Major Home Mortgage Lender Stops Accepting Applications

New Century Financial Corp. said Thursday that it has stopped accepting mortgage applications because some of the lender’s financial backers are now refusing to provide access to financing.

According to CNN Money, New Century also said that it has received $150 million worth of margin calls from its so-called warehouse lenders.

It has satisfied about $80 million of those calls, but $70 million remains, according to the mortgage company.

“As a result of the current constrained funding capacity, the mortgage lender has elected to cease accepting loan applications from prospective borrowers effective immediately, while the company seeks to obtain additional funding capacity,” New Century said in a statement.

“[We expect] to resume accepting applications as soon as practicable; however, there can be no assurance that the company will be able to resume accepting applications.”

New Century shares fell 4.4 percent to $3.70 on Thursday. The stock slumped 25 percent to close at $3.87 during regular trading, leaving it down more than 85 percent so far this year.

As we’ve discussed at great length now, subprime (or bad credit mortgages) are offered to buyers who fail to meet the strictest lending standards.

Companies like New Century that specialize in these loans have suffered as housing prices stopped rising and mortgage rates climbed from record lows.

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.

On Friday, New Century said it had breached one of those requirements, or covenants, and also disclosed that it’s the subject of a federal criminal investigation.

New Century said Thursday that it has yet to get waivers on this covenant from five of its mortgage lenders, having made no progress on this point since Friday.

“Once you get hit with one of these crunches, warehouse lenders don’t want to lend to you, so you’re really done,” said Joseph Mason, professor of finance at Drexel University’s LeBow College of Business and a visiting scholar at the Federal Deposit Insurance Corp.

Mason, who recently published a study on the bad credit mortgage market, said he’s expecting more bankruptcies in the sector.

Subprime originators usually sell their loans on to big banks or package them up into mortgage-backed securities for sale into the secondary market.

The buyers of these assets have the right to send them back in certain circumstances, including when borrowers fail to make payments during the first month or two.

In those cases, the loan origination source is forced to repurchase the loans.

New Century said late Thursday that one of its financial backers forced the company to repurchase some home loans. It didn’t identify the lender.

One of New Century’s lenders also has extended $265 million in financing that is mainly secured by its real estate investment trust mortgage loan portfolio.

New Century also announced that it borrowed more money to help it refinance roughly $710 million in mortgage loans currently financed through another lending relationship.

The company said it’s talking with lenders and other third parties about getting more access to financing, but warned that its efforts might fail.

“These firms that rely on funding mechanisms like securitizations are like sharks - if they stop moving they die,” Mason added.

In another blow earlier on Thursday, New Century said one of its directors - David Einhorn of hedge fund Greenlight Capital - resigned.

SOURCE: CNN Money