Mortgage Lender Probed; Regulators Move to Tighten Standards

New Century Financial , one of the largest lenders to borrowers with poor credit, said U.S. prosecutors in California are conducting an investigation of trading in its securities.

The criminal investigation also covers accounting errors regarding the money the company sets aside to cover certain loans it is forced to buy back at a loss, New Century said in a
filing, adding it had agreed to assist the investigation

The lender said it won't be able to file its 2006 annual report on time, and plans to request an extension from the Securities and Exchange Commission.

The latest problems with mortgage lenders came as U.S. bank regulators moved to tighten standards on subprime borrowers.

The largest U.S. home mortgage lender, Countrywide Financial reported a sharp increase in late payments, including those for loans by borrowers with relatively strong credit records.

These warnings added to the mounting evidence of instability in the subprime mortgage market.

Regulators Tigheten Rules For Lenders

Bank regulators are issuing new guidance for mortgage lenders, based on concerns that lenders are not accounting for an "elevated credit risk", according to a draft of the guidance obtained by Reuters.

The proposed guidance asks lenders to weigh a "borrower's ability to repay the debt by its final maturity at the fully indexed rate, assuming a fully amortizing repayment schedule," the document states.

Regulators are concerned lenders are issuing mortgages to borrowers with little proof that they can repay their loan and do not fully understand the risk of increasing payments, the document states.

Subprime borrowers could find themselves unable to afford monthly payments after the initial "teaser" rate expires and make payments for taxes and other expenses if lenders do not hold such costs in escrow, the document states. These borrowers then face the risk of "losing their home," the document states.

The document also outlines a series of consumer protection principles that lenders should bear in mind such as providing ample information about the long-term costs of the loan and the risk of future "payment shock."

Delinquencies Mounting

Delinquencies have been increasing in the subprime sector and there have been concerns that the trend will spread to higher-quality loans and cause other ripples in the U.S. economy. Already these fears are said to have contributed to the selloff in U.S. stocks this week.

In a filing with the Securities and Exchange Commission, Countrywide said it was seeing a rise in late payments. Payments were at least 30 days late on 2.9% of prime home-equity loans serviced by the company, up from 1.6% a year earlier and 0.8% at the end of 2004, the company said.

Late payments were even more common for its subprime loans, the Calabasas, Calif., lender said. Payments were late on 19% of its subprime mortgage loans, compared with 15.2% at the end of 2005 and 11.3% at the end of 2004.

In January, Countrywide reduced its lending to people with poor credit history, as defaults rose to their highest level since at least 2002.

Separately, New Century became at least the second lender in the troubled sector to delay filing its annual report with the SEC. On Tuesday, Fremont General also said it would delay the key filing.

Earlier last month, New Century said it planned to restate its financial results for the first three quarters of last year to correct errors regarding the company's allowance for loan-repurchase losses. At that time, the Irvine, Calif., real estate investment trust delayed its fourth-quarter earnings report and said it expected to report a loss for the period.