New Century Feels Crunch

Today, New Century can no longer originate loans for a profit. Because of its "current constrained funding capacity," the company said Thursday that it has elected to cease accepting loan applications from prospective borrowers.

That means the new $265 million of financing might simply be used to pay off an existing warehouse line.

Besides the margin calls, the other major cash drain at the company is that it is being forced to buy back bad mortgage loans from banks because of early defaults of borrowers.

Analysts estimate Wall Street banks might "put back" $4 billion worth of loans to New Century. If the company can resell those loans for only, say, 80 cents on the dollar, it will be forced to record a loss of around $800 million.

Shares lost more than half their value Monday after New Century said it was under investigation for its accounting and overtrading in its securities.

Earlier Thursday, David Einhorn of the New York-based hedge fund Greenlight Capital, one of New Century's largest investors, said he resigned from New Century's board. Greenlight Capital owns 6.3% of the lender's outstanding common stock.

Just in the last month, subprime lenders NovaStar (NFI Quote) and HSBC (HBC Quote) reported financial setbacks tied to rising delinquencies and defaults. The government and big mortgage buyer Freddie Mac (FRE Quote) announced rules aimed at tightening lending standards. Fremont General (FRE Quote) announced plans to leave the subprime lending business after getting a cease-and-desist order from the FDIC.

Lamparillo predicts New Century won't be the only mortgage lender to run into trouble.

"Some of these companies have liberal, liberal underwriting guidelines that are impractical," he says.