Bloomberg has a good story revealing the issues surrounding New Century Financial – one of the nation’s leading subprime lenders.
The issue stems around agreements New Century has with the large Wall Street players to finance and purchase mortgage loans originated by New Century. Because New Century has failed on two key items that preclude the financing (filing its annual report on time and being profitable over a two-quarter rolling period) many of those agreements are now in default. Without a waiver to extend the agreements those lines of credit would be cut-off; essentially making it impossible for New Century to continue to operate.
“These credit lines are the lifeblood of subprime mortgage companies,” said Vince Arscott, an analyst in the structured- finance division of Fitch Ratings. “It’s really going to be up to the respective credit committees of the banks, whether they want to be exposed to this risk. They may just slowly start to turn off the nozzle.”
“Right now it’s 50-50” whether the investment banks pull financing for subprime lenders including New Century, said Bose George, an analyst at Keefe Bruyette & Woods in New York. “If things get better, it’s possible they survive. If things get worse, the possibility that warehouse lines get pulled is real.”
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