A booming subprime mortgage industry put millions of people in homes over the past few years, generating juicy profits for lenders and fueling billions of dollars in mortgage-backed securities issues.

Now, a sharp downturn for the subprime mortgage business represents the latest sign of trouble in the teetering housing industry.

Past-due mortgages and foreclosures have been growing over the last 12 months. And subprime lenders are struggling with shaky loan quality, increased competition and unusual interest rate movements.

"The housing market is going down," said David Liu, a mortgage analyst at UBS AG in New York. "In a slower market, it's the weakest borrower and the weakest lender that are the first to go."

The subprime skid claimed a local victim this month, when Carrollton-based Sebring Capital Partners LP said it was shuttering its operations. The failure eliminated 325 jobs, including 140 in North Texas.

Sebring's general counsel, Michael Waldron, attributed the company's demise to "a combination of market conditions, unfortunately."

"We had a good group of people who worked hard to explore every option to prevent this," he said. "We had a very dedicated group of employees who built something over the years, and unfortunately, we were unable to sustain it."

The deteriorating outlook is a concern for other subprime lenders, which extend loans to people with low credit ratings, charging them higher interest rates than people with better ratings would pay. Interest rates for subprime mortgages range several percentage points above rates for prime mortgages.

The value of subprime mortgages issued has grown by more than fivefold this decade, rising from $120 billion in 2001 to $625 billion last year, according to Inside Mortgage Finance, a trade publication.

Some 5.7 million subprime mortgages were outstanding as of June, or 13 percent of the total tracked by the Mortgage Bankers Association. Subprime mortgages accounted for more than 2 percent of the total in 2000.

Texas companies with significant subprime lending operations include Houston-based Aegis Mortgage Corp.; Lewisville-based EMC Mortgage Corp., which is owned by Bear, Stearns & Co. Inc.; and Lewisville-based Nationstar Mortgage LLC, formerly known as Centex Home Equity Co.

Two sides to their story

Subprime companies are often vilified as predatory lenders that smooth-talk customers into taking on loans they can't afford. In some cases, the reputation is well-deserved, consumer-advocates say.

But subprime mortgage firms have also played a big role in putting people with low credit scores into homes of their own.

Today, the U.S. homeownership rate -- the percentage of occupied housing units that are occupied by their owners -- stands at 69 percent.

That compares with 65.1 percent at the end of 1995, according to the Census Bureau. Over the previous 15 years, the rate had declined slightly from 65.5 percent.

The growth of subprime lending -- fueled by new technologies and new mortgage products -- could have accounted for as much as half of the increase, according to two economists at the Federal Reserve Bank of Chicago, Jonas Fisher and Saad Quayyum.

"Subprime lending appears to be a very significant factor," Mr. Fisher said.

Lately, however, the subprime mortgage business has been showing signs of trouble.

Seriously delinquent subprime mortgages -- loans either in foreclosure or at least 90 days past due -- accounted for 6.2 percent of the subprime portfolio as of the end of June, compared with 5.8 percent 12 months earlier. The serious delinquency rate for prime mortgages was 0.8 percent at the end of June, compared with 0.7 percent 12 months earlier.

One source of weakness is the slowing economy. Layoffs and stagnant wages sometimes translate into mortgage loans not being repaid. If the economy slows further next year, the subprime lending industry's woes could get worse.

Another problem: During the housing boom of the last few years, some customers, perhaps guided by eager salespeople, did indeed sign up for mortgages that they couldn't afford.

"All those creative loan packages are wonderful for some people," said Bettye Banks, senior vice president for education at Consumer Credit Counseling Service of Greater Dallas. "But they're not wonderful for everybody."

Other challenges

Subprime mortgage lenders face other challenges as well:

--Increased competition and declining profitability.

"Subprime has always been characterized by pretty wide margins, but those margins have been compressed a lot over the last year and a half or so," said John Bancroft, managing editor at Inside Mortgage Finance. "In part, volume has kind of flattened out. And also, there's been a lot more competition from the larger, more monolithic companies that are active in all parts of the mortgage business."

--Interest rates. Many subprime mortgage lenders borrow money at short-term interest rates, lend it at long-term interest rates and turn a profit because long-term rates are usually higher than short-term rates.

Lately, however, that profit spread has been erased, as interest rates on benchmark 10-year U.S. Treasury notes have dipped below the rates for two-year Treasuries.

"That has just killed subprime companies," said Sam Garcia, publisher of MortgageDaily.com, a Dallas-based online publication.

--Buybacks. Lenders such as Sebring Capital typically sell the mortgages they issue to larger concerns that then package them into securities.

But if the mortgages do not meet certain standardized requirements, or if borrowers stop paying soon after the loans are made, lenders can be forced to buy them back.

Left with questions

Sebring Capital would have faced all those challenges, but company executives declined to provide a detailed explanation of the firm's failure, beyond Mr. Waldron's brief comments.

Even authorities were left scratching their heads. Asked what happened at Sebring Capital, John Fleming, general counsel of the Texas Department of Savings and Mortgage Lending, said, "That's a good question, I don't know either."

"We were faxed a notice that effective Dec. 1, Sebring Capital was ceasing operations and not accepting new loan applications," Mr. Fleming said.

Industry analysts said loan buybacks might have played a significant role in bringing down Sebring Capital. A large number of buybacks could have presented the company with liabilities that outstripped its assets.

Sebring Capital issued mortgages totaling $930 million last year, according to National Mortgage News. That made the company the 54th largest subprime mortgage lender nationwide.

Sebring Capital issued mortgages worth $921 million in 2004, and $966 million in 2003, according to National Mortgage News.