New Century's woes deepen, spread
Troubled mortgage lender on the hook for $8.4 billion as financing vanishes. Top Wall Street firms, home prices could take hit.
NEW YORK (CNNMoney.com) -- Embattled mortgage lender New Century Financial Corp. warned Monday of a series of serious financial problems that cast its future in doubt - and cast a pall over much of the nation's financial sector.
The problems at New Century, No. 2 in lending to borrowers with weak credit, could also weigh on the nation's struggling housing market - and home prices - as a major source of mortgage financing dries up. Overall, lenders in the so-called subprime sector made $640 billion in mortgage loans last year, about a fifth of the total mortgage market and nearly double the amount from 2003.
Irvine, Calif.-based New Century said that all of its own lenders are cutting off financing, that it has been found in default of many of its financial agreements, and that it does not have the funds necessary to meet its obligations, which could reach $8.4 billion. The company's market value has shriveled to only $178 million.
In addition, New Century (Charts) said it does not expect to meet the March 16 extension for filing a 10-K annual financial report with the Securities and Exchange Commission. Missing that deadline will pose additional problems with its various financial agreements and could lead to a delisting of its stock.
The company is the No. 2 lender in the so-called subprime mortgage business that has been getting increased attention on Wall Street and from federal regulators. Its shares had already been badly battered over the last month on rising concerns of a possible bankruptcy filing and the stock tumbled another 48 percent in before-hours trading Monday.
The New York Stock Exchange said it has halted trading in New Century and may suspend trading, though the issue remains under review.
The company's SEC filing could shake up the financial sector. It mentioned financing agreements with many top Wall Street firms, including Morgan Stanley (Charts), Citigroup (Charts), Barclays Bank (Charts), Bank of America (Charts), and Credit Suisse First Boston Mortgage Capital, a unit of Credit Suisse Group (Charts), as well as the mortgage arm of Goldman Sachs (Charts).
Shares of Morgan Stanley and Barclays sank about 1 percent apiece while Goldman and Bank of America posted smaller losses in afternoon trading. Citigroup and Credit Suisse were little changed.
The company's filings said that several of its lenders were now demanding New Century and its subsidiaries repurchase all outstanding mortgage loans, and that its other lenders now have the right to make that demand. It said if each of them do, its total repayment obligations would be about $8.4 billion.
"The company and its subsidiaries do not have sufficient liquidity to satisfy their outstanding repurchase obligations under the company's existing financing arrangements," said the company's filing.
"We know they didn't get their $8 billion by holding a bake sale. We knew it would touch other financial institutions; now we'll see how," said Art Hogan, chief market analyst at Jefferies & Co., about the impact New Century would have on the broader financial sector.
Officials at New Century could not be reached for further comment.
Bose George, analyst with Keefe, Bruyette & Woods, an investment bank focused on the financial services sector, said he saw little chance for New Century to avoid filing for bankruptcy unless it could find a buyer for its remaining assets. Even then he's not sure how much value there would be for the company's current shareholders, given its obligations.
In addition, he said that New Century's woes are certain to spread to other subprime lenders.
"There's no real sign why or how things will get better (for subprime lenders) in the near term," he said. "Since all these guys are funded by Wall Street, perception is obviously huge. If lenders feel they could lose money on (loans to the sector), they'll pull them. The fear in the market does kind of feed on itself."
There is also rising concern that the crisis in the subprime sector could pose further problems for the struggling U.S. housing market. Public interest group The Center for Responsible Lending forecast recently that 19 percent of subprime mortgages originated during the past two years will end in foreclosure.
Federal regulators recently proposed much tougher standards for lenders making subprime loans. But the tougher standards and problems with lenders in the sector will likely mean many borrowers will be cut off from financing, raising concerns about what problems in the subprime sector might mean for the real estate market and home prices overall.
Shares of New Century lost 78 percent of their value last week after a March 2 filing that said the company faced criminal investigations and its outside auditor KPMG said there was substantial doubt about New Century's ability to survive.
According to its Web site, the company was founded in 1995, and Monday its site was still highlighting this ironically proud claim "Where does a company go after its rapid growth to the ranks of the nation's top mortgage lenders? Back to work."
Industry trade publication Inside B&C Lending ranked it as the No. 2 subprime mortgage lender with loans of $51.6 billion in 2006 and $52.7 billion in 2005. It had about 8.1 percent of the subprime market in 2006, according to the ranking, behind only HSBC (Charts).
Beyond the companies that were lending money to New Century, the subprime sector had attracted many of the nation's leading financial firms, including Countrywide Financial (Charts), one of the nation's largest mortgage lenders, as well as Wells Fargo (Charts) and Washington Mutual (Charts).
In addition, some of the leading subprime lenders are in fields far from finance, including General Electric (Charts), whose WMC Mortgage unit is the nation's No. 5 subprime lender, and General Motors (Charts), which still has 49 percent of finance unit GMAC, owner of the No. 12 lender in the sector.