Funds Swap Into Subprime Short Plays

Rather than shorting troubled subprime lender stocks, many hedge funds that are bearish on housing are using derivatives to bet billions of dollars against the shakiest parts of the subprime market.

The recent plunge in New Century (NEW Quote) and warnings from giant HSBC (HBC Quote) have highlighted the growing risks inherent to the sector. Subprime lenders offer mortgages to homebuyers who do not qualify for regular mortgages, usually because of low credit scores.

Lenders in recent years sold off the bulk of their originated loans to Wall Street investment bankers, which securitized the loans into asset-backed securities. As homeowner defaults increase nationally, lenders such as New Century are being forced to take back bad loans from the banks and record losses. ...