Lenders report huge losses on subprime mortgages

There's more trouble in the mortgage-lending market — and that could mean problems for higher-risk borrowers who want to refinance their home loans.

An independent Orange County, Calif., lender and Europe's largest bank combined to spook Wall Street on Thursday by reporting huge losses on "subprime" mortgages to borrowers with bad credit, high debt loads or other risk factors.

The unexpectedly bad news from Irvine, Calif.'s New Century Financial and London's HSBC Holdings sent shares of subprime lenders tumbling by double digits, with New Century down 36 percent. The disclosures shaved smaller amounts off the stock price of HSBC and other lenders with broader operations.

HSBC's New York-listed shares fell $2.44, or 2.6 percent, to $89.78. Washington Mutual, Countrywide Financial and Wells Fargo, all of which write subprime mortgages as well as conventional loans, saw their stocks slip by about 1 percent to 3 percent. WaMu shares fell $1.18 to $44.77.

The shakeout in the subprime industry began last year as housing prices leveled off and interest rates rose higher, curbing demand for loans. At first, some companies loosened lending standards to keep loan volume high — a tactic that has produced a wave of early loan defaults. More recently, companies such as New Century have tightened their loan policies to reduce their exposure to mortgages that could go sour.

As part of the fallout, marginal borrowers who snapped up loans with initial easy-money terms in 2004 and 2005 will find it impossible to refinance this year to avoid sharply higher payments, especially with home prices flat or lower in many areas, said industry analyst Zach Gast.

Up to $800 billion of adjustable-rate mortgages will reset to higher payments in 2007, and one in every 11 home loans is both adjustable and subprime, according to the Mortgage Bankers Association.

"There could be a good chunk of borrowers with nowhere to go to get loans," said Gast, who follows the industry for the Center for Financial Research and Analysis, a Rockville, Md., forensic accounting and due-diligence firm with mutual funds, hedge funds and insurers as clients.

"It means a lot of people are going to lose their homes."

Gast said investors in mortgage-backed bonds, who for years demonstrated an unquenchable demand, have begun backing away from securities created from the riskiest pools of loans.

HSBC, which bought U.S. subprime lender Household International for $15.5 billion in 2003, said it would raise its provisions for bad loans by $10.5 billion, 20 percent more than analysts had expected. The action was taken mainly because adjustable subprime loans are driving delinquencies higher, Chief Executive Michael Geoghegan said on a conference call.

New Century is the second-largest subprime-mortgage originator after Wells Fargo, with HSBC just behind in the No. 3 slot. New Century said late Wednesday that it had underestimated the losses it would record as a result of loan buyers forcing it to repurchase mortgages that had quickly fallen into default.

It said it would record a loss of undetermined size for the for the fourth quarter, rather than the $1.08 per share earnings Wall Street was expecting. New Century also said it would revise downward its financial results for the first nine months of last year.

New Century shares plummeted $10.92 Thursday, to $19.24, its lowest price in nearly four years. It was the sharpest decline for the stock since late 1998, when many subprime lenders were forced out of business by credit fears sparked by Russia's default on its debt.

Analyst Richard Eckert of Roth Capital Partners in Newport Beach, Calif., had upgraded New Century to a "buy" in November because its shares looked cheap and Eckert had confidence in management.

Now, he said, the confidence factor among investors and analysts is "close to zero."