New Century on bankruptcy's doorstep
NEW YORK (Reuters) - New Century Financial Corp. NEW.N, the largest independent U.S. subprime mortgage lender, said on Monday its lenders plan to halt financing, pushing the company closer to bankruptcy amid dwindling cash and $8.4 billion in obligations that could come due immediately.
New Century's struggles are part of a wider meltdown among lenders to less-creditworthy home buyers who are defaulting on mortgages in increasingly large numbers. The contagion could spread, roiling a larger section of the U.S. economy while hitting investors, such as pension funds, which bought securities backed by suspect home loans, analysts say.
If home prices remain flat this year and next, mortgage defaults could total $225 billion, creating a real risk of pulling down the broader housing market and weighing on borrowers with good credit, Lehman Brothers analysts said in a research note.
"Our expectations of defaults at about 1.5 million to 2 million units are fairly significant in a soft housing market," the analysts said recently.
The largest U.S. mortgage lender, Countrywide Financial Corp. CFC.N, warned that subprime turmoil may hurt near-term profit, sending its stock down 2.7 percent.
Soon after the market opened on Monday, the New York Stock Exchange delayed trading in New Century's shares, citing a pending news announcement. The shares had already plunged 48 percent before regular NYSE trade, dropping to $1.66. The NYSE said it is reviewing the listing status of New Century stock.
New Century declined comment on speculation that it would seek bankruptcy protection. Late on Monday, Standard & Poor's downgraded the company's credit rating to "D," calling its failure to meet its lenders' requests "tantamount to a general default."
New Century of Irvine, California said in a U.S. Securities and Exchange Commission filing on Monday that it could be forced to repurchase about $8.4 billion in loans, if lenders accelerated all of its obligations. It said it does not have sufficient liquidity to satisfy those debts.
Among its key lenders is investment bank Morgan Stanley (MS.N), which could force New Century to repurchase $2.5 billion in loans. The repurchase obligation to Morgan Stanley was the largest cited by New Century in the SEC filing.
Other lenders are Citigroup Inc. (C.N), Bank of America Corp. (BAC.N), Credit Suisse (CSGN.VX), Goldman Sachs Group Inc. (GS.N) and Ixis Real Estate Capital.
New Century said it had already received two letters from Bank of America that "purport to accelerate" repurchase obligations pegged at $600 million.
As of September 30, New Century reported $25.1 billion of assets, including $14 billion in loans held for investment, and total liabilities of $23 billion. The company reported $350 million in cash and liquidity at the end of the year, but it appears its cash has fallen below $60 million, according to the SEC filing.
New Century said it has been accused of breaching a covenant with Citigroup that required the subprime lender to maintain at least $60 million in cash.
"The value of their assets is questionable, because they probably have exposure on the subprime (asset-backed securities) they issued," said Steve Persky, principal at Dalton Investments, which manages $1 billion in assets. "... They've said their accounting can't be relied on, so it looks like New Century is toast."
Los Angeles-based Dalton had a short position in New Century shares, but closed it out, Persky said.
New Century shares, down 89 percent this month, have been hammered by a barrage of negative announcements, including that it would stop making new loans and was the target of a criminal investigation.
Over the past several weeks, subprime shares have been battered over a rising tide of late payments by borrowers. That trend continued on Monday, lopping 16.2 percent off Fremont General Corp.'s FMT.N stock, 19.1 percent off NovaStar Financial Inc. NFI.N stock, and 27.8 percent off Accredited Home Lenders Holding Co. LEND.O stock.
Comstock Homebuilding Cos. (CHCI.O), whose customers include subprime borrowers, saw its shares fall 6.3 percent.
Robert Froehlich, chief investment strategist at DWS Scudder, said a crimp in subprime lending could hurt U.S. housing demand.
"Because of the virtual collapse of mortgage lending standards over the past couple of years in the U.S., rapid growth in subprime lending has accounted for much of the incremental home purchase demand in recent years," Froehlich said. "Removing this segment will soften already slowing demand."
New Century said there was no guarantee it would get adequate financing to meet its obligations. If the company were not able to satisfy repurchase obligations, lenders could liquidate related mortgage loans.
The company would be on the hook for any difference between the liquidation amount and contractual amount of the loans.
"The company and its subsidiaries may not have sufficient resources to satisfy any such deficiency," New Century said.
That could well set the stage for a bankruptcy filing, if a white knight financing deal did not materialize.