New Troubles in Subprime City

Industry players unveiled a fresh batch of bad news Monday, while a new report said the sector's woes were weighing on homebuilders

Stock investors averted their gaze from the subprime mortgage mess on Mar. 19, choosing to focus instead on a fresh wave of merger news that helped send major indexes higher. But the elephant is still very much in the room. Another barrage of news from companies that make residential loans to customers with weak credit shows that industry players continue to face a steep climb as they try to restore their financial health and return to the good graces of equity investors. And a widely followed real-estate industry report said subprime woes were beginning to weigh on the homebuilding sector.

Three of the key players in the recent subprime drama faced new developments on Mar. 19. Accredited Home Lenders (LEND) said it received a notice from the Nasdaq Stock Market that that its common stock is subject to delisting in connection with Accredited's failure to file its 2006 10-K with the Securities and Exchange Commission prior to expiration of Mar. 15 deadline.

Accredited intends to request a hearing before a Nasdaq panel to appeal the determination, which will stay the delisting pending the panel's decision. The company said it's "working to file its Form 10-K as soon as possible."

Accredited also announced that a class action lawsuit was filed against the company and certain officers and directors, alleging that the company issued materially false and misleading statements regarding its business and financial results. Accredited said it believes the lawsuit has no merit and intends to defend the case vigorously.

Company execs have been struggling to bolster the company's finances even as their potential investors lose confidence. But the San Diego company said Mar. 16 that it has found a buyer for nearly its entire $2.7 billion loan portfolio -- albeit at a substantial discount (see, 3/16/07, "Two Subprime Lenders Find Help").

Accredited shares fell nearly 18% to $8.95 on Mar. 19.

Meanwhile, shares of Novastar Financial (NFI) lost 8% to $5.43 on Mar. 19. The Kansas City (Mo.) based lender said after the close of trading Mar. 16 that it intends to reduce its workforce by about 350 people, or about 17%, to align itself with what it calls, with considerable understatement, "changing conditions in the mortgage market."

The cuts will come from NovaStar's wholesale loan origination group and related operations. The company estimates a total pre-tax charge to earnings of between $2.7-$3.1 million will be incurred in the first quarter of 2007. NovaStar had already been addressing its woes by tightening underwriting guidelines and boosting rates on its loans to improve margins.

And industry poster child New Century Financial (NEWC.PK) said on Mar. 19 that it has received cease-and-desist orders from Connecticut, Maryland, Rhode Island and Tennessee in the preceding week, restraining the company from taking new applications for mortgage loans, according to an Associated Press report. Massachusetts, New Hampshire, New Jersey and New York issued similar orders last week, the company said.

Ceasing and desisting shouldn't be too much of a stretch for beleaguered New Century, as it has already stopped making new loans as it endures a liquidity crunch and faces a criminal probe into its accounting practices and the prospect of bankruptcy.

New Century shares dropped 7.3% to $2.17 on OTC Bulletin Board trading Monday.

Finally, a report from a homebuilding industry group released Mar. 19 showed that ripple effects from the subprime meltdown were being felt by homebuilders. The National Association of Home Builders/Wells Fargo Housing Market index, a measure of builder confidence, declined to 36 in March from a downwardly revised 39 reading in February. The NAHB attributed the decline to "concerns about deepening problems in the subprime mortgage arena."

"Builders are uncertain about the consequences of tightening mortgage lending standards for their home sales down the line, and some are already seeing effects of the subprime shakeout on current sales activity," said NAHB chief economist David Seiders in a Mar. 19 press release. But the group asserts that "the fundamentals of today’s housing market still are relatively strong, including a favorable interest-rate structure, solid growth in employment and household income, lower energy prices and improving affordability in much of the single-family market" -- with the latter coming on the heels of price cuts and sales incentives offered by builders.

The NAHB still sees modest improvements in home sales for the rest of 2007, although the mortgage market woes "increase the degree of uncertainty" for its outlook.

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