Scary Times for Subprimes

The lenders' woes continued Tuesday, with trading in New Century's shares suspended by the NYSE and Accredited Home hunting for new capital

New Century Financial (NEW) has some company in the stock-market doghouse. Other subprime lenders are dishing out bad news as well -- and with market fears about the health of companies that provide residential loans to higher-risk borrowers accelerating, shares in the group plunged for a second straight session on Mar. 13.

On Mar. 13, the New York Stock Exchange announced that it was suspending trading in New Century's shares because of the company's disclosures in SEC filings on Mar. 12 and 13 that its lenders were discontinuing their financing arrangements with the company. The shares, which did not trade on Mar. 12 amid a halt by the NYSE, are expected to be quoted in the Pink Sheets.

Also on Mar. 13, New Century said it was facing an SEC investigation and a subpoena for documents for a criminal probe by the U.S. Attorney's Office and the Pacific Regional Office of the SEC in Los Angeles. On Mar. 12, Standard & Poor's Ratings Services cut the company's counterparty credit rating to D from CC (see, 3/12/07, "More Trouble in Subprime City").

The NYSE move is just the latest in a string of distressing developments for New Century, which may file for Chapter 11 bankruptcy protection. The stock has collapsed in the last month, from just north of $30 to its last quoted trade of $3.21 on Mar. 9.

Subprime lenders have been hit by a sharp increase in early payment defaults on residential loans, and skittish investors who purchased the loans have kicked back an unexpectedly high level of loans to the originators. The sheer level of defaults and a lack of adequate loan-loss reserves pummeled the earnings of these institutions, according to a Mar. 9 report from Standard & Poor's Ratings Services, while substantial erosion in investor confidence made it difficult for the subprimers to unload new and repurchased loans at a reasonable price. And the so-called warehouse lenders -- bigger financial outfits that provide financing for the subprimers to make the loans -- have pulled funding amid the troubles.

One day after New Century announced that funding from its lenders had dried up, another subprime lender, Accredited Home (LEND), announced that it was seeking to shore up its balance sheet amid the sector's slide. The shares tumbled 52% to $5.45 in mid-morning trading Mar. 13 after the company said it is it exploring strategic options to boost its liquidity, including raising additional capital and cutting more jobs, to provide the company with flexibility to retain or sell originated loans based on assessment of best overall return. The stock was also reportedly hit with a downgrade from a Bear Stearns equity analyst on Mar. 13.

Investors punished shares of other subprime lenders for a second straight day on Mar. 13. Fremont General (FMT) fell 12% to $5.95, while NovaStar Financial (NFI) slipped 10% to $3.80.

Meanwhile, mortgage giant Countrywide Financial (CFC) fell 2.2% on Mar. 13, a day after it lowered earnings guidance and tightened subprime lending standards.

The Wall Street Journal reported on Mar. 13 that amid mounting defaults in the market for subprime mortgages, some big banks, such as HSBC (HBC), and mortgage companies are striking out in their efforts to wrest compensation from originators of those high-risk, high-return loans. Originators say they can't afford to buy back their loans or are pursuing bankruptcy protection because they are being squeezed by the onslaught of defaults, according to the Journal.

Companies in the industry may not survive the current tumult in their existing state. In a Mar. 9 report, S&P Ratings said it expects the shakeout within the sector to continue, with investment banks and possibly hedge funds and private equity firms purchasing distressed subprime lenders or their discounted assets (S&P, like, is owned by The McGraw-Hill Cos.). "Whatever form it takes, subprime mortgage lending will inevitably continue," adds S&P. But the industry landscape may look a lot different once the dust settles.

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