Market Scan
More Bad News From New Century
Joshua Lipton, 03.12.07, 4:20 PM ET
New Century Financial kicked off the week the same way it ended the last one: with bad news for Wall Street.
The company, the second-largest subprime mortgage lender in America, told investors on Monday morning that all of its lenders had stopped short-term funding or will do so soon. The Irvine, California-based company said it would require more than $8 billion if it was put in position where it was required to repurchase all its outstanding mortgage loans, but New Century said it doesn't have the liquidity to meet that financial obligation.
The company's shares were suspended from trading on Monday.
On Friday, shares of <ORG>New Century<ORGID idsrc="nyse" value="NEW"></ORGID></ORG> sank more than 17%, a day after the lender said it would stop accepting loan applications from prospective borrowers because it no longer has money to lend. (See: "No More Loans For New Century").
Stifel Nicolaus equity analyst Christopher Brendler was concerned for New Century's future. "They are in huge trouble," Brendler said. "I'm surprised that they haven't already applied for bankruptcy protection."
Like other subprime lenders, New Century has been suffering from rising default.
Brendler said it will be tough for the company to track down a buyer because there is such concern now for the future of the subprime sector. But there could be one kind of investor willing to ride to New Century's rescue: a cash-rich private equity firm.
"The price could be right," Brendler said. "So what you might see is a private-equity player coming in, which could hold it for six months and then make some money on it."
What other subprime lenders could be in trouble? Brendler said to watch out for the independents, like Novastar and Accredited Home Lenders, which he downgraded to "sell."
"The independents don't have the balance sheet to fall back on," Brendler said. "All of their funding comes form Wall Street. And Wall Street is cutting off that funding."
In afternoon trading, shares of <ORG>Novastar Financial<ORGID idsrc="nyse" value="NFI"></ORGID></ORG> sank 12.2%, or 64 cents, to $4.60 while shares of <ORG>Accredited Home Lenders<ORGID idsrc="nasdaq" value="LEND"></ORGID></ORG> plunged 22.3%, or $3.52, to $12.26.
Subprime lenders tend to be especially active in markets like California and Florida, Brendler said, where homes are relatively expensive.
"They are more active in places like Florida and California because of the affordability issues," the analyst noted. "The market is more expensive in those areas so you need to become more creative with your financing."
Separately, Wachovia analyst Jim Shanahan downgraded his rating on <ORG>Countrywide Financial Corporation<ORGID idsrc="nyse" value="CFC"></ORGID></ORG>to "underperform" from "market perform."
In a client note, Shanahan said that earnings for the company are likely to be under pressure throughout the first half of 2007, primarily due to higher credit costs and lower production margins.
"While the origination and sale of subprime mortgages represents only a small part of the CFC story," the analyst wrote, "we are more concerned that the weakness has spread to other sectors of the residential mortgage market."
Shares of Countrywide slipped 2.6%, or 92 cents, to $35.18.
The Associated Press contributed to this article.
