Morgan Looks to Unload New Century Loans

Updated from 2:34 p.m. EDT

Morgan Stanley(MS Quote) is auctioning off $2.5 billion worth of New Century Financial(NEWC Quote) mortgage loans, which could mean that a bankruptcy filing by the lender is near.

The New York investment bank announced the sale of 13,200 loans through print ads for the public auction on Friday. The news was first reported by The New York Post Monday.

The loans were held as collateral by Morgan Stanley for providing financing to New Century as the Irvine, Calif.-based subprime lender struggles to stay in business.

The auction is part of a "protocol" to get a sense of what the loans are worth to potential buyers, a source familiar with the situation said.

Morgan Stanley placed the ads in the The Wall Street Journal and The New York Times.

Lenders such as New Century, Fremont General(FMT Quote), Accredited Home Lenders(LEND Quote) and NovaStar(NFI Quote) have been rocked by rising delinquencies and defaults. In addition, the companies also have been slammed by financing providers looking for lenders to take back at least a portion of loans sold to them.

Morgan Stanley's move comes as rumors swirl that New Century may soon be filing for bankruptcy. New Century has stopped making new loans and funding loans in process as virtually all of its lenders have yanked financing to the company.

Matt Howlett, an analyst at Fox-Pitt Kelton, says Morgan Stanley's decision to cut its losses is a "last step before bankruptcy" for New Century.

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