A sub-prime epidemic
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A sub-prime epidemic
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SCOTT JAGOW: The nation’s sub-prime mortgage companies are dropping like flies — into bankruptcy, into oblivion. The next one to go might be a big one: New Century Financial. Today the company said all of its lenders have cut off funding. More now from Hillary Wicai.
HILLARY WICAI: Bank of America, Citigroup and Barclays have sent notices to New Century saying that certain subsidiaries had failed to satisfy margin calls.
Zach Gast is with the Center for Financial Research and Analysis. His company helps institutional investors spot accounting risk. Gast says New Century is a big step closer to bankruptcy.
ZACH GAST: New Century, like most of their peers, is entirely dependent on what are called warehouse lenders who fund the loans that they make before they’re able to sell them. And all of those lenders have now withdrawn their lines of credit. And the logical conclusion if New Century isn’t able to sell itself in the next couple of days, is that they are going to have to declare bankruptcy.
And Gast says this is the start of a significant shakeout in the sub-prime lending industry.
On Friday, New Century’s shares dropped 17 percent.
In Washington, I’m Hillary Wicai for Marketplace.
JAGOW: Shares of New Century are plunging again this morning to about $1.50. A few months ago, they were trading at $51.
This morning, the National Association of Business Economists came out its list of the biggest threats to the U.S. economy. No. 1 — terrorism. No. 2, well it used to be energy prices, but now it’s consumer debt. This has a lot to do with the housing market, as Pat Loeb reports.
PAT LOEB: A couple of years ago when housing prices were at their peak and interest rates were low, lots of homeowners refinanced or took out second mortgages with adjustable rates.
Catherine Mann, a business professor at Brandeis University, says that was fine, as long as home values continued to grow.
CATHERINE MANN: It doesn’t start to come home to roost, it doesn’t start to bite until the housing market begins to remove the source of cash that many borrowers have had and that of course, has been the equity in their house.
Mann says housing prices have stopped growing, just as mortgage rates are getting adjusted upward. That means borrowers are going to have a hard time paying their bills.
Those same forces have led to the collapse of the sub-prime market, and Mann says economists now worry that the impact will spread to other parts of the economy.
I’m Pat Loeb for Marketplace.
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