As the AP reported today:
Banks, Sub-Prime Mortgage Firms Hurt After Disclosure Of Probe At New Century
March 6, 2007
By JOE BEL BRUNO, Associated Press NEW YORK -- Mounting concerns on Wall Street that mortgage lenders might be hurt by increasing defaults and delinquencies sent investors fleeing Monday from some of the biggest names in the industry.
The meltdown among lenders that specialize in home loans to people with weak credit, known in the industry as sub-prime lenders, again ravaged stock prices. Financial institutions ranging from Britain's HSBC Holdings PLC to sub-prime leader Countrywide Financial Corp. sank amid reports of strained portfolios as loans went bad.
The latest to rattle the markets was New Century Financial Corp., the nation's second-largest sub-prime lender. The Irvine, Calif.-based company disclosed a criminal probe into the trading of its securities, and into the lender's accounting procedures.
Already beleaguered investors were swift to react. New Century's shares lost 60 percent on Monday - wiping $532 million from its market value. Wall Street, still wobbly after last week's huge plunge, also punished the rest of an industry blamed for loosening lending standards amid an eroding housing market.
In Connecticut, Middletown-based Mortgage Lenders Network filed for bankruptcy protection last month when its sources of funding disappeared.
"We see increasing evidence that this industry is now in a downward spiral whereby each negative development fuels additional deterioration in key fundamentals, including origination volume, pricing, credit, and most importantly, funding," Stifel Nicolaus analyst Christopher Brendler said.
And that ain't all, folks. The sub-prime market re-contracts its obligations to major commercial lending entities, so if the sub-prime market really goes sour, look forward to a domino effect...which appears to have already begun as the story linked above reports:
Concerns about a meltdown at New Century include the possibility it will not be able to meet covenants with major financial backers, the company said. Sub-prime lenders enter into agreements with big banks to finance their operations. These backers require sub-prime lenders to meet minimum financial targets or face breaching loan agreements that would force banks to pull out of the deals.
This dragged down shares of some of the top U.S. banks and investment banks.
Morgan Stanley Inc., which had a 5.5 percent stake in New Century as of Dec. 31, dropped $1.33, or 2 percent, to $72.03. State Street Corp., with a 3.8 percent stake, shed 12 cents, to $64.96. Citigroup Inc., with 3.5 percent stake, traded as low as $49.56 before recovering to post a 27-cent gain, at $50.24.
Other sub-prime lenders also tumbled. Countrywide Financial fell $1.03, or 2.8 percent, to $35.99, and it is down about 14 percent since January. Novastar Financial Inc. shares plunged $2.17, or 30 percent, to $5.07, and are down about 40 percent this year.
Higher U.S. interest rates and a stagnant housing market began to take their toll on borrowers who had been relying on the rising value of real estate markets to help them refinance mortgages.
Last year, 13.5 percent of mortgages originated in the U.S. were sub-prime, according to the Mortgage Bankers Association. This is up from 2.6 percent in 2000. The subprime market accounted for about 20 percent, or $600 billion, of the $3 trillion mortgage market.
The stock market drop last week may or may not turn out to be the beginning of a huge slide--it's hard to tell in an arena that is so cyclical and in which so many factors can produce a given downturn. But the mortgage default phenomenon and its consequences, that's pretty much sure to be a problem. With a capital P.
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