Subprime mortgage defaults are soaring in the northern Californian city of Merced and angry local officials are placing much of the blame for the rout on property speculators from the nearby San Francisco bay area.

Subprime mortgages are typically granted to individual homebuyers with tarnished credit histories. But Merced officials say such loans were also granted in large numbers to investors, who used them to buy homes in the city known as the “gateway to Yosemite” because of its proximity to the national park.

These investors exploited low “teaser” rates on the loans to buy homes, but ran into difficulty when the rates were reset at higher levels. The resulting defaults are causing no small measure of hardship in the city. In some cases, officials say people renting homes from these investors have been evicted as lenders prepare the properties for resale.

“There should be a special place in hell for those people,” James Marshall, Merced city manager, says of the speculators. “I’ve heard about renters who were making their payments on time and then all of a sudden they would get a knock at the door.”

Merced, a city of 80,000 people, is at the forefront of the mortgage foreclosure ­crisis in the US. Notices of default – the start of the repossession process – are up more than 200 per cent since the same time last year, meaning that Merced is jostling with nearby Stockton and Modesto for the title of the US’s foreclosure capital.

Like Stockton and Modesto, Merced is within commuting distance of San Francisco and the Bay Area, which made it appealing to investors. Its housing market was also fuelled by the opening of a University of California campus on the outskirts of the city in 2005 – the height of California’s property boom.

“During the market run-up, not a day went by when I didn’t get a call from people in the Bay Area or Los Angeles who wanted to buy in or around Merced,” says Loren Gonella, the owner of Coldwell Banker Gonella Realty. He says the “vast majority” of buyers were speculators.

Masoud Niroumand, housing programme manager for Merced, says investors were so confident that they often set their sights higher than one property. “There were a lot of investors from outside the area who bought more than one home,” he says. “But when the market got bad they just walked away.”

In Fresno, an hour south of Merced, investors were also able to use cheap credit to snap up multiple unit apartment buildings. Mortgages were based on a property’s market value at the time, rather than its ability to generate rental income.

“Lenders treat duplex, triplex and fourplexes the same way they treat single family homes,” says Robin Kane, founding partner of RCK Organization, a commercial real estate brokerage. “So apartment buildings with up to four units would qualify for a subprime loan.

“The guy who bought one apartment building probably had five of them,” he adds. “He got on the subprime gravy train and made a killing at the top of the cycle.”

But when the market ­collapsed, none of these investors had anything to fall back on.

“It was a great ride for a lot of investors but eventually the music stopped and someone had to pay the piper,” says Mr Kane. “What was supposed to be a liquid asset becomes a ball and chain around your neck when you owe more than the market value of the property.”

Back in Merced, home values have fallen 50 per cent since the peak of the housing boom in 2005. The market is awash with foreclosures, which accounted for more than 75 per cent of property sales in the last six months, says Mr Kane.

This is good news for local buyers and has opened up the market to people who had previously been priced out. “At the peak of the boom, 7 [per cent] or 8 per cent of the local population could afford to buy an average priced home in Merced,” says Mr Gonella. “Today, it’s more like 60-65 per cent.”

But while the city has become more affordable for local buyers, it continues to feel the effects of the housing crash. “We’re going to see a lot of mom and pop businesses going out of business. All the construction has gone. A lot of people worked in real estate and lending – they’ve gone too.”

Mr Gonella’s agency has put 500 homes in escrow since the start of the year as buyers have snapped up foreclosed properties at knock-down prices. But the market has not stabilised.

“It’s going to take about a year,” he says. “As long as we have all these foreclosures going on, we’re going to have downward pressure on prices. And we’re probably at the peak of foreclosures right now.”