Posted by Tom Davie
NEW YORK (Dow Jones) — Several analysts agreed Monday that New Century Financial Corp., one of the nation’s largest subprime mortgage lenders, likely faces liquidation or bankruptcy following revelations that it’s under criminal investigation and in violation of debt covenants with several lenders.
"New Century is more likely to enter the death spiral we had feared, as filing delays, financial difficulties, likely restricted liquidity and regulatory/ criminal investigations could conspire to limit its options outside of bankruptcy," Merrill Lynch analysts wrote early Monday.
As troubles continue to roil the market for subprime mortgages, New Century ( NEW) disclosed late Friday that it’s technically in default with several lenders and that federal regulators have begun an investigation.
New Century shares fell 56.7%, plummeting $8.31 in premarket action, after dropping in Friday’s session as well.
Subprime mortgages are offered to homebuyers who fail to meet the strictest lending standards. Lenders specializing in such loans, like New Century, rely in part on big banks to finance their operations. Known as warehouse lenders, these institutions require that subprime lenders meet certain minimum financial targets or they otherwise have the right to end the business relationship.
Analysts at Jefferies & Co. also said the company has moved into worst-case scenario territory with its Friday filing. They cut their rating on the shares to underperform from hold.
New Century said it had received waivers for being out of compliance with debt covenants from six of 11 lenders, but deals with others remain uncertain.
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March 2 (Bloomberg) — New Century Financial Corp. disclosed a criminal probe and regulators told Fremont General Corp. to halt improper subprime loans, piling new scrutiny on two home lenders who’ve already lost about half their value this year.
Investigators are focused on New Century’s accounting and trading in its securities, the Irvine, California-based company said in a filing with the U.S. Securities and Exchange Commission today. Fremont said a regulatory order will require it to stop giving mortgages to people who can’t repay, and it plans to get out of the subprime home-loan business.
“It just shows there was a lack of principles and standards,'’ said David Hendler, an analyst at CreditSights Inc. in New York. “There was no real major guardian of conservative standards anymore, and that’s a danger to the safety of the market.'’
A surge in defaults on mortgages to the least-creditworthy borrowers has forced more than 20 lenders to close or seek buyers since the start of 2006. Earlier today, the Federal Reserve told banks to scrutinize their underwriting standards on subprime mortgages and make lending terms easier to understand.
New Century said in its filing that the U.S. attorney for the Central District of California is running a criminal inquiry “in connection with trading in the company’s securities, as well as accounting errors regarding the company’s allowance for repurchase losses.'’
SEC Seeks Meeting
SEC staff members also told New Century they want a meeting to discuss events that preceded the company’s Feb. 7 disclosure of a pending restatement to earnings, according to the filing. NYSE Regulation Inc. is reviewing trades that took place before Feb. 7 and has requested information, the company said.
New Century, the second-biggest subprime lender, said it will cooperate with the three inquiries. Laura Oberhelman, a spokeswoman for New Century, declined to comment on the filing. Earlier today, the company cut 300 jobs, or about 4 percent of its workforce, she said.
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Filed under News, Finance, Compliance, Credit, Secondary Mortgage Market, Business, Corruption, Accounting, Wholesale Lenders, Litigation, Mortgage Blog by Godfather
1 x 8 + 1 = 9
12 x 8 + 2 = 98
123 x 8 + 3 = 987
1234 x 8 + 4 = 9876
12345 x 8 + 5 = 98765
123456 x 8 + 6 = 987654
1234567 x 8 + 7 = 9876543
12345678 x 8 + 8 = 98765432
123456789 x 8 + 9 = 987654321
1 x 9 + 2 = 11
12 x 9 + 3 = 111
123 x 9 + 4 = 1111
1234 x 9 + 5 = 11111
12345 x 9 + 6 = 111111
123456 x 9 + 7 = 1111111
1234567 x 9 + 8 = 11111111
12345678 x 9 + 9 = 111111111
123456789 x 9 +10= 1111111111
9 x 9 + 7 = 88
98 x 9 + 6 = 888
987 x 9 + 5 = 8888
9876 x 9 + 4 = 88888
98765 x 9 + 3 = 888888
987654 x 9 + 2 = 8888888
9876543 x 9 + 1 = 88888888
98765432 x 9 + 0 = 888888888
Brilliant, isn’t it?
And finally, take a look at this symmetry:
1 x 1 = 1
11 x 11 = 121
111 x 111 = 12321
1111 x 1111 = 1234321
11111 x 11111 = 123454321
111111 x 111111 = 12345654321
1111111 x 1111111 = 1234567654321
11111111 x 11111111 = 123456787654321
111111111 x 111111111 = 12345678987654321
WHEN THE ENRON CORPORATION scandal broke in late 2001, the mortgage banking industry braced for a problem. Enron, it seemed, had used special-purpose vehicles (SPVs) to achieve off-balance-sheet treatment. So do many mortgage companies. Would the regulators rush in to stop the use of SPVs by honest companies for legitimate purposes, or would they understand the difference between legitimate and abusive SPVs? Would the mortgage industry’s honorable participants lose this valuable tool of risk management because of what the Enron gang did?
To their credit, the Securities and Exchange Commission (SEC) and the Federal Accounting Standards Board (FASB) took the time to evaluate the SPV terrain before treading in with revised rules. And the revisions that have been promulgated and proposed to date do not run roughshod over this terrain. FASB Interpretation No. 46R (dealing with which entities must be consolidated for financial reporting) and the proposed revisions to FASB Statement 140 (tinkering with the requirements for treatment as a qualified special-purpose entity), both issued in 2003, reflect a nuanced understanding that there are legitimate transactions that use SPVs and that that should be accounted for as sales, moving assets off-balance-sheet. If FASB Interpretation No. 46R and the FAS 140 proposal move the goal posts, it is as much a response to changes in market practice as it is to changed sensibilities post-Enron.
Yet there are now two other phenomena–also accounting-related, and also an outgrowth of the Enron after-math–that have the potential to be more insidious for financial managers at mortgage companies.
You’re on your own
The first problem derives from the Sarbanes-Oxley Act of mid-2002, and the resulting changes in the accounting firms’ view of their own roles. That is an unwillingness, or inability, on the part of the accounting firm that audits a company to provide advisory services about structuring transactions. Where audit firms used to seek out opportunities to serve as consultants, helping to design transactions for intended accounting treatment, those firms now are wary of being too close to the company during the planning stages of a transaction.
At a Dec. 1, 2004, meeting of the FASB’s Small Business Advisory Committee, the chief executive officer of a top accounting firm himself is reported to have complained about auditors’ "inability to give answers." He blamed pressure from the SEC and the Public Accounting Oversight Board, and recognized that there’s now a sort of "Catch-22" situation, in which the fallout is the ability to conduct complicated transactions at all. Some audit firms are going so far as to say, in effect, "Please go to our competitors for …
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