Federal Reserve governor Susan Bies on Friday said problems in the subprime mortgage market could escalate, further unnerving investors, as shares in troubled lender New Century Financial continued to plummet.
At a risk management forum in Charlotte, North Carolina, Ms Bies said lenders were likely to see an increase in defaults involving borrowers who took out mortgages with low “teaser” interest rates, which jump to higher levels during the life of the loan.
“What’s happening is the front end of this wave of teaser-rate loans that are coming into full pricing,” said Ms Bies, who is retiring from the Fed. “So what we’re seeing in this narrow segment is the beginning of the wave – this is not the end, this is the beginning.” She added that, thus far, problems remain contained in the subprime sector.
The comments, reported by Bloomberg, came as shares in troubled mortgage lender New Century Financial fell another 17 per cent to $3.21 as analysts said the company would probably have to file for bankruptcy protection. Also on Friday, General Electric’s US home lending unit, WMC Mortgage, said it would cut back on loans and cut 460 jobs, or 20 per cent of its staff. Concerns about the subprime market helped limit US stocks to modest gains in spite of solid employment numbers.
New Century shares are off nearly 80 per cent since the lender disclosed last week that federal prosecutors were probing its accounting practices and trading in its shares. The mortgage group is negotiating with lenders to extend credit agreements and is not accepting new loan applications.
Andrew Wessel, analyst at JPMorgan, said the chances of New Century surviving were slim. “We believe it is likely that [the company] has essentially mortgaged its last unencumbered assets,” he said.
Morgan Stanley has extended $265m in new financing to New Century and taken over a $710m facility withdrawn by Citigroup. Morgan Stanley’s lending, like that extended by other banks, is secured by mortgage loans held by New Century. Banks that buy subprime loans from New Century to package and sell as securities also generally have the right to sell back the loans if they go into default. However, New Century may not be in a position to buy back bad loans.
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