The addition of subprime mortgage behemoth New Century Financial Corp. to the growing queue of bankrupt subprime lenders has a number of home equity ABS investors wondering where, exactly, issuance is going to come from this year.
New Century originated $12.2 billion in subprime mortgages in the last quarter of 2006, placing it a mere $103 million behind then-number one ranked subprime lender HSBC Finance, according to ASR sister publication National Mortgage News.
Subprime mortgage loans have fueled U.S. CDO issuance for years and boosted ABS issuance to record levels. Overall home equity ABS issuance declined 32% in the first quarter to $88.6 billion from $130.7 billion in the fourth quarter of 2006, according to ASR Scorecard database.
And while New Century is rumored to still be in search of a buyer for its lending operations, it faces an uncertain fate that would rest on factors such as shaky Wall Street alliances, fraud and regulatory scrutiny.
The volume of subprime loan production is expected to decline by at least 30% this year, according to Bear Stearns, as lenders tighten underwriting guidelines or exit the business altogether. After the dust settles, some speculate a fair amount of issuance in the sector will begin to shift back to what has been a relatively dormant Federal Housing Authority (FHA) program - particularly as government officials eye reforms that would help move more troubled borrowers into the Federally insured loans.
FHA loan issuance has declined 46% since 2001 to only $2.6 million loans, according to the Mortgage Banker's Association, a trend directly correlated with the rise in subprime mortgage issuance.
Lehman Brothers analysts last week wrote they expect a short-term increase in FHA loan issuance, as subprime borrowers look to refinance, and a long-term increase in supply from new borrowers. If the FHA relaxes current lending guidelines as part of a Federal bailout for subprime borrowers, supply could rise by $90 billion this year and in 2008, Lehman estimates. From subprime rate resets alone, issuance could rise by $37 billion, and from a long-term increase in new borrowers, issuance could increase by an eventual $20 billion to $40 billion annually. If there were a full-fledged bailout of subprime borrowers - a scenario Lehman wrote was unlikely - issuance would balloon by some $170 billion through 2008.
New Century filed for Chapter 11 bankruptcy protection last Monday in the U.S. Bankruptcy Court for the District of Delaware. The filing put to an end weeks of market speculation as to when the top-three subprime lender - that has been running on fumes for sometime - would assent to bankruptcy.
The CIT Group and Greenwich Capital Financial Products agreed to provide New Century with as much as $150 million in debtor-in-possession financing, which the court approved late last week. New Century is allowed an initial $50 million upon the close of the agreement.
Carrington Capital Management emerged as a potential buyer of New Century's servicing assets and servicing platform. Carrington offered $139 million, although a higher bidder could emerge in bankruptcy proceedings. Likewise, Greenwich Capital Financial is looking to buy New Century loans and residual interests for $50 million.
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