Analysts are speculating that New Century Financial, the beleaguered subprime mortgage lender, will shortly file for Chapter 11 bankruptcy protection. Their evidence is the disclosure that Barclays and Morgan Stanley, two of New Century's main lenders, are repossessing loans that had been used to secure financing. New Century will hand over the loans it made with Barclays credit lines; in exchange, it will be forgiven the obligation to buy back $900 million of those loans. Morgan Stanley will auction off $2.48 billion of New Century subprime mortgages that constitute the collateral behind New Century's $2.5 billion credit line from the investment bank. Stifel Nicolaus analyst Christopher Brendler: Both banks "felt so uncomfortable with" New Century's ability to repay them that "they decided to just take the loans and auction them off themselves...I'm surprised that New Century hasn't filed for bankruptcy already." All New Century's lenders are pulling their financing, and it has received default notices from Barclays, Bank of America, Citigroup, Credit Suisse, Goldman Sachs and Morgan Stanley, among others. If all its lenders demand mortgage repurchases simultaneously, New Century could owe $8.4 billion, an impossible sum that would force the company's liquidation.
Sources: Wall Street Journal
Commentary: California, Fannie Mae Sever Ties With New Century • New Century Halts New Loans; Einhorn Resigns
Stocks/ETFs to watch: New Century Financial Corp. (PINK:NEWC.PK), Accredited Home Lenders (LEND), Novastar Financial (NFI), Fremont General (FMT), Fieldstone (FICC)
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