Subprime lender stocks fell along with the ABX.HE index last week, as more news of troubled subprime lenders reverberated through the market. And unlike in the recent past, the news affected the second and third-largest U.S. subprime lenders - HSBC Holdings Plc and New Century Financial Corp., respectively. While sources betting against the subprime sector could almost be described as giddy, those on the other side of the fence worried that the damage 2006 vintage loans seemed to be causing for lenders might be the beginning of unprecedented defaults.
The triple-B-minus index of the ABX.HE 06-2 series hit a low of 85 on Wednesday, while shares of Irvine, Calif.-based subprime lender New Century plummeted nearly 30% to the lowest price in more than eight years. New Century, awash in subprime mortgage buyback requests, posted a fourth-quarter loss, revised this year's loan origination estimate downward and announced it would be restating earnings for the first three quarters of 2006. Citing "internal weaknesses," the lender said the low price it was receiving on the secondary market for loans it had resold after being subject to repurchase requests needed to be factored into earnings. New Century also stated that the combination of a rising volume of repurchased loans and claims in the fourth quarter, along with a downward revision in the fair value of its residuals, would result in a loss for the quarter.
Meanwhile, HSBC, Europe's largest bank, warned that losses stemming from bad debts in 2006 would be roughly $1.8 billion - or 20% - higher than analyst estimates, triggered largely by poor performance among the subprime ARMs and second liens it holds. HSBC Chief Executive Michael Geoghegan said in a conference call last week that management made a mistake pushing for volume and the second-lien business, and that it would "not happen again." Sources said the bank was taken by surprise particularly at the rapid deterioration of its subprime second lien portfolio, much of which was acquired in 2006. These loans typically have a very front-loaded loss distribution pattern. According to Dominion Bond Rating Service, closed-end second lien loans losses on average begin as early as the fourth month, with nearly half of all cumulative losses happening in the first 24 months.
Last but not least, in what was probably the least bit of shock to market participants, the troubled Middletown, Conn.-based Mortgage Lender's Network USA filed for Chapter 11 bankruptcy. Interestingly, Merrill Lynch surfaced in bankruptcy filings as the company's largest unsecured creditor, the same position it holds with now-bankrupt Ownit Mortgage Solutions.
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