Mortgage Lowdown

New Century Financial Corp. has stopped taking mortgage loan applications because some its financial backers have refused to continue financing its loans. New Century appears to be the latest victim in the subprime mortgage sector which is taking a battering at the moment. Lenders such as New Century have suffered because house prices have stopped rising and mortgage rates have increased slightly. These lenders would have to rely on bigger financial institutions to take some of the risk on these risky mortgages and home equity loans and to provide finance for their operations. These institutions require subprime lenders to meet minimum financial targets and would have the right to cease their backing if these targets aren’t met.

“As a result of the current constrained funding capacity, the mortgage lender has elected to cease accepting loan applications from prospective borrowers effective immediately, while the company seeks to obtain additional funding capacity,” New Century said in a statement.

Not only has New Century breached one of these regulations but they have also revealed that they are the subject of a federal investigation. The company is in a difficult position as when one of these bigger lenders stop their relationship, it is likely that other lenders will be skeptical about forming any relationships with New Century. Other subprime lenders will find themselves in similar positions in the coming months.

It is usual practice for subprime lenders to sell their loans on to bigger banks and these banks have the right to force New Century to repurchase these loans if certain guarantees aren’t met. This is exactly what happened last week. New Century also announced that it has borrowed more money to help refinance approximately $710 million in mortgage loans which is currently financed through another lending institution.

There could be tough times ahead for subprime lenders as they try and figure out a way to soften the burden and find a solution to this problem.