Delinquencies and foreclosures have already led 31 subprime companies down the toilet. And it’ll soon be 32, should things get any worse for the likes of New Century Financial (NEW: NYSE).

New Century Financial traded above $30 just weeks ago. It now trades under $6. Not only did NEW just announce it was the target of a Federal criminal inquiry into the accounting and trading in the stock, it warned that it will likely breach a lending covenant with financial backers. Plus, there are fears that auditors could warn of substantial doubt over the company’s ability to stay in business much longer.

We’re not talking about a small company here. New Century is one of the biggest subprime lenders in the United States. And it’s now facing possible liquidation or bankruptcy.

Zack Gast, a financial sector analyst at the Center for Financial Research and Analysis, as quoted by MarketWatch.com says, “If New Century’s lenders do not grant the requested waivers, the company is likely to be forced to sell or shut down.”

Investing in Subprime Lenders: Are We There Yet?

We’re still not nearing a housing bottom, or an improving lending market. Ask a company like New Century Financial, Fremont General (FMT: NYSE) or the 30 other doomed subprime lenders.

Ask Lennar (LEN: NYSE), KB Home (KBH: NYSE) and DR Horton (DHI: NYSE), who still don’t see this mythical housing bottom.

Ask JP Morgan’s CEO, James Dimon, who has said, “Mortgages are the one area of subprime lending where ‘we really see something taking place that looks like a recession….’”

Or read the most recent Center for Responsible Housing report, which projects that “2.2 million borrowers will lose their homes and up to $164 billion of wealth in the process.”

Indeed, rising loan defaults and foreclosures are on the rise and are likely to continue crushing subprime lenders for this reason: “Subprime lenders are particularly susceptible to the current housing-market downturn because they often deal with borrowers who stretch financially to buy homes. More than half of these borrowers, for instance, take out adjustable mortgages, whose interest rates are often lower than those of fixed-rate mortgages. But adjustable rates change, based on market conditions. In addition, many subprime lenders are not obligated to follow the tougher regulations that apply to commercial banks,” according to United Press International.

“The subprime market will remain under pressure for at least the next half year,” according to Edwin Groshans, vice president of mortgage finance for Fox-Pitt Kelton, as referred to by Forbes.com. “We expected to see $30 billion of losses in the subprime mortgage space this year. And it’s coming in faster than expected.”

Good Investing,
Ian Cooper
March 6, 2007

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