Monday, March 12, 2007

Signs of the End of Easy Money

Okay, so maybe I was wrong when I wrote that no one is quite sure who will feel most of the pain on their balance sheets when mortgages go bad. It seems that recent events are starting to identify some of the big losers:
NEW YORK ( -- Embattled mortgage lender New Century Financial Corp. warned Monday of a series of serious financial problems that cast its future in doubt - and cast a pall over much of the nation's financial sector.

The problems at New Century, No. 2 in lending to borrowers with weak credit, could also weigh on the nation's struggling housing market - and home prices - as a major source of mortgage financing dries up. Overall, lenders in the so-called subprime sector made $640 billion in mortgage loans last year, nearly double the amount from 2003.

Irvine, Calif.-based New Century said that all of its own lenders are cutting off financing, that it has been found in default of many of its financial agreements, and that it does not have the funds necessary to meet its obligations, which could reach $8.4 billion. The company's market value has shriveled to only $178 million

...The company's filings said that several of its lenders were now demanding New Century and its subsidiaries repurchase all outstanding mortgage loans, and that its other lenders now have the right to make that demand. It said if each of them do, its total repayment obligations would be about $8.4 billion.

"The company and its subsidiaries do not have sufficient liquidity to satisfy their outstanding repurchase obligations under the company's existing financing arrangements," said the company's filing.

"We know they didn't get their $8 billion by holding a bake sale. We knew it would touch other financial institutions; now we'll see how," said Art Hogan, chief market analyst at Jefferies & Co., about the impact New Century would have on the broader financial sector.
I expect that we'll see quite a few more stories like this in coming months. For some reason, even though it happens at the peak of every business cycle that some firms do more lending than they should, and as a consequence end up running into serious financial trouble when the business cycle turns, it still happens at the peak of every business cycle. This one was no exception.

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