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Subprime Lenders Fall On New Century Woes Dow Jones Newswires2/8/07 By Henry Sanderson Shares of subprime lenders fell Thursday amid worsening news for companies involved in subprime loans, as New Century Financial Corp. (NEW) reported deteriorating fundamentals at its lending operation and HSBC Holdings PLC (HBC) said it set aside more money to cover bad loans.New Century said late Wednesday it will restate financial results for the first three quarters of 2006 to correct accounting errors regarding the company's allowance for loan-repurchase losses. The company postponed reporting its fourth-quarter results and said it expects a loss for the period. The Irvine, Calif., real estate investment trust also said it expects its loan production to drop 20% in 2007 as the company tightens its underwriting standards due to early defaults on its loans and expected guidance from regulators. New Century previously said it expected its loan production to be flat in 2007. "Importantly, it is difficult to predict the impact of the steps we continue to take in response to changing market conditions," New Century said in a release. The company originated $59.8 billion in mortgages in 2006. New Century Financial shares fell $9.93, or 33%, to $20.24, a new 52-week low. HSBC Holdings fell $2.75, or 3%, to $89.47, after the company announced late Wednesday that the capital it sets aside to cover bad debts, including the soured mortgages, would be 20%, or $1.76 billion higher than analysts' consensus estimates. Other lenders falling were Accredited Home Lenders Holding Co. (LEND), whose shares fell $3.08, or 10.6%, to $25.92. Shares of Novastar Financial Inc. (NFI) fell $2.95, or 14.3%, to $17.65. Fremont General Corp. (FMT) shares fell $1.33, or 9.5%, to a 52-week low of $12.62. Fieldstone Investment Corp. (FICC) fell 45 cents, or 13.3%, to $2.93. The warning from HSBC weighed broadly on U.S. stocks, with the Dow Jones Industrial Average and S&P 500 lower and the financial services industry broadly down. Shares of Lehman Brothers Holdings (LEH) and Bear Stearns Cos. (BSC) - two investment banks with relatively higher exposure to the mortgage business - were each recently down 1% on the day and had fallen more than their Wall Street cohorts. The warnings from New Century and HSBC are just the latest rumblings of trouble in the business of lending to people with weak credit histories. Countrywide Financial Corp. (CFC), the nation's largest mortgage lender, offered a gloomy forecast when it announced fourth-quarter results Jan. 30, citing continued credit deterioration in the entire mortgage industry. A number of small subprime lenders have gone out of business, while others have sold themselves to investment banks like Merrill Lynch & Co. (MER), Lehman Brothers, Bear Stearns, Morgan Stanley (MS) and Barclays PLC (BCS). The U.S. subprime mortgage business has come under pressure from a slowing housing market and rising interest rates - but also from a rash of early defaults on loans made in 2006, an indication of weak lending standards. Many loans are bundled and used to back securities issued by Wall Street banks and others. If borrowers default too early in the life of the loans, lenders can be forced to repurchase them. That in turn can strain lenders' cash. "The writing has been on the wall for the last six to nine months," Bob Moulton, president of Americana Mortgage Group, a large residential mortgage broker based in Manhasset, N.Y. JPMorgan Chase & Co. (JPM) Chief Executive James Dimon said in late January that the bank is cutting its exposure to subprime mortgages amid deteriorating industry conditions. Wachovia Corp. (WB) recently shut down its EquiBanc Mortgage Corp. unit, following "an intensive strategic review of its mortgage business which has altered the company's approach to the origination of non-conforming loans," according to a message on EquiBanc's Web site. New Century was downgraded by three analysts Thursday. Roth Capital Partners analyst Richard Eckert was caught surprised by the move. "I had no reason to suspect they would have to restate their earnings," he said. "But when I look back on it, I thought their provisions for [loan] repurchases were a little light." Lenders were talking about the problems with loans in the second and third quarter of last year, but New Century didn't seem concerned, he said. "New Century's accounting issues and deteriorating fundamentals at its lending operation could put it on a steep downward slope, in our view," Merrill Lynch analyst Kenneth Bruce wrote in a research note. He cut his recommendation on the stock to sell from neutral. He said he was more concerned that liquidity issues and adverse market reactions could undermine the company's business model and financial stability even further, saying the company will shift to "survival" mode. He said the shares are likely to remain under pressure until an acquisition appears more realistic or business fundamentals improve. Jefferies & Co. said that after write downs, the company's book value could fall by 20%, and cut its rating on the stock to hold from buy. Friedman Billings Ramsey analyst Scott Valentin, who downgraded the stock to under perform from market perform, said another risk was the company's so-called warehouse lines of credit, a funding source important in its ability to make loans. In addition to weighing on stocks, the string of negative news has pushed the riskiest portions of the benchmark credit derivative index based on subprime mortgages into record territory Thursday, indicating a higher perceived risk of defaults. Though the derivative index, known as the ABX, remains an investment vehicle used mainly by a small group of hedge funds and banks, market participants have looked to it as a gauge of sentiment on subprime home loans - the most vulnerable sector in the housing market. "The ongoing barrage of bad headlines continues to weigh on the subprime market," said Derrick Wulf, portfolio manager at Dwight Asset Management.
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