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Subprime Lender On Verge Of Bankruptcy

March 13, 2007

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Talk about irony; the nation's second largest subprime lender, which got rich making "creative" loans to consumers who couldn't otherwise qualify to purchase the home they were buying, is itself now broke.

New Century Financial Corp. says it lacks sufficient funds to pay its creditors, leading to speculation on Wall Street the company will file for bankruptcy.

The company's problems likely stem from the fact that a large number of its mortgage customers can no longer make their monthly payments. Many are faced with huge increases in their payments after an initial low, adjustable rate was adjusted upward to the prevailing market interest rates.

Bloomberg quotes Bose George, a Wall Street analyst with Keefe Bruyette & Woods as saying New Century is "one step closer to bankruptcy." The company's only salvation, he says, is for some large investment bank to buy the company.

Others say this may only be the tip of the iceberg, revealing the murky underworld of the subprime lending market, where most customers are consumers with few, if any, other options. Most subprime customers have poor or no credit. A subprime lender will make loans to them, but covers its increased risk with higher rates and fees.

New Century Financial has come under increasing financial pressure as Wall Street loses its one time infatuation with subprime lending. In recent weeks Freddie Mac has said it will no longer do business with subprime lenders.

Now, investment banks like Goldman Sachs, Morgan Stanley and Citigroup are demanding that New Century repurchase all mortgage loans that they financed. The company says it simply doesn't have the cash to do that.

While New Century Financial's woes make news, less reported is the devastation felt by subprime borrowers.

Various real estate industry analysts calculate that more than 1.5 million Americans may suffer foreclosure because they obtained subprime mortgages with escalating rates, pushing payments beyond their means.

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