March 21 (Bloomberg) -- The collapse in shares of subprime- mortgage companies over the past month rewarded so-called short sellers who bet that rising defaults among the riskiest borrowers would curb lenders' profits.

Some traders who predicted declines in shares of New Century Financial Corp., NovaStar Financial Inc. and Accredited Home Lenders Holding Co. say such stocks may fall further as loan delinquencies increase and demand for mortgage-backed securities wanes. New Century sank 90 percent last month, while NovaStar lost 73 percent. Accredited slid 54 percent.

``The subprime guys are history,'' said Steven Persky, chief executive officer of the $1.1 billion Los Angeles-based hedge fund Dalton Investments LLC, which began shorting shares of subprime lenders two years ago. ``They're ultimately going to have to file'' for bankruptcy.

New Century, NovaStar and Accredited Home were some of the most-shorted U.S. stocks from Feb. 12 to March 12, the date of last month's short-sale statistics from the New York Stock Exchange.

Short interest in the stocks climbed last month after New Century, the biggest specialist in home loans made to people with relatively low credit ratings, and HSBC Holdings Plc, Europe's biggest bank, said losses from bad U.S. home loans were piling up faster than they expected.

About 36 percent of New Century's shares available for trading, or float, was borrowed and sold to profit from falling prices. Traders sold short 46 percent of Accredited's float, while 44 percent of NovaStar's float was shorted.

Defaults Increased

Jeff Gentle, a NovaStar spokesman, declined to comment. New Century spokeswoman Laura Oberhelman didn't return a voice message seeking comment. Accredited spokesman Rick Howe also didn't reply to a message seeking comment.

The NYSE and American Stock Exchange will report March short-interest figures after the close of trading today. The Nasdaq Stock Market will follow on March 27.

Defaults on subprime loans increased as competition and a slower housing market prompted lenders to lower their standards and give mortgages to borrowers who couldn't make their monthly payments. More than 24 subprime lenders closed or sought buyers since the start of 2006 as late payments and defaults climbed.

Shares of mortgage companies plunged on Feb. 8 after New Century said it probably lost money in the last quarter and wouldn't make as many loans this year as it had previously forecast. HSBC said it set aside $1.76 billion more than analysts estimated to cover bad loans in 2006.

`No Skin in Game'

``The lending standards had loosened to the point where virtually anybody could get a loan and the borrowers had little or no skin in the game,'' said Brian Horey, general partner at Aurelian Partners LP in New York, which has shorted New Century, Accredited, and Fremont General Corp., a California thrift that's selling its home-lending business.

Subprime lenders resumed their slide on Feb. 21 after NovaStar, a Kansas City, Missouri-based real estate investment trust, posted a surprise fourth-quarter loss and said it won't make much money on its mortgage investments for the next five years.

The stocks plummeted again after New Century said on March 2 that it may need waivers from its own lenders to stay in business and disclosed a criminal probe into its accounting. The same day, Fremont said a regulatory order would require it to stop giving mortgages to people who can't pay, and announced plans to exit the subprime home-loan business.

Shares Slide

The shares slid during the following week as New Century said it halted new loans and didn't have the cash to pay creditors, increasing speculation that the company will go bankrupt. The NYSE suspended trading in the New Century's shares.

The rout continued on March 13 after the Mortgage Bankers Association said late payments on subprime loans reached a four- year high of 13.3 percent, and foreclosures on all home loans rose to a record. Accredited led the decline after the company said it was considering ``strategic options'' because it couldn't meet its own lenders' demands for cash.

Horey of Aurelian Partners, who initiated his short positions in July and August, said he expects shares of subprime lenders to continue to fall as loan delinquencies and home foreclosures increase over the next few months.

``We're still in the early innings of the whole housing and lending slowdown,'' he said. ``We're not going to see a bottom probably before the end of this year.''

`Beginning of Wave'

That view is shared by Federal Reserve Governor Susan Bies, who said on March 9 that subprime defaults are at the ``beginning of a wave'' and banks are likely to see more missed payments and foreclosures as consumers with weak credit histories begin to face higher monthly mortgage payments.

Dalton's Persky says more subprime lenders may be forced into bankruptcy as they struggle to secure financing from investment banks and other institutions that purchase their loans and package them into securities to sell to investors.

``Their financing is dependent on being able to sell these subprime asset-backed securities, and the demand for that is now zero,'' said Persky. ``They won't be able to survive.''

New Century said yesterday that Fannie Mae, the biggest source of money for U.S. mortgages, served notice it will no longer buy the company's loans.

Shares of subprime lenders may be buoyed by acquisitions and new financing from hedge funds and banks. The stocks rebounded last week after buyout fund Blackstone Group LP agreed to acquire PHH Corp.'s home-lending business and Bear Stearns Cos., the biggest underwriter of mortgage-backed bonds, said it may buy more subprime loans.

Goldman Looking

Goldman Sachs Group Inc. may consider an acquisition of a subprime-lending company at bargain prices, the Wall Street Journal said on March 14, citing Chief Financial Officer David Viniar.

Accredited shares jumped 20 percent yesterday after the company got a $200 million loan from hedge-fund manager Farallon Capital Management LLC, giving the company time to attract more financing or find a buyer. Today, Citadel Investment Group LLC, the hedge fund that purchased bankrupt subprime lender ResMae Mortgage Corp., reported a 4.5 percent stake in Accredited.

``You have some of these subprime lenders that looked like they were going bankrupt getting lines of credit,'' said Steve Neimeth, who manages about $900 million at AIG SunAmerica Asset Management in Jersey City, New Jersey. ``Hedge funds and other financial institutions lending to them who are doing their due diligence say, `Things are OK, we'll lend to you.'''

Accredited has climbed 192 percent from an all-time low of $3.97 on March 13, and NovaStar has gained 78 percent during the same period. New Century is up 106 percent from an all-time low of 67 cents on March 14.

Deepening Woes?

Still, some traders said the subprime lenders' woes may be just beginning.

``I don't think anybody knows the extent of their problems,'' said Joseph Parnes, who helps manage $82 million as president of Baltimore-based Technomart Investment Advisors. He has short positions in mortgage lenders including American Home Mortgage Investment Corp.

The following list highlights some of the biggest moves among the most-shorted U.S. stocks last month. Percentage changes are from Feb. 12 to March 12, the date when this month's figures were compiled. ``Winners'' are stocks that fell in price, while ``losers'' rose.

Winners

CV Therapeutics Inc. (CVTX US) declined 28 percent after traders shorted 30 percent of its shares. The drugmaker said on March 6 that its chest-pain treatment, Ranexa, didn't help people with acute heart disease in a study.

Home Solutions of America Inc. (HSOA US) dropped 31 percent after 39 percent of its float was shorted. The provider of home- renovation services in disaster areas said on March 5 that net income last year rose less than the company forecast because of the slowdown in the U.S. housing market.

Hovnanian Enterprises Inc. (HOV US) fell 18 percent after 34 percent of its shares were sold short. The sixth-largest U.S. homebuilder by revenue posted a fiscal first-quarter loss on March 8 that exceeded analysts' estimates. The company took charges of $93 million on canceled contracts for homes in southwest Florida and to write off its 2005 purchase of a Florida homebuilder.

Losers

Great Atlantic & Pacific Tea Co. (GAP US) rose 17 percent after 21 percent of its shares were sold short. The owner of A&P and Food Emporium supermarkets agreed on March 5 to buy Pathmark Stores Inc. for $689.7 million to expand in the U.S. Northeast.

KBW Inc. (KBW US) climbed 23 percent after 31 percent of its float was shorted. The investment bank that focuses on advising other financial firms said on Feb. 20 that fourth-quarter net income more than tripled as revenue from mergers and acquisitions surged. Earnings were almost three times as high as the average analyst estimate compiled by Bloomberg.

Movie Gallery Inc. (MOVI US) gained 27 percent after traders sold short 29 percent of its shares. The second-largest U.S. video-rental chain said on Feb. 20 that it will receive $900 million in financing from a group led by Goldman Sachs Group Inc. The financing will help the company avoid defaulting on some debt, according to Moody's Investors Service, a ratings service.

To contact the reporter on this story: Michael Patterson in New York at mpatterson10@bloomberg.net.

Last Updated: March 21, 2007 13:10 EDT