New Century Leads Subprime Lender Selloff as its Shares Plummet 70%

Shares of subprime lender New Century Financial Corp. fell nearly 70% yesterday, their worst drop ever, leading a widespread decline in the share prices of subprime mortgage companies. New Century's disclosure that it was the subject of a criminal probe into its accounting practices as well as into the trading of its securities sent shares down $10.09 to just $4.56 (the shares have traded for as much as $51.97 in the last 52 weeks). Other subprime lenders to tumble include Fremont General Corp. (-32%), Accredited Home Lenders Holding Co. (-26%) and NovaStar Financial Inc. (-41%). Additionally, less risky lenders like Countrywide Financial Corp. took a hit, falling 4.9% after Lehman Brothers analyst Bruce Harting cut his outlook on shares to 'equal weight' from 'overweight.' J.P. Morgan analyst Andrew Wessel believes New Century will likely declare bankruptcy soon saying the company's "only hope of avoiding insolvency is to find a larger partner to provide capital in return for majority ownership." Reuters reports bonds backed by New Century loans, which use credit-default swaps as a gauge, escaped yesterday's selloff relatively unscathed. Meanwhile, the Wall Street Journal is reporting that the sharp drop has led several investment firms to prepare to increase their bets on a recovery in subprime lenders' share prices.

Sources: Bloomberg, Business Week, Reuters, Wall Street Journal
Commentary: Stifel: Subprime Mortage Sector in 'Downward Spiral' • Asset-Backed Insecurities: Containing the Subprime Mortgage Collapse • Crisis in the Subprime Market: The First Step is Admitting You Have a Problem
Stocks/ETFs to watch: New Century Financial (NEW), Countrywide Financial Corp. (CFC), Accredited Home Lenders Holding Co. (LEND), Novastar Financial Inc. (NFI), Fremont General Corp. (FMT)Competitors: Fannie Mae (FNM), Freddie Mac (FRE), HSBC Holdings (HBC), Wells-Fargo (WFC). ETFs: Vanguard REIT ETF (VNQ)

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