New Century bites finance sector
Embattled subprime lender says its lenders are cutting off financing; faces $8.4 billion in obligations.
By Chris Isidore, CNNMoney.com senior writer
March 12 2007: 10:52 AM EDT
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 Irvine, Calif.-based company, No. 2 in lending to borrowers with weak credit, 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 under current circumstances.
New Century Financial detailed a new series of financial problems in a filing with the Securities and Exchange Commission early Monday.
The subprime mortgage market is heading for a meltdown with some major lenders defaulting on current financial agreements. CNN's Gerri Willis reports. (March 10)
In addition, the company 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 delayed opening in New Century (Charts) shares early Monday and a spokeswoman for the exchange said the delay was for an announcement from the NYSE about New Century.
The company's SEC filing could shake up the entire 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 Goldman and Morgan Stanley each lost about 1 percent in early trading. Citigroup and Bank of America were narrowly higher at the open.
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.
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.
Subprime woes: How far, how wide
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