More Trouble in Subprime City
The steady stream of bad news out of the subprime mortgage lending industry -- and its poster child, New Century Financial (NEW) -- continues. In a Form 8-K filed with the Securities and Exchange Commission Mar. 12, New Century said it had received notices from certain lenders asserting that it was in violation of financing arrangements, and that those violations amounted to events of default under those agreements. In addition, its lenders have cut off access to needed financing.
It gets worse. Some lenders -- including units of Bank of America (BAC), Credit Suisse First Boston (CS), Goldman Sachs (GS), and Morgan Stanley (MS) -- advised New Century that they are accelerating the company's obligation to repurchase all outstanding mortgage loans provided under existing financing agreements. If all of the company’s lenders accelerate the repurchase obligations, New Century would be on the hook for approximately $8.4 billion.
New Century said in the 8-K that it does not have sufficient liquidity to satisfy their outstanding repurchase obligations, though it remains in discussions with its lenders and other parties regarding financing alternatives. Like other subprime lenders, New Century relies on credit facilities from other financial outfits to fund mortgage loan originations and purchases before such loans can be pooled and sold to investors.
That wasn't the only bad news on the credit front for the company. On Mar. 12, Standard & Poor's Ratings Services said that it lowered its counterparty credit rating on New Century to CC from CCC, and when news hit that the company's lenders had cut off funding, the agency further lowered the rating to D from CC. (S&P, like BusinessWeek.com, is owned by The McGraw-Hill Cos.)
New Century, which is also facing a criminal accounting probe, may be forced to file for Chapter 11 bankruptcy protection. The Irvine (Calif.) company's stock has dropped from $30 to $3 in the last month (see BusinessWeek.com, 3/12/07, "Subprime Lending's Next Act"). New Century and other companies that mainly provide residential loans to higher-risk borrowers have suffered amid rising default rates and as regulators have tightened lending standards.
New Century shares did not trade Mar. 12 (the last quote on Mar. 9 was $3.21) and the New York Stock Exchange said it would continue the halt in trading in the company's securities until information about its liquidity and financing efforts has been disseminated.
The news rippled through the share prices of other companies in the industry. Accredited Home (LEND) tumbled nearly 24% to $11.95, while NovaStar Financial (NFI) fell 19% to $4.24. Fremont General (FMT) fell 16% to $6.73.
And bigger fish are getting hurt as well. Shares of mortgage-lending giant Countrywide Financial (CFC) fell 2.7% to $35.14 on Mar. 12 after Wachovia Securities reportedly downgraded its rating on the shares, according to Standard & Poor's MarketScope. Wachovia is worried that weakness in secondary market liquidity has spread to other sectors of the residential mortgage market.
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