In the wake of news Friday of the potential collapse of New Century Financial Corp., the intended withdrawal of Fremont General Corporation from the subprime mortgage business and a report by Countrywide Mortgage that default rates on both subprime and "Alt-A" mortgages are climbing, HSBC Holdings, the global bank headquartered in London, reported it was taking a $10.5 billion writedown due to anticipated defaults in the U.S. mortgage market. HSBC, in filing its annual report, announced loan impairment charges of $10.573 billion for 2006, 26% more than it set aside in 2005. SEE HIGHLIGHTS HERE
Stephen Green, group chairman of HSBC, said in comments accompanying the annual report that "A slowdown in the rate of growth in US house prices accelerated delinquency trends in the US sub-prime mortgage market. Deterioration was marked in the more recent loans, as the absence of equity appreciation reduced customers' options for refinancing. Reduced refinancing options also highlighted the fact that, as adjustable rate mortgages reset over the next few years at higher interest rates than their original rates, the effect of the greater contractual payment obligations will lead to further delinquency."
New Century Financial Corp., the nation's second largest subprime mortgage lender, late Friday informed the Securities and Exchange Commission that it will restate its financial results to reflect a loss for 2006 and that it is under investigation by the U.S. Attorney's office for the Central California District. Additionally, the company informed the SEC that if its lenders do not grant waivers from certain requirements regarding financial performance or it does not find new sources of funding, its auditor, KPMG, has informed New Century it will report that "substantial doubt exists as to the company's ability to continue as a going concern."
Fremont General Corporation, the fourth largest U.S. subprime lender, also on Friday informed the SEC that it would delay filing its 2006 annual report, citing regulatory changes and its intention to exit the subprime business.
New Century disclosed that the SEC and NYSE Regulation Inc. were looking into the company's securities transactions and that the U.S. Attorney for the Central District is "conducting a criminal inquiry under the federal securities laws in connection with trading in the Company's securities, as well as accounting errors regarding the Company's allowance for repurchase losses."
New Century made the disclosures in a form-12b-25 filing with the SEC early Friday evening. It reported that the company's annual report would be delayed while financials for 2006 were restated. The company said it would post a loss for the second two quarters of the year SEE THE FILING HERE
New Century, with a 7% market share, is second only to Countrywide Financial Corp. in market share of subprime mortgages. It has issued some $33.9 billion in such loans, according to the Mortgage Bankers Association.
Countrywide reported in an SEC filing on Friday that late payments on prime home-equity loans had doubled to 2.9% at the end of 2006 from the period a year earlier. The company also reported late payments on 19% of its subprime mortgages. SEE THE 10K HERE (mortgage delinquency data on page 113)
Also on Friday, Fremont General Corporation, the fourth-largest subprime lender with $29.8 billion in mortgages issued, filed with the SEC to inform it that it too would miss the March 1 deadline for filing its 2006 financial results. (SEE RELEASE HERE) (SEE THE SEC FILING HERE)
Fremont also announced that it has hired Credit Suisse Securities LLC to advise it on exiting the subprime business. It said management and members of its board had "entered into discussion with various parties regarding the sale of this business." SEE RELEASE ON PROPOSED SALE HERE
Federal regulators, including the Federal Reserve, on Friday advised mortgage lenders that they intends to crack down on loose qualification standards, including income checks and interest-only offers that allow people with insufficient income to qualify for loans. Lenders and the public have 60 days to comment before regulations are tightened.
The tumult in the subprime market and the resulting tightening of standards has effectively priced a large segment of the U.S. population out of the housing market. With home ownership having peaked near 70% during the housing boom, analysts are now predicting that the percentage of U.S. residents who own their homes could fall closer to 50%.