Industry Highlights

Big banks and investors that purchased subprime mortgages originated by small lenders over the last couple years are responding to an increase in defaults on the products by ordering the lenders to buy them backs. Many subprime originators are now facing bankruptcy because they lack the money necessary to comply, and some experts argue that the subprime mortgage market is weakening at a faster pace due to these repurchase demands. New Century Financial Corp., for instance, is among the lenders on the brink of bankruptcy, fielding repurchase orders from Morgan Stanley, Citigroup Inc., Goldman Sachs Group Inc., Credit Suisse Group Inc., IXIS Real Estate Capital Inc. and Bank of America Corp. The company reportedly owes a total of $8.4 billion to these creditors, and Piper Jaffray analyst Robert Napoli says that repurchasing the loans at a 20-percent loss would eliminate New Century shareholders' equity.

The quick action that Wall Street banks and brokerage firms have taken to stop backing mortgage companies that relaxed lending standards last year has impacted struggling subprime concern New Century Financial. In its securities filing on Monday, the firm revealed that the credit lines of all of its lenders have been frozen and that those creditors are demanding the lender buy back $8.4 billion in loan using money it borrowed from the banks. Nearly a decade ago, U.S. Bancorp helped save New Century from financial crisis by infusing it with cash in exchange for a stake in the lender; and although this time Morgan Stanley has emerged as a potential white knight, its $975 million financial package may not be enough to keep the company afloat. Banks have taken a step back as a result of the downturn in the subprime lending market, which has experienced an increase in default rates over the past six months.

Accredited Home Lenders Holding Co. is requesting waivers and extensions from its creditors and is considering its options for generating more capital. The subprime mortgage lender wants to raise new funds so that it will have the flexibility to retain or sell loans that it has originated. Accredited, which also is considering eliminating more jobs in order to cut costs, says it is unlikely to file its annual report on time. So far this year, the lender has paid about $190 million in margin calls on its credit facilities; and in recent days, its stock price has tumbled along with the shares of New Century Financial and other mortgage companies.