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NEW YORK - High-risk mortgage lender New Century filed for bankruptcy and fired more than half its work force yesterday as signs emerged the US housing crisis is spreading into better-quality home loans.
Rising defaults on variable-rate mortgages have pinched lenders who made loans to borrowers with spotty
credit histories, leaving many in financial trouble.
Until now, such issues had been mostly contained to subprime, the riskiest category of mortgages.
But now lenders in a class of loans known as Alt-As, which sit in a grey area between risk and safety, are also ringing alarm bells.
"We are only at the very beginning of the problems facing subprime," said Brad Hintz, analyst at Sanford C. Bernstein. "This liquidity crisis is continuing in the marketplace."
M&T Bank Corp, whose largest outside shareholder is Warren Buffett's Berkshire Hathaway, said on Friday that its mortgage investments would hurt first-quarter profit. The company also said the value of its Alt-A portfolio had fallen by US$12 million ($17 million) in just three months.
Impac Mortgage Holdings, another Alt-A specialist that had previously complained about being unfairly lumped in with subprime lenders, has admitted it, too, is feeling the pain.
The company slashed its quarterly dividend by 60 per cent last week, although its CEO maintained the firm should have enough cash to get through the housing downturn.
Financial stocks fell after the New Century filing, which included the immediate firing of 3200 employees. But investors were even more concerned about the possibility of a wider credit crunch.
Echoing concerns expressed by other credit agencies, Fitch Ratings said in a report that the ripple effect of subprime might also have an impact on car loans and credit cards.
"Fitch will be monitoring the subprime credit card and auto sectors closely to see how losses and late-stage delinquencies on subprime mortgages may affect performance," the agency said.
In a testament to the massive erosion of value in high-risk mortgages, Barclays said yesterday it had paid US$76 million for subprime lender EquiFirst Corp, about two-thirds less than its original offer.
It blamed the lower price on slowing housing prices and higher delinquencies.
New Century, the biggest subprime mortgage company to go bankrupt, made 27.2 per cent of all of its loans last year, when the market for lending to people with poor credit began collapsing.
In court papers filed with its Chapter 11 bankruptcy petition, New Century, which is based in Irvine, California, said it originated or bought US$60 billion worth of mortgage loans last year, out of US$220 billion it has written or purchased since the company was formed in 1995.
Late payments on US subprime mortgages reached a four-year high in last year's final quarter, the Mortgage Bankers Association reported. In the past 12 months, at least 30 home lenders have halted operations or sought buyers. At least five have filed for bankruptcy protection since November.
- REUTERS, BLOOMBERG