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New Century, strapped for cash, halts home lending

March 09, 2007|E. Scott Reckard | Times Staff Writer

New Century Financial Corp., whose losses have triggered a criminal probe and torpedoed its stock, said Thursday that it had quit making home loans because Wall Street wouldn't supply enough cash for the company to fund them.

The Irvine-based company, a leader in making loans to borrowers with shaky credit, said it was trying to negotiate an end to the cash crunch but couldn't assure investors it would succeed.

One of its Wall Street partners -- it didn't say which -- has granted the company some breathing room by chipping in nearly $1 billion in new credit, New Century said.

Although that news provided some hope, it's hard to imagine New Century surviving if buyers of mortgages and mortgage-backed securities continue to back away from the sub-prime market, said analyst Matthew Howlett of investment firm Fox-Pitt, Kelton. If New Century survives, it could become part of its benefactor, which Howlett identified as Morgan Stanley & Co.

New Century bankruptcy rumors swept the market Thursday, driving the lender's stock down $1.29, or 25%, to $3.87. The company announced its lending halt and financing deal after regular trading ended. Its shares fell further after hours, to $3.75.

A surge in defaults on sub-prime loans has hammered the stocks of the industry's lenders.

New Century said Feb. 7 that it had badly miscalculated losses on soured loans and would restate earnings for the first nine months of last year. The disclosures triggered an investigation by federal prosecutors.

New Century made $51.6 billion in sub-prime loans last year, a total exceeded by just two other lenders.

New Century keeps some of the mortgage loans it makes but sells many to investors. Wall Street also provides the credit lines that the firm uses to fund and hold loans until they can be packaged for sale as bonds.

These Wall Street lenders can cut off credit if New Century fails to meet financial benchmarks such as staying profitable over any two-quarter period.

Although some of the company's 16 lenders have set aside these covenants, five have refused to waive the profitability requirement, and New Century said one demanded that it buy back $710 million in loans.

The rescuer firm identified as Morgan Stanley took over financing of the $710 million in loans. It also provided $265 million in new financing.

New Century said it would use the cash to refinance debts or pay off its obligations. But it said it remained at loggerheads with the five lenders over their margin calls -- demands that it supply an additional $70 million in capital as a cushion against future losses.

The cash squeeze was reminiscent of the beginning of the end for Ownit Mortgage Solutions, an Agoura Hills sub-prime lender that stopped funding loans late last year after Wall Street cut it off. Ownit later filed for bankruptcy protection.

Separately on Thursday, investment fund Greenlight Capital said its principal, David Einhorn, had quit New Century's board. The hedge fund is the company's second-largest stockholder. It didn't give a reason for Einhorn's departure.

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