Major home lender files for bankruptcy

New Century Financial Corp., once the nation's second-largest provider of home loans to high-risk borrowers, filed for bankruptcy protection on Monday, the victim of its own financial missteps as well as pressures felt by its rival lenders. New Century immediately fired 3,200 workers - more than half its work force - and said it intends to sell off its major assets. New Century was the latest so-called subprime lender to fall on hard times amid a spike in mortgage defaults caused by borrowers unable to make payments. Subprime loans target borrowers with low credit scores. The mortgages carry relatively high interest rates but can also offer low initial payments.

"New Century's failure raises the very real risk that the problems facing the subprime sector will spread into the broader mortgage market," said Octavio Marenzi, CEO of Celent, a Boston-based financial research and consulting firm. "Relatively lax lending standards were by no means limited to subprime lenders, and problems could easily spread to the broader banking sector," he said.

Like other subprime lenders, New Century profited during the real estate boom, when appreciation rates soared and equity protected most homebuyers from defaulting on their loans. Most could simply refinance or sell homes at a big enough profit to pay off mortgages and move on. Investment banks also jumped in, eager to buy loans from subprime lenders then slice them up into bond products to sell on Wall Street.

news.yahoo.com :

New Century was the largest independent U.S. provider of "subprime" mortgages, or home loans to people with poor credit histories. More than 30 rivals have sold or closed similar operations in the past year. The demise of New Century came less than two months after the company first disclosed problems with delinquent and defaulted loans. It stopped making loans last month, after having made nearly $60 billion in 2006. "We are only at the very beginning of the problems facing subprime," said Sanford C. Bernstein & Co. analyst Brad Hintz. "This liquidity crisis is continuing."

U.S. homeowner delinquencies and defaults surged after many subprime lenders eased their lending standards too far. Some of the lenders offered low initial rates, which later jumped beyond what customers could afford, or even made loans that customers could not afford in the first place.

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