"When you underwrite at that level, you have the potential to knock a lot of borrowers out of the marketplace," O'Connor says. Among the affected borrowers, he says, are people "who use these products as credit improvement vehicles" by getting a 2/28 mortgage, making on-time payments for two or three years, raising the credit score above 660, then refinancing into a lower-rate loan.

It would be disruptive to virtually eliminate an entire class of loans such as 2/28 and 3/27 ARMs, says Paul Halpern, a partner with Chrysalis Capital Partners, a private equity fund that invests in distressed companies, including financial services companies. "The number of choices of lenders that a consumer might find for a given credit score, and dollar need, is going to shrink," Halpern says, adding that some people will be waiting for their loan to close when suddenly the company they're working with "shrinks out of play."

Bob Walters, chief economist for Quicken Loans, says lenders might get rid of subprime hybrid ARMs and simply change their criteria for fixed-rate subprime loans to make them available to more borrowers. Subprime loans have their place, he says: "About 10 percent of subprime loans are delinquent now. That means 90 percent aren't. How much of this are we going to slice off, and where are they going to get credit?"

O'Connor, Halpern and others agree that bankers are creative, and they'll find ways to bypass the new guidelines if they have to. And one class of lender doesn't even have to worry about federal regulations: real estate investment trusts, or REITs. Even though they lend money, they're not classified by federal regulators as financial institutions.

"It's a competitive advantage for anyone that's not federally regulated," says Jeff Lazerson, president of Mortgage Grader, a brokerage in Southern California.

But it's not easy being REIT. At least four of the 25 biggest subprime lenders in 2006 were REITs. It's possible that none of the four will be REITs at the end of this year. New Century Financial, a top-three subprime lender last year, is suffering from acute financial distress and might go out of business. Novastar Financial has problems, too, and is considering giving up its status as a REIT. The others, ECC Capital and Fieldstone Investment Corp., have sold their mortgage operations to other companies that aren't REITs.