Question marks are hanging over the US mortgage market
Shares in New Century Financial, one of the biggest sub-prime lenders in the US, have been suspended amid fears that the firm may be heading for bankruptcy.Sub-prime lenders provide money to clients with a poor credit history, charging higher rates of interest because of the greater risks involved.
New Century has been hit by a number of problems, including an increase in default rates in the sub-prime sector.
The firm’s shares have lost about 90% of their value this year.
They had dropped 50% in electronic trading ahead of the market open on Wall Street, before the New York Stock Exchange suspended trading pending an announcement.
The company and it subsidiaries do not have sufficient liquidity to satisfy their outstanding repurchase obligations under existing financial arrangements
New Century’s sliding share price intensified during the recent global stock market sell-off, when concerns about the strength of the US mortgage market had been a main cause of the slump.
Since then, the firm has stopped taking applications for new loans and revealed that it would be the subject of a criminal probe by the US Attorney General.
On Monday, investors were concerned that the company did not have enough cash to honour repayments after it was told by creditors that it was in default of debt agreements.
Creditors include Morgan Stanley, Barclays, Bank of America and Citigroup, and they want New Century to buy back the mortgage loans they financed.
Should New Century have to buy back all of its bad loans, then it would have to pay many billions of dollars. It currently has about $60m (Ã‚Â£31m) in cash.
“The company and it subsidiaries do not have sufficient liquidity to satisfy their outstanding repurchase obligations under existing financial arrangements,” New Century said in a regulatory filing.
The company is holding talks with creditors to try to resolve the situation, however, it warned that there was no guarantee a deal would be reached.
Last week, analysts said that there was a good chance the company would go bust.