have provided a home equity loan to a borrower with a credit score of at least 580. Today the minimum is 620 to 680, depending on a borrower's circumstances.

Can't or don't want to put down a down payment? He said loans in which 100 percent of the purchase price can be financed are available generally only to people with credit scores of 680 and higher. "Before, we could offer this to borrowers with a credit score as low as 560 to 580," he said.

- Lesley Mitchell

Credit checks. Income tests. Employment verifications. Qualifying for a home loan can be stressful under the best of circumstances.

But for William and Ronda Starks of Syracuse, the recent turmoil in the nation's mortgage industry helped turn the process of refinancing their home into a financial nightmare. It's an ordeal that resulted in a two-day hospital stay for Ronda, whose high blood pressure and heart problems make her especially susceptible to any type of stress.

"You can't imagine what it was like to go through something like this unless you go through it yourself," her husband said.

More Utah families are getting caught in one of the biggest shakeouts to occur in the home lending industry in decades. A debacle stemming from a spike in foreclosures of so-called subprime loans made to families with less-than-perfect credit has made it harder than ever to get one of these types of high-interest loans.

It also has the potential to undermine one of Utah's strongest economic expansions in years by rattling its real estate market and mortgage industry.

An estimated one in 10 home loans - about 52,000 mortgages in Utah - is considered subprime. That's slightly under the national rate, which is closer to 14 percent, according to First American LoanPerformance, a company that tracks the nation's mortgage industry. But the trend in lending is definitely in that direction. About one in five new home loans being granted in Utah fall into the subprime category.

And anyone can slip into that category if they have had an issue with their credit, even something seemingly as minor as late payments.

William Starks said he had no idea he and his wife would enter the subprime world or have any trouble refinancing when they began the process in January. He knew they had a few blemishes on their credit record, but the couple was able to get a loan at a good rate a few years ago.

They had decided to refinance because they needed to cash out on some of their equity. The whole process was supposed to take only a couple of weeks and provide them with a new fixed-rate loan with a higher balance in the low 6 percent range.

But two weeks into the process, the Starkses began to watch helplessly as things went horribly wrong.

The loan that appeared to be a certainty in January a month later had still not closed and no longer seemed to be a done deal. By March, they were getting desperate.

"The rate kept going higher and higher," William Starks said. "We kept thinking, 'What the heck is going on?' It's not supposed to work this way."

At one point, their mortgage lender said the best he could do was 9 percent, although by mid-March they were able to close their loan at 7 1/4 percent.

That's still 1 point higher than what they had expected. And that fixed-rate loan they had hoped to get? All they could qualify for was an adjustable-rate loan that remains fixed for only two years. After that, their mortgage rate - and payment - could balloon.

The Starkses' woes stem from problems that had their start in the early 1990s, when lenders in response to high demand for home loans began to relax lending guidelines to accommodate subprime borrowers - generally people whose credit scores fall below the 620 range out of a possible 850. Before that, only people with higher credit scores could get a home loan, let alone one with little or no down payment.

"Twelve years ago, there was no subprime market to speak of," said Bob Visini, a spokesman for First American LoanPerformance. "But there was an untapped market for people who wanted to buy a home with less-than-perfect credit."

Credit scores are a composite derived from an individual's credit record. And borrowers can fall into the subprime category after negative information appears on their credit report, such as a bankruptcy or late credit payments over a period of time.

Generally, subprime borrowers are at higher risk for defaulting on their loans. But defaults remained relatively low for all types of borrowers throughout much of the 1990s and early 2000s as real estate markets throughout the country boomed.

Lenders started approving more loans to people with lower and lower credit scores. Many of those loans required little or no down payment.

A hot real estate market can hold down mortgage defaults and foreclosures because homeowners with financial troubles are able to sell their homes quickly - many times at a profit - without resorting to foreclosure and walking away from their loans.

But the nation's stellar real estate market has come to a screeching halt over the past year - with the performance in Utah and several other states in the West being an exception. Homes in much of the country are languishing on the market for months, even as anxious owners are cutting prices by tens of thousands of dollars. Home prices are flat, or even worse, declining.

In such an environment, defaults - especially among subprime borrowers - have ballooned.

In recent weeks, a number of companies specializing in subprime loans have laid off thousands of workers; some have even closed their doors. The U.S. Securities and Exchange Commission said it is investigating subprime lenders. Consumer advocacy groups and some lawmakers are demanding investigations into whether some subprime lenders have pushed loans on borrowers - including minorities and those with low incomes - who had no chance of repaying them.

As a result, the mortgage industry is tightening up, and in recent weeks, subprime borrowers have found it harder to buy or refinance - if they can qualify at all. If they do qualify, they are facing rates and terms many will find unfavorable.

How unfavorable?

According to credit score provider Fair Isaac & Co., a borrower with a credit score from 500 to 579 would have to pay 9.8 percent for a $300,000 home loan. The monthly payment would be $2,586. A borrower with a credit score from 760 to 850 would have to pay only 5.8 percent and have a monthly payment that's a whopping $827 less - $1,759.

But many subprime borrowers with credit scores that low may not even qualify now. And there are worries that fewer buyers could aggravate the downturn in real estate markets nationwide.

In Utah, some believe the whole subprime mess could impact the housing market - but there is cautious hope that it will not be to a high degree because of Utah's booming economy and population growth.

"It will take a small percentage of buyers out of the buyer pool, for sure" said Gary Cannon, president of the Salt Lake Board of Realtors. "But I don't think the effect will be huge, because we still have a lot of other buyers out there."

Glen Ogden, president of the Utah Mortgage Lenders Association, agrees.

"In this way, our timing is really good," he said, noting that lending standards are being tightened before, not after, Utah's real estate market begins to slow down in a big way. In other markets, lending standards are being tightened at a time when sellers already are hurting for buyers.

"Because of that, I don't think we'll be affected to the degree that other areas have."

First American LoanPerformance, the company that tracks U.S. mortgage industry data, indicates that problems with subprime loans are not as bad in Utah as nationally.

In addition to the share of outstanding subprime loans in Utah (about 10.3 percent) being lower than the national average of about 14 percent, the share of new subprime loans being originated here is one in five, compared with one in four nationally. That means the state has less exposure to such loans, though not much less.

Perhaps the most positive trend is that only about 9.5 percent of subprime loans in Utah were 60 or more days past due at the end of last year, compared with 11.8 percent nationally.

Utah's rate is up from 8.7 percent in 2005. But the national rate of past-due subprime loans has increased by a greater margin, from 7.7 percent in 2005 to 11.8 percent in 2006, said First American LoanPerformance's Visini.

Undoubtedly, though, some buyers in Utah will watch their ability to buy or refinance shrink or disappear, and some sellers will be affected. Alan Brymer, of Provo, said he experienced this while recently trying to sell an investment property in another state to a borrower who fell into the subprime category.

"The lending standards kept changing, and eventually they didn't qualify anymore," he said. "I think lenders are overanalyzing things to the point of being ridiculous."

He eventually found another buyer who did qualify - but only after a frustrating delay of several months.

"If they are going to change the rules, they should honor the deals that are already in the closing process," he said.

But Al Bingham, a senior loan officer for National City Mortgage in Salt Lake City, said that's simply not possible in a number of situations.

That is because in most cases, mortgages are originated by a company that immediately sells those loans to investors on the secondary market. If the secondary market will not accept a loan made to a certain borrower, in most cases it can't be made.

Bingham said the frustration for lenders is the renewed emphasis on credit scores - and the rigid guidelines being put in place.

"Credit scores are so critical right now that every point matters," he said. "Even if you are one point off [from a minimum], there are no exceptions."

The reason is that defaults are a drag on the U.S. economy, and the worry is that the rise in defaults on subprime loans could lead to a widespread downturn.

But so far, that hasn't happened. And the mess has not trickled into every aspect of mortgage lending.

Kay Ashton of mortgage lender Home Loan Corp. in Bountiful said the subprime problems have not resulted in tighter lending standards and a jump in interest rates for all borrowers - only those who fit into the subprime category.

But he said he is staying tuned.

"No one knows what's going to happen next. We're all watching closely to see how this all works out."

lesley@sltrib.com