Big banks and mortgage companies are putting the squeeze on subprime loan originators as defaults continue to mount. During 2005 and 2006, prior to the onset of the decline in the housing sector, banks enthusiastically purchased subprime loans -- with repurchase agreements attached. Those agreements oblige the originator to buy back a loan in the event that the borrower fails to pay. As more and more banks demand repurchases, more and more originators are filing for bankruptcy protection. Subprime lender New Century Financial said yesterday it has been hit by a wave of defaults and might owe its creditors a combined total of $8.4 billion for mortgage repurchases. If all its lenders demand repurchases, the company will have to enter Chapter 11. Creditor Morgan Stanley gave New Century a $265 million advance last week but also said it was discontinuing further financing. HSBC is making its case for repayment at bankruptcy hearings across the country. HSBC Finance Director Douglas Flint: "It's proving quite difficult in the sense that many of the parties...don't have the wherewithal" to buy back the loans.
Sources: Wall Street Journal
Commentary: Major Banks Try to Offload Subprime Portfolios • New Century Halts New Loans; Einhorn Resigns • New Century Leads Subprime Lender Selloff as its Shares Plummet 70% • HSBC, Mortgage REITs, New Century and Novastar
Stocks/ETFs to watch: HSBC Holdings plc [ADR] (HBC), Morgan Stanley (MS), Citigroup Inc. (C), Goldman Sachs Group Inc. (GS), Credit Suisse Group Inc. [ADR] (CS), Bank of America Corp. (BAC), New Century Financial Corp. (NEW), Countrywide Financial Corp. (CFC). ETFs: BLDRS Europe 100 ADR Index (ADRU), WisdomTree High-Yielding Equity (DHS), KBW Capital Markets ETF (KCE)
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