New Century Stops Making Loans, Bankruptcy Appears More Likely

New Century Financial shares fell to an eight-year low on Friday, after analysts said the largest independent U.S. subprime mortgage lender, which faces a criminal probe and has stopped making new loans, may soon seek bankruptcy protection.

Meanwhile, investors continued to sell off shares of other subprime lenders companies, while analysts search for signs of further tightening of lending practices and distress in the subprime market. Subprime lenders make loans to people with poor credit histories, and have suffered from rising defaults. More than 20 have quit lending or gone bankrupt in the past year.

The decline in New Century shares came after the company said it stopped taking loan applications, lined up $265 million of funding secured by its mortgage loan portfolio and other assets, and arranged to refinance $710 million of loans. Morgan Stanley provided the financing, people familiar with the matter said.

New Century said it has failed so far to obtain relief from several lenders. Analysts said the Irvine, California-based real estate investment trust, having pledged most of its assets as collateral, has little left to offer creditors. The company also faces a federal criminal probe into its accounting and trading in its securities, and shareholder lawsuits.

"We feel it is likely that New Century just used up its last option to avoid collapse, and believe a bankruptcy filing or liquidation may well be announced in the next week or two," wrote JPMorgan analyst Andrew Wessel.

Merrill Lynch analyst Kenneth Bruce added that while the financing might provide New Century a "temporary lifeline," the REIT faces "likely liquidation in bankruptcy."

Bruce and Wessel wrote that a bankruptcy filing "seems imminent."

The company is the largest independent U.S. subprime lender, and said it made $59.8 billion of mortgage loans in 2006.

Fremont Can't Estimate Exit Costs
Earlier this week, another large subprime lender, Fremont General , of Santa Monica, Calif., stopped making loans, and put many of its 2,400 subprime workers on paid leave. It is trying to sell its subprime unit.

On Friday, Fremont said it is unable to estimate the cost of selling its subprime mortgage loan business, adding there is no guarantee of finding a buyer for the troubled unit.

Fremont disclosed last week that it planned to leave the subprime mortgage business and agreed to a cease-and-desist order with federal regulators related to improper lending practices.

"No agreement has yet been reached regarding the sale of this business and there is no assurance that the company will be able to enter into any transaction," Fremont General said in a Securities and Exchange Commission filing Friday.

Federal bank regulators on Wednesday ordered Fremont General to tighten its loan policies to avoid future losses from defaults by borrowers, the first move by federal regulators against an institution related to the recent turmoil in the market for subprime mortgages.

The Federal Deposit Insurance found the bank was making subprime mortgage loans without having the proper criteria for assessing borrowers' ability to repay, and that it was marketing and making the loans "in a way that substantially increased the likelihood of borrower default or other loss to the bank."

Home-mortgage delinquencies and foreclosures are spiking, especially for people who took out subprime mortgages during the housing boom that waned in the second half of 2005.

Fremont General's battered stock rebounded earlier this week after the company told employees that its subprime mortgage business had drawn interest from five or six potential buyers.

GE Mortgage Unit Layoffs 20% Of Workforce
Meanwhile, General Electric's WMC Mortgage unit said it is laying off 460 staffers across the U.S., representing about 20% of its workforce.

The mortgage lender has also stopped writing new loans to people who do not make down payments, spokeswoman Brandie Young said on Friday.

"We've realigned our resources to be more consistent with today's market," Young said.

General Electric is the parent of NBC Universal and CNBC.

Independents Most At Risk

One option New Century could have to avoid bankruptcy is to find itself a buyer.

Chris Brendler, a Stifel Nicolaus analyst, wrote that New Century's value if it were liquidated could be negative $63 million, and "in a 'fire sale' situation, likely lower."

Still, he said the REIT "is more valuable as an acquisition candidate given its large origination and servicing platforms."

In an interview on CNBC, Brendler said he expects private-equity to be active in the sector over the next six months.

The smaller, independent lenders are most at risk in the currently environment, Brendler said.

"They don’t have any other business lines that they can fall back on, and most importantly their funding is more precarious," Brendler said. "A name like Accredited Home Lenders, which I think of the independents is most poised to survive given its cash and liquidity as well as its credit quality, is still at risk here. And quite frankly, it is a difficult situation for any of the independents."

This was reflected in the Friday's trading as shares of Accredited Home Lenders Holdings and NovaStar Financial sold off again Friday, adding to losses earlier in the week.

According to Brendler, the more diversified companies such as Countrywide Financial and Wells Fargo have an advantage in this climate.