It seems a bit anticlimactic now, but New Century Mortgage Corporation have declared bankruptcy according to an announcement today on their website. 

As a sidenote: I always find it odd that companies don't clean up their website when they end up in this situation.  You can still find out about New Century's groundbreaking products and even apply for a job of you're so inclined.  Go figure. 

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 4^th 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.  

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.  

Glance over at Wall Street and you’ll find some troubling indications on the health of some of the lenders.  We know that foreclosures are on the rise and that there are looming concerns about interest rates, but seems that the analysts are taking notice. 

New Century Financial Corp (NEW) took a big hit late last week on the back of news of  an unexpected fourth quarter loss .

New Century Financial focuses on sub-prime lending, the market that is taking a disproportionate share of the blow being dealt to financial institutions by rising default levels.  Sub-prime lenders get a lot of scrutiny from watchdog groups and consumer advocacy organizations - and rightly so; this is a market that is prone to abuse.  But inarguably sub-prime lenders provide a service to the real estate community by offering options to potential homeowners who otherwise would be unable to purchase a home.  Look for liquidity to be negatively impacted as these companies get clobbered – which will impact homeowners as they try to refinance adjustable rate mortgages that they entered into back in rosier days. 

So what does it mean to me?  Well a lot of real estate investors have jumped into risk/complicated loans during the easy-money days, with they expectation that they would either a) sell the property or b) refinance in the future.  Well refinancing will get harder if the current trend continues; they very companies that started the trends in sub-prime lending and exotic mortgages are on the brink of leading the market towards tightening lending standards.  Take a look at your situation and decide whether or not you need to take action. 

See also:

• Option ARMs in the news
• Mortgage choices for investors