New Century Financial Under Criminal Probe; Fremont Quits Subprime Market

B

ByLoSellHi

http://www.bloomberg.com/apps/news?pid=20601087&sid=azPvuAgOAyvg&refer=home

New Century Faces U.S. Probe; Fremont Quits Subprime (Update3)

By Bradley Keoun and Christine Harper

March 2 (Bloomberg) -- New Century Financial Corp. said it's the subject of a criminal probe and Fremont General Corp. agreed to a cease-and-desist order with bank regulators in the biggest regulatory actions to emerge from the subprime mortgage meltdown.

The investigation is focusing on New Century's accounting and trading in its securities, the Irvine, California-based company said in a filing with the U.S. Securities and Exchange Commission today. Fremont said a regulatory order will require it to stop giving mortgages to people who can't repay, and it plans to exit the subprime home-loan business.

``It just shows there was a lack of principles and standards,'' said David Hendler, an analyst at CreditSights Inc. in New York. ``There was no real major guardian of conservative standards anymore, and that's a danger to the safety of the market.''

A surge in defaults on mortgages to the least-creditworthy borrowers has forced more than 20 lenders to close or seek buyers since the start of 2006. Earlier today, the Federal Reserve told banks to scrutinize their underwriting standards on subprime mortgages and make lending terms easier to understand.

New Century, whose shares have lost half their value this year, said in its filing that the U.S. attorney for the Central District of California is running a criminal inquiry ``in connection with trading in the company's securities, as well as accounting errors regarding the company's allowance for repurchase losses.''

SEC Seeks Meeting

SEC staff also told New Century it wants a meeting to discuss events that preceded the company's Feb. 7 disclosure of a pending restatement to earnings, according to the filing. NYSE Regulation Inc. is reviewing trades that took place before Feb. 7 and has requested information, the company said.

New Century, the second-biggest subprime lender, said it will cooperate with the three inquiries. Laura Oberhelman, a spokeswoman for New Century, declined to comment on the filing. Earlier today, the company cut 300 jobs, or about 4 percent of its workforce, she said.

The company's lenders include units of Goldman Sachs Group Inc., which extended a loan agreement last month that was due to expire on Feb. 15 to May 14. The filing said the company's auditor, KPMG LLP, will include a statement questioning New Century's ability to stay in business if the company can't get lenders to ease terms or find new financing.

Fremont plans to report a net loss from continuing operations in the fourth quarter after setting aside more money to buy back loans that defaulted, the Santa Monica, California- based company said in a regulatory filing.

Cease and Desist

Fremont General Credit, a unit of Fremont, is submitting to a cease-and-desist order by the Federal Deposit Insurance Corp. halting 14 violations that include ``unsatisfactory lending practices'' and ``operating with a large volume of poor quality loans.''

The proposed order was received Feb. 27, Fremont said in a statement. Shares of Fremont plunged 24 percent on Feb. 28 after the company postponed the release of its fourth-quarter results.

The lender said it hired Credit Suisse Group to help sell the subprime residential business, and talks have started with ``various parties.''

Two other California lenders, Impac Mortgage Holdings Inc. and Accredited Home Lenders Holding Co., said today they won't be able to file their financial reports on time. Shares of both tumbled.

Material Weakness

Impac found a ``material weakness'' in its cash-flow reporting, the Irvine, California-based company said today in documents filed with the SEC. Accredited Home, based in San Diego, delayed its report until March 16 because of ``sizable demands upon the company's management and staff,'' including a recent merger that may cause a writedown.

Shares of New Century fell $1.20 today, or 7.6 percent, to $14.65, before the announcement in New York Stock Exchange composite trading. They dropped as low as $10.60 in after-hours trading. Fremont, which fell 4.3 percent to $8.71, has lost 46 percent this year.

Impac shares fell 10 percent to $5.96. The stock has declined 32 percent this year. Accredited Home's stock fell 3.7 percent to $21.70 in Nasdaq Stock Market trading. Shares in the company have fallen 21 percent in 2007.

-- With reporting by Justin Baer and Jody Shenn in New York. Editor: RBGreen (ehs/rik)
 
This stock will be at 5 in a week, before getting delisted. I was so close to shorting this one the last week when NFI got hammered. Now I'm kicking myself.
 
Quote from CalScholar:

This stock will be at 5 in a week, before getting delisted. I was so close to shorting this one the last week when NFI got hammered. Now I'm kicking myself.
More...

It may not be too late to short it, though the puts have skyrocketed.
 
I'd still consider it at current after hours pricing (10.40), but I'm guessing it will open at 9 or less on Monday morning. Another one I've been looking at is LEND. Still some good downside potential there.

I spent a few months working at a mortgage brokerage during the final months of the housing boom. Now that's a shady business. Refinancing and lending to people with no credit or income to speak of, which the banks loved, by the way. A little something called "stated income," whereby you simply take the client's word as to how much he's making. Of course, the rate is just a touch higher for those guys. The idea was this: as long as house values keep rising, there's no risk for the lender or the borrower. Guess again!

Now the banks are clamping down because past borrowers can't repay their loans. Meanwhile, the mortgage brokers are being investigated for predatory lending practices and sued by individual clients. None of these companies are immune from the shit-storm that the market has in store for them. Perhaps the biggest no-brainer short-play in recent memory and I've remained on the sidelines. I'll have to do something about that come Monday morning.
 
nytlogo153x23.gif


Authorities Investigate Big Lender

By VIKAS BAJAJ and JULIE CRESWELL
Published: March 3, 2007

Federal prosecutors and securities regulators are investigating stock sales and accounting errors at the New Century Financial Corporation, the biggest mortgage company that specializes in lending to people with weak, or subprime, credit, the company disclosed in a corporate filing yesterday.

The company also warned that a delay in filing its financials may put vital financing into jeopardy.

The troubles at New Century are the latest sign of the deterioration in subprime lending — until recently the fastest-growing segment of the mortgage business. The market has been struggling to contain the fallout from rising default rates and weakening home prices. Late last year, some smaller lenders started going out of business and last month several bigger companies, including New Century, started reporting problems.

Another large lender, the Fremont General Corporation, said yesterday that it planned to sell its subprime mortgage business after reaching an agreement with the Federal Deposit Insurance Corporation to restrict its activities in that area. As part of the agreement, Fremont will be able to continue taking deposits.

The investigations into New Century, which is based in Irvine, Calif., and wrote $33.9 billion in mortgages last year, started after the company said on Feb. 7 that it would restate earnings for three quarters, which sparked a huge sell-off in its shares. Yesterday, it said its problems had prevented it from filing its annual report, which was to be released Thursday. The board is conducting an investigation of the accounting problems.

The company’s shares have fallen more than 53 percent since the start of the year — before the most recent announcement, which came after the stock market closed. Its shares were down $3.73, or 25 percent, to $10.92, in after-hours trading.

On Feb. 22, the company said the regulatory arm of the New York Stock Exchange contacted it about sales in the company’s securities before that announcement. On Wednesday, it received notice from the United States attorney’s office in Los Angeles that it was conducting a criminal investigation. Federal prosecutors are looking into trading in New Century securities and errors in how the company accounted for home loans that it was forced to buy back from Wall Street firms that buy its loans and package them into bonds. Also, the Securities and Exchange Commission has requested a meeting with its executives.

It is unclear what stock sales investigators are looking at, but data from securities filings compiled by Thompson Financial show that two of the company’s top executives sold sizable blocks of shares in the second half of last year. Robert K. Cole, a former chairman and a founder of the company, sold stock worth $6.7 million in the third and fourth quarters after not selling significant numbers of shares for the previous three quarters. And Edward F. Gotschall, another founder and vice chairman, sold shares worth $14.7 million after not selling significant numbers of shares for the previous six months.

Earlier last spring, the executives, both of whom are still on the board, said they would be moving out of their leadership positions. They later disclosed plans to sell stock.

A spokeswoman for New Century said the executives and the company would not comment beyond the company’s filing. A spokesman for federal prosecutors in Los Angeles also declined to comment.

New Century, which was formed in 1995, narrowly survived a shakeout in the subprime sector in the late 1990’s when concerns about faulty accounting and Russia’s default scared investors away from risky bonds tied to subprime mortgages. The credit crunch caused several of its rivals to disappear, but New Century pulled through because it received a large cash infusion from U.S. Bancorp in Minneapolis at the time.

With fewer competitors, the company was well positioned to grab market share during the housing boom that began earlier this decade with the help of low interest rates. Subprime loans, which are largely given to poor and minority borrowers, had rapid growth but as more lenders jumped in lending standards were loosened and default rates for loans made in 2006 have been high.

New Century now appears to be facing a credit crunch similar to the one it encountered in the late 1990s.

The company said the delay in filing its financial reports had put its access to billions of dollars in credit lines and other financings into jeopardy. The company will have to seek a second set of waivers from banks that provide it credit lines totaling $17.4 billion if it does not file financial reports by March 15.

Also, the company will have to seek waivers from lenders that have provided it with 11 financing arrangements, because it will not have at least $1 in net income for the six months that ended in December. It has gotten six waivers so far, but they are contingent upon the company getting similar leniency from the other five.

The company’s fate will probably hinge largely on the providers of its capital, which include Wall Street’s biggest banks, which also own a hefty chunk of the company. Morgan Stanley, Goldman Sachs, Barclays Capital and Deutsche Bank own about 16 percent of the company, according to securities filings. Citigroup recently bought a 5.1 percent stake in the company and Greenlight Capital, a prominent hedge fund, owns 6.3 percent. Its president and co-founder, David Einhorn, sits on the board of New Century.
 
You must log in or register to reply here.
Back
Top