This is huge.
By James R. Hagerty and Gregory Zuckerman and Ruth Simon
From The Wall Street Journal Online
In the clearest sign yet of how rapidly funding is vanishing for the risky loans that helped fuel the housing boom, nervous creditors forced New Century Financial Corp., the nation's second-largest subprime mortgage lender, to stop making new loans.
The Irvine, Calif., company, which has been plagued by rising defaults on its subprime mortgage loans -- home loans made to borrowers with weak credit -- said it has been in talks with its creditors to "identify ways to address their concerns" and obtain more funds in the near term. But it added that "there can be no assurance that these efforts will succeed."
Yesterday, people close to the matter said New Century got fresh financing from one of its biggest creditors, investment bank Morgan Stanley. Even so, the company's mounting woes intensified speculation that it may be forced to file for protection from creditors under Chapter 11 of the federal Bankruptcy Code unless it can find a suitor or sell assets soon.
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Who gets hurt when subprime loans go bad.A former New Century executive said the company's best option might be to try to sell its servicing business, which collects payments and handles other administrative duties on loans outstanding, and its mortgage portfolio. As of Sept. 30, the company reported that its portfolio totaled $14 billion.
A New Century spokeswoman declined to comment on the possibility of a bankruptcy filing or asset sales.
In 4 p.m. composite trading on the New York Stock Exchange, New Century's shares dropped $1.29, or 25%, to $3.87, giving the company a market value of about $215 million. The stock has fallen 73% since last Friday, when it closed at $14.65.
Director Steps Down
One of New Century's outside directors also stepped down. Late Wednesday, hedge-fund manager David Einhorn resigned the board seat he won in March after tangling with company management over strategy. Mr. Einhorn is president of Greenlight Capital LLC, New York, which holds a 6.3% stake in New Century. At the current share price, that stake is valued at about $14 million, down from more than $160 million in mid-2006. Mr. Einhorn declined to comment.
New Century's fate now is in the hands of its chief creditors, which along with Morgan Stanley include Goldman Sachs Group Inc., Barclays PLC and Credit Suisse Group.
Investment banks like these provide financing for lenders like New Century to make loans, then buy those loans and package them into securities for sale to investors world-wide.
Portfolio of Loans
New Century said one of its lenders, which it didn't identify, has provided it with $265 million in financing secured by the company's portfolio of loans held as an investment. That lender also provided $710 million of financing for mortgage loans previously financed by another lender, which exercised its right to withdraw that financing, New Century said.
People familiar with the matter cited Citigroup as the company that withdrew funding and Morgan Stanley as the provider of new financing. A Citigroup spokesman declined to comment.
Wall Street firms and big banks stand to gain in some ways from the troubles of subprime lenders, even as they take some hits on loans and securities. The turmoil is reducing the number of competitors in what was until recently a very lucrative business. Many of the firms make subprime loans themselves, often through mortgage brokers.
Until a few weeks ago, the mortgage industry was awash in cash from investors searching for higher yields. That made it easy for borrowers to get a mortgage -- even if they had bad credit or couldn't document their income or provide a down payment.
Now, rising defaults have soured investors' appetite for securities backed by such mortgages, making it hard for subprime lenders to sell their loans and raise cash to make new ones. The industry's troubles are quickly and sharply cutting the availability of credit for borrowers with weak credit.
The latest disclosures at New Century come as two other large subprime lenders, Novastar Financial Inc. and H&R Block Inc.'s Option One, announced this week they would no longer be offering certain "piggyback" products, a pair of loans that together finance 100% of a home's cost.
A third lender, Fremont General Corp., stopped making subprime home loans earlier this week after announcing its exit from the business last Friday under pressure from regulators.
While several dozen lenders have shut their doors, others are quickly upping the minimum credit scores they require for various types of loans.
"The last couple of weeks have been almost catastrophic," said Armand Cosenza, a mortgage broker in Cleveland. Mr. Cosenza said he turned down eight loan applicants on Wednesday because he couldn't get them a mortgage. At least five of them would have qualified for a loan six months ago, he said.
George Hanzimanolis, a mortgage broker in Tannersville, Pa., says his office has turned away 30 to 40 people in the past week because of tighter lending standards. "It's scary how quickly these very large lenders are just...imploding," he says. "The situation will get uglier before it gets better."
Many economists say that the subprime crunch won't cause big problems for the U.S. economy. But economists at Goldman Sachs in New York said in a report this week that the tightening of subprime credit could cut annual demand for new homes by 200,000 units, or about a fifth of new-home sales last year.
"This credit tightening potentially will create another leg down in housing," said Ivy Zelman, a Cleveland-based housing analyst for Credit Suisse Group.
Some of the Wall Street firms that have financed New Century's lending have expressed confidence that its troubles won't have a major impact on them. Earlier this week, Barclays, which has given a $1 billion line of credit to New Century, said: "The vast majority of our exposure to all U.S. subprime lenders is fully collateralized. We do not anticipate material losses to arise from our exposure to the sector."
As of Sept. 30, Morgan Stanley had extended a $1.5 billion credit line to New Century. A person close to the firm said it believes that any losses from New Century won't be material.
Morgan Stanley, Goldman Sachs and Credit Suisse declined to comment on details of their exposure to New Century.
Rare Black Eye
For Mr. Einhorn, the hedge-fund manager, the New Century debacle is a rare black eye. As of yesterday, his Greenlight Capital's 6.3% stake made it New Century's second-largest shareholder, after Hotchkis & Wiley Capital Management LLC, Los Angeles, with a 7.1% stake, according to Thomson Financial. A Hotchkis spokesman declined to comment.
Greenlight Capital was down 2.8% through the end of February, according to a letter sent to investors, with the bulk of those losses due to New Century. Last year, the fund scored gains of 25%.
New Century, second in its share of the subprime market only to Countrywide Financial Corp., disclosed last Friday that it is subject to a federal criminal inquiry into trading in its securities and accounting. The company also said it expects to report pretax losses for the fourth quarter and full year but couldn't yet quantify them, pending an investigation by the audit committee of its board into accounting problems.
New Century, which last year made loans totaling $59.8 billion, has about 6,700 employees after laying off about 300 earlier this month.
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