New Century sheds 70 percent

NEW YORK Mon Mar 5, 2007 3:29pm EST

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NEW YORK (Reuters) - New Century Financial Inc. NEW.N shares fell more than 70 percent on Monday amid worries it might go bankrupt, as mounting fears over defaults triggered a broad sell-off in mortgage lenders.

Subprime lenders, which make loans to people with poor credit histories, suffered the biggest declines. The meltdown spread to Countrywide Financial Corp. CFC.N, the largest mortgage lender, whose shares fell amid fears that even homeowners with good credit histories will miss more payments.

Monday's slide came after Irvine, California-based New Century, the largest independent U.S. subprime lender, said late on Friday that federal prosecutors and securities regulators are examining accounting errors and stock trading.

New Century, a real estate investment trust, said that, if it doesn't get relief from its own lenders, its auditor may find "substantial doubt" about its survival prospects.

"We think there is further downside risk, possibly to $0," wrote Merrill Lynch & Co. analyst Kenneth Bruce. "Bankruptcy seems a likely course of action."

New Century did not immediately return a call for comment. Four other big subprime lenders -- Fremont General Corp. FMT.N, Accredited Home Lenders Holding Co. LEND.O, Impac Mortgage Holdings Inc. (IMH.N) and NovaStar Financial Inc. NFI.N -- each fell more than 25 percent.

Subprime lenders are struggling because of slowing home price appreciation and rising default rates. Lax underwriting standards led to a surge of "early payment" defaults, where new borrowers miss some of their first payments. Many subprime lenders are being forced to buy back loans at a loss. Several quit the business or went bankrupt in the last three months.

HSBC Holdings Plc (HSBA.L)HBC.N, Europe's largest bank, said on Monday that subprime weakness helped push North American bad debts up 38 percent last year to $6.8 billion.

FREMONT FALLS

New Century said it is not in compliance with 16 financing agreements totaling $17.4 billion because it is filing its annual report late. It said just six of 11 lenders have waived a requirement that it be profitable for two straight quarters.

Probes into New Century are looking at trades before February 7, when the REIT projected a fourth-quarter loss and announced a restatement. Its shares fell 36.2 percent the next day.

New Century shares fell $10.64, or 72.6 percent, to $4.01 in afternoon trading. The stock is down more than 90 percent from its $66.95 peak in December 2004.

The shares of Fremont, the second-largest independent subprime lender, fell $2.83, or 32.5 percent, to $5.88 in afternoon trading.

The Santa Monica, California lender on Friday said it may sell its subprime business. It said it stopped making subprime loans, and on Monday morning it put "many" of its roughly 2,400 residential mortgage workers on paid leave. Fitch Ratings and Moody's Investors Service downgraded its debt.

Among other subprime lenders, Accredited fell $6.75, or 31.1 percent, to $15.05; Impac fell $1.76, or 29.5 percent, to $4.20, and NovaStar fell $2.91, or 40.2 percent, to $4.33.

COUNTRYWIDE DOWNGRADED

Delinquencies and defaults are also increasing among "prime" and "Alt-A" borrowers, who have less credit risk.

The shares of Calabasas, California-based Countrywide, which is also the fourth-largest subprime lender, fell after Lehman Brothers Inc. analyst Bruce Harting downgraded the firm to "equal weight" from "overweight" and cut the "prime" mortgage sector to "neutral" from "positive."

"The rapid high-profile demise of the pure-play subprime lending industry has caused major, real dislocations in the market that should negatively impact the prime-oriented lenders' earnings over the course of 2007 at the very least," Harting wrote.

Countrywide last week said borrowers are making payments late on 19 percent of the subprime loans it services.

Washington Mutual Inc. (WM.N) shares fell after Credit Suisse analyst Moshe Orenbuch said the largest U.S. savings and loan may need to boost reserves by $300 million for subprime losses.

Alan Gulick, a Washington Mutual spokesman, said the thrift does not comment on analyst reports, or provide mid-quarter updates on reserves.

In afternoon trading, Countrywide fell $1.44, or 3.9 percent, to $35.58, and Washington Mutual fell $1.24, or 2.9 percent, to $41.34. The KBW Mortgage Finance Index .MFX fell 3.1 percent.

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