Morgan Looks to Unload New Century Loans

The move could signal that a bankruptcy filing is imminent at the lender.
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Updated from 2:34 p.m. EDT

Morgan Stanley

(MS) - Get Report

is auctioning off $2.5 billion worth of

New Century Financial

(NEWC)

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)

,

Accredited Home Lenders

(LEND) - Get Report

and

NovaStar

(NFI)

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.

Howlett says lenders like Morgan Stanley are "losing money every day" with these loans.

The lenders, he believes, are figuring that New Century isn't going to get the capital and "it's probably better now just to cut your losses than sort of working them out in a lengthy bankruptcy."

Several other troubled lenders have recently been bailed out.

Fremont General announced last week that it is selling $4 billion of loans. The Santa Monica, Calif., lender said it was exiting the subprime business in February.

Accredited scored a $200 million term loan commitment from hedge fund Farallon Capital Management of San Francisco. Accredited is selling $2.7 billion worth of loans held for sale to an unnamed buyer so it can meet margin calls.

Howlett said both Fremont and Accredited have "better quality" operations than New Century and don't share the same liquidity issues.

New Century also has been hit with multiple "cease and desist orders" from state regulators. It is under investigation led by the

Securities and Exchange Commission

and U.S. Attorney's office, and the New York Stock Exchange delisted the company for falling below listing requirements.

Most recently, Barclays has asked New Century to repurchase $900 million of mortgage loans.

A call to New Century wasn't immediately returned.