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US sub-prime giant is brought low

The New York Stock Exchange delisted ailing mortgage giant New Century Financial Corporation, the second largest funder of sub-prime loans in the US, last week.

As MortgageStrategy went to press, investment banking analysts were predicting that the non-depository real estate investment trust would file for bankruptcy protection shortly.

An analyst at Merrill Lynch wrote in one research note that “the next disclosure is likely a bankruptcy filing”.

New Century’s shares last traded at about $1.30 compared with a high of $52. Billions of dollars in investor money has been lost and shareholders are already suing the company.

The non-depository REIT is the subject of a criminal probe into its accounting and the Securities and Exchange Commission is also investigating the company.

Over the past few months it has been the subject of margin calls from warehouse lenders as well as buyback requests from secondary investors.

Late last week, most of its warehouse lenders stopped financing the company, which has $40bn in servicing rights on its books.

Meanwhile, another top ranked sub-prime lender, Accredited Home Lenders, revealed last week that it has been hit with millions of dollars in margin calls and is exploring “various strategic options”.

Early last week its stock had been decimated by the news, plummeting 54% to a 52-week low of $5.19. Its 52-week high is $60. But at the time of going to press, its stock had bounced back slightly to $9.30.

Almost 15% of the sub-prime lending industry has been wiped out over the past year and at least 20% more is at risk because it is losing money or facing margin calls.

US sub-prime loans production plunged by 32% in the fourth quarter compared with the same period a year earlier. US A- to D lenders originated $143bn in mortgages compared with $211bn in Q4 2005.

From the beginning to the end of 2006 the sector originated $665bn in sub-prime loans, or 20.4% of all mortgages funded in the U.S. In 2005 sub-prime accounted for 24.1%.


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