New Century Financial , the largest independent U.S. subprime mortgage lender, said on Monday its lenders plan to halt financing, pushing the company closer to bankruptcy amid dwindling cash and $8.4 billion in obligations that could come due immediately.
New Century's struggles are part of a wider meltdown among lenders to less-creditworthy home buyers, which has seen the sector struggle as default rates have soared. The contagion could spread, roiling a larger section of the U.S. economy while hitting investors, such as pension funds, which bought securities backed by suspect home loans, analysts say.
If home prices remained flat this year and next, mortgage defaults could total $225 billion, with a real risk of pulling down the broader housing market and weighing on borrowers with good credit, Lehman Brothers analysts said in research note.
"Our expectations of defaults at about 1.5 million to 2 million units are fairly significant in a soft housing market," the analysts said recently.
The largest U.S. mortgage lender, Countrywide Financial , warned that subprime turmoil may hurt near-term profits, sending its stock lower in the afternoon.
Soon after the market opened Monday, the New York Stock Exchange delayed trading in New Century's shares, citing a pending news announcement. The shares had already plunged 48% before regular NYSE trade, dropping to $1.66. The company declined comment on speculation that it would seek bankruptcy protection. The exchange said it is reviewing the continued listing status of New Century's stock.
New Century of Irvine, Calif., said in a U.S. Securities and Exchange Commission filing Monday that it could be forced to repurchase about $8.4 billion in loans, if lenders accelerated all of its obligations. It said it does not have sufficient liquidity to satisfy those obligations.
Key Lenders Include Big Investment Banks
Among the key lenders is investment bank Morgan Stanley , which could force New Century to repurchase $2.5 billion in loans. Other lenders include Citigroup
The repurchase obligation to Morgan Stanley was the largest cited by New Century in a filing with the U.S. Securities and Exchange Commission.
New Century said it had already received two letters from Bank of America that "purport to accelerate" repurchase obligations pegged at $600 million.
Separately Monday, Standard & Poor's on Monday cut its counterparty credit rating on New Century Financial Corp. to "D," or default, citing notices of default from several lenders based on violations of financing arrangements.
New Century's inability to meet the notes that are immediately payable is tantamount to a general default, S&P said. It cut New Century's rating to "D" from "CC."
As of Sept. 30, New Century reported $25.1 billion in total assets, including $14 billion in loans held for investment, and total liabilities of $23 billion. The company reported $350 million in cash and liquidity at the end of the year, but it appears its cash has fallen below $60 million, according to Monday's SEC filing.
New Century said it has been accused of breaching a covenant with Citigroup that required the subprime lender to maintain at least $60 million in cash.
"The value of their assets is questionable, because they probably have exposure on the subprime (asset-backed securities) they issued," said Steve Persky, principal at Dalton Investments, which manages $1 billion in assets. "...They've said their accounting can't be relied on, so it looks like New Century is toast."
Los Angeles-based Dalton had a short position in New Century shares, but closed it out, Persky said.
New Century shares, down 89% this month, have been hammered by a barrage of negative announcements, including that it would stop making new loans and was the target of a criminal investigation.
Shares of Subprime Lenders Battered
Over the past several weeks, subprime shares have been battered over a rising tide of late payments by borrowers. That trend continued on Monday, lopping 17.6% off Fremont General's
Robert Froehlich, chief investment strategist at DWS Scudder, said a crimp in subprime lending could hurt U.S. housing demand.
"Because of the virtual collapse of mortgage lending standards over the past couple of years in the U.S., rapid growth in subprime lending has accounted for much of the incremental home purchase demand in recent years," Froehlich said. "Removing this segment will soften already slowing demand."
New Century said there was no guarantee it would get adequate financing to meet its obligations. If the company were not able to satisfy repurchase obligations, lenders could liquidate related mortgage loans.
New Century would be on the hook for any difference between the liquidation amount and contractual amount of the loans.
"The company and its subsidiaries may not have sufficient resources to satisfy any such deficiency," New Century said.
That could well set the stage for a bankruptcy filing, if a white knight financing deal did not materialize.