The meltdown in the business of high-cost mortgages to high-risk borrowers accelerated Friday as one major lender revealed that it was under federal criminal investigation and a second said it would quit the business after regulators accused it of making too many loans likely to end in foreclosure.
As bankruptcies, forced sales, huge loan losses and tumbling stock prices have roiled this sub-prime lending industry, fears that its woes would infect the housing markets and the broader economy contributed to this week's huge sell-off on Wall Street.
Federal regulators, meantime, on Friday proposed stricter guidelines for government-insured banks and thrifts that make such loans, to ensure that they go only to people who can afford them for the long haul.
"It's about time, don't you think?" Edward Leamer, director of economic forecasts at UCLA, said of the proposed rules.
Leamer expressed concern that the sub-prime sector's troubles could spread to the prime loan market for more creditworthy borrowers. What's more, the shrinking availability of sub-prime mortgages and rising defaults on existing loans will contribute to a likely decline in housing prices for the immediate future, he said.
The criminal investigation disclosed Friday focuses on how New Century Financial Corp. of Irvine accounted for losses when it was forced to buy back soured loans last year, and whether its executives profited by selling stock while misleading other shareholders.
The company disclosed the probe after the close of regular trading, during which its shares fell $1.20 to $14.65. Shares plummeted nearly 25% in after-hours trading to $11.02.
New Century, the largest independent sub-prime lender, shocked Wall Street last month when it said that it would restate results for the last year, erasing $268 million in profit it had reported.
Shareholder lawsuits accuse the company's officers and directors of selling stock for more than $26 million at falsely inflated levels. A company spokeswoman had said Thursday that it would defend the civil suits vigorously. She declined to elaborate on a company filing with the Securities and Exchange Commission that described the U.S. attorney's office criminal probe of its accounting and trading practices. The company said its own audit committee and the SEC also were investigating.
Federal regulators already have leveled civil accusations against the No. 2 independent sub-prime lender, Fremont General Corp. of Santa Monica.
