New Century's Vitality at Risk
By Dina ElBoghdady and David Cho
Washington Post Staff Writers
Tuesday, March 13, 2007
New Century Financial, once a highflying lender of risky mortgages, said yesterday that it does not have the money to pay its lenders, fueling speculation that it might not survive much longer.
The New York Stock Exchange halted trading of New Century's shares, which had dropped to $1.66 from $3.21 Friday.
The California company said in a filing with the Securities and Exchange Commission yesterday that all of its lenders have either pulled its funding or have said they will do so. "They need to come up with an alternative source of funding or else they are going to file for bankruptcy," said Matthew Howlett, an industry analyst at investment bank Fox-Pitt Kelton.
The unraveling of New Century is one of the highest-profile setbacks to the subprime mortgage market, which caters to people with blemished credit histories or insufficient cash for a down payment. In recent years, when housing prices were rising, millions of people used such mortgages to buy homes they otherwise could not afford. Once home prices leveled off, borrowers started to default on their mortgages. That wreaked havoc on the subprime sector, which accounted for about a fifth of all new mortgages last year.
Concerns about the future of the risky loans have already rattled stock markets. The fear is that problems with subprime borrowers will spill over into the broader mortgage market, damage the economy and dampen demand for homes.
Some lenders have started adopting tougher standards and are turning away the riskiest of would-be homeowners, something federal regulators have been urging them to do.
"There's zero doubt the impact of tightening of the mortgage credit is going to have a negative impact on home sales," said Thomas A. Lawler, founder of Lawler Economic and Housing Consulting in Vienna. "The kicker is how much will it be."
Then there will be all the homes that will be foreclosed on because cash-strapped subprime homeowners will not be able to pay their mortgages. Those are expected to add to an already high supply of housing for sale.
In a report scheduled to be released this week, Lehman Brothers estimates that 300,000 extra homes could flood the market in 2008 and 400,000 more in 2009 because of foreclosures of homes that were bought with subprime mortgages.
While that is not a big portion of the total housing market, it's still enough to have an effect on the psychology of home buyers, said Michelle Meyer, an economist at Lehman Brothers.
"You already have a big excess in inventories," she said. "So if you add to the large supply of homes, the market will take longer to correct."
New Century is the center of speculation about the fallout from the subprime market in part because it is one of the nation's largest subprime lenders, with an estimated $52 billion in subprime loans last year.
Last week, the company stopped accepting new loan applications under pressure from its creditors. It also has been late in releasing its most recent earnings and has said it will restate most of its financial results for 2006 because of accounting errors. The company is under investigation by a number of federal authorities, including the SEC, for its stock trading.
Like most subprime lenders, New Century sells its mortgages to investment banks that package these loans into bonds and trade them on the market. In recent weeks, the value of those mortgages has plummeted as investors abandoned the sector.
Under some of its banking agreements, New Century has to cover the difference between the original and decreased value of the mortgages.
In the SEC filing yesterday, New Century said it does not have the money, so its bankers have declared that it is in default.
Under its loan agreements, New Century could be forced to buy back the mortgages that the banks have not been able to sell on the market.
If all the banks force New Century to buy the mortgages, the amount would total $8.4 billion. Its lenders include such banks as Bank of America, CitiGroup, Credit Suisse and Morgan Stanley.
As recently as last week, Morgan Stanley made an emergency $265 million loan to New Century.
About two dozen lenders have closed or sold themselves this past year because of troubles similar to those New Century faces.
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