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Huge Mortgage Lender Files for Bankruptcy
Analysts say Wall Street's hunger for these securities drove New Century and other companies to push a high volume of risky loans with insufficient regard for people's ability to repay them.
Lenders like New Century "are selling what is ordered up by Wall Street," said Irv Ackelsberg, a Philadelphia lawyer who assists homeowners facing foreclosure and who testified on the issue to the Senate Banking Committee last month. "The real market demand is for these bond securities."
As the subprime mortgage market unraveled, however, the appetite for such bonds faded. New Century was left with no way to pay its creditors, who cut off funding last month.
While New Century's survival is in doubt, some of its creditors contend they would not take big hits from the bankruptcy filing. Morgan Stanley, for example, has said it would auction $2.5 billion worth of mortgages that it holds as collateral for short-term loans it made to New Century. The bank predicted the auction would cover most of the losses from its New Century deals.
The fall of New Century and other mortgage companies sparked a broad reassessment of lending practices. Many lenders have been tightening standards, requiring home buyers to provide more documentation of their income. Mortgage with no down payments are disappearing.
"It's clear that people at the margin of creditworthiness will have significantly more difficulty obtaining mortgage loans," said Croft of the Mortgage Asset Research Institute. "I think the industry has to take a lot of responsibility for the problems it is experiencing today."
Staff researcher Richard Drezen contributed to this report.