Subprime Stew Bubbles

Subprime mortgage lenders tanked again Monday as investors worried that problems among borrowers with weak credit histories could spread to healthier businesses.

Taking the biggest hit was New Century Financial(NEW), which plunged 53% after the company said the Justice Department was investigating its accounting. Analysts said the lender could face funding problems.

New Century's latest setback sent shares of subprime rivals NovaStar(NFI), Fremont General(FMT) and Accredited Home Lenders(LEND) down between 17% and 28%.

But also pulled down were Countrywide(CFC), which fell 2.7%, and Washington Mutual(WM), off 1.9%.

Bruce Harting, an analyst at Lehman, downgraded Countrywide on Monday to equal weight from overweight.

"We have been big supporters of Countrywide over the years because we believe it is by far the best operator in the mortgage business that has been undervalued by the market," he wrote, "but what we are learning from the turmoil in the subprime sector, which is now dragging down prime lenders, is that even the best operators can get pulled under by a strong undertow."

Christopher Brendler, an analyst at Stifel Nicolaus, cut NovaStar, Accredited and New Century to sell on Monday.

"We see increasing evidence that this industry is now in a downward spiral whereby each negative development fuels additional deterioration in key fundamentals including origination volume, pricing, credit and most importantly funding," Brendler writes in a note.