Subprime tsunami

While a lot of small and mid-sized subprime lenders have gone down in flames or been picked off by competitors in recent weeks, the announcement by New Century Financial Corp. today that it has stopped funding loans seems to be evidence that something serious is afoot.   

New Century has relied on 15 short-term repurchase agreements with creditors for more than $17 billion in borrowing capacity to fund loans that are pooled into securities and sold to Wall Street investors.

What's happening now, according to the company's SEC filings, is that New Century's creditors are demanding it buy back bad loans that have gone into early payment default. In this margin call environment, New Century can't get the credit it needs to make more loans.

New Century said last month it would have to restate results for most of 2006 because it underestimated what its losses would be for the bad loans it was forced to repurchase. Now there's a criminal investigation into the matter and at least 10 lawsuits seeking to represent aggrieved shareholders.

Mortgage lending used to be something that banks did with their customers' savings. The process of securitization -- pioneered by government-sponsored entities Fannie Mae and Freddie Mac -- helped make more money available for such purposes.

The flow of global investment capital into securities likes those New Century relied on to fund its loans may have helped fuel the most recent housing boom, and if investors are rushing for the exits that could prolong the downturn.

The tightening of credit could have a more serious impact on housing markets than foreclosures themselves. The subject is explored in more depth in a special report, Subprime tsunami, that's on the Inman News site today. (The story's only available to members for now, but will make its way into the news feed).
--Matt Carter, Inman News

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