Anyone that was paying attention, knew that this was coming but the pace of the unraveling is accelerating at breakneck speeds!
New Century says it faces criminal probe
Subprime-mortgage lender warns it will likely breach lending covenant
By John Letzing & Alistair Barr, MarketWatch
Last Update: 9:04 PM ET Mar 2, 2007
SAN FRANCISCO (MarketWatch) -- New Century Financial Corp. said late Friday that it's facing a federal criminal probe and will likely breach a major lending covenant with its financial backers, bringing into question the survival of the second-largest U.S. subprime-mortgage lender.
The U.S. Attorney's Office for the Central District of California is conducting a federal criminal inquiry into trading in New Century securities as well as accounting errors, the company wrote in a regulatory filing late Friday.
The Securities and Exchange Commission also is looking into the company, as is the regulatory arm of the New York Stock Exchange, New Century disclosed. The company added that it is complying with all three inquiries.
Shares of New Century (NEW: 14.65, -1.20, -7.6% ) were down almost 25% in after-hours trading Friday at about $11, after falling more than 7% in the regular session to $14.65.
The mortgage lender said it expects that it won't report at least $1 of net income for the two quarters ended Dec. 31, as stipulated in covenants with its lenders.
New Century did say that it has received waivers from six of 11 of these lenders, though it has not received waivers from the remaining five. Some of these waivers will take effect when New Century gets similar waivers from the other lenders that have the two-quarter net income covenant, according to the company.
Subprime mortgages are offered to home buyers who fail to meet the strictest lending standards. Lenders specializing in such loans, like New Century, rely in part on big banks known as warehouse lenders to finance their operations. These backers require that subprime lenders meet certain minimum financial targets; otherwise, they have the right to end the business relationship.
'If New Century's lenders do not grant the requested waivers, the company is likely to be forced to sell or shut down.'
— Zack Gast, CFRA
"Subprime lenders without deposits depend on their warehouse lines," said Zack Gast, a financial sector analyst at the Center for Financial Research and Analysis, a research firm. "If New Century's lenders do not grant the requested waivers, the company is likely to be forced to sell or shut down."
Indeed, New Century warned that if it can't get waivers or covenant amendments from enough of its financial backers, the company's auditor, KPMG, will conclude "that substantial doubt exists as to the company's ability to continue as a going concern."
New Century slashed its forecast for loan production earlier this year because early-payment defaults and loan repurchases have led to tighter underwriting guidelines. The company also said that it has to restate most of its results from 2006 because of mistakes in how it accounted for losses on repurchased loans.
Companies like New Century that specialize in subprime loans have suffered as housing prices stopped rising and interest rates climbed from record lows. See full story.
