Earlier this month I commented on how players in the sub-prime market were taking a beating. New Century Financial, the #2 lender to borrowers with weak credit, was emerging as the poster child for the troubles that this market sector was facing. Based on unexpectedly weak 4th quarter numbers the company’s share price lost more than a third of its value, dropping from the $30’s to the $20’s.
This, as it turned out, was not a buying opportunity; in fact it was only the start of the bad news. Today New Century came out with statements which draw into question the company’s future viability. Wall Street responded decisively, further selling off the company’s stock and driving it down to the low single digits. Failure to meet filing deadlines may trigger repurchase obligations with New Century will be unable to satisfy, an event that could send the company into a death spiral.
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This isn’t a good sign for the economy in general, and the housing market in particular. If (when) New Century goes down there will be considerably less liquidity in the sub-prime mortgage market which will cut off many potential buyers from the credit they need to buy a home. This could lead to lots of things that may not be music to investors’ ears: fewer buyers, higher interest rates, downward price pressure.
So what does it mean to me? This is bad news for investors w/ shaky credit who jumped into risky mortgages with the expectation of refinancing later on. If this sounds like you then look out – that bank that was eager to put you into an Option ARM last year might not be so eager to refinance now. It’s going to get worse; if you’re in a mortgage situation that you’re not too crazy about then now is the time to do something about it.
