The second largest sub-prime lender in the US, New Century Financial, has filed for Chapter 11 bankruptcy. The finance firm has sought protection from creditors after being forced by its shareholders to repurchase billions of dollars worth of bad loans.
The beleaguered firm's creditors include investment bank Goldman Sachs and Britain's Barclays bank, which is currently in the process of acquiring its Dutch rival ABN Amro. Meanwhile, Barclays Bank has announced that it would acquire another US sub-prime lender EquiFirst for $76 million - down from $225 million it had initially offered.
New Century also plans to sell its loan servicing operations to Carrington Capital Management for $139 million, subject to bankruptcy approval. It also plans to eliminate 3,200 jobs, more than half its workforce, with immediate effect.
In March New Century's shares had been suspended from trading amid fears that it lacked the resources to meet its obligations. The firm's shares have lost about 90 per cent of their value this year, dropping 50 per cent in electronic trading before the New York Stock Exchange suspended trading pending an announcement.
Sub-prime lenders, who lend to individual borrowers with poor credit ratings have suffered from the downturn in the US housing market. Some US economists had warned early this week that the current tide of defaults in the sub-prime mortgage sector would continue to weigh on the US's slowing housing market.
The slowing US housing market, coupled with rising US interest rates, has meant fewer sub-prime customers have been able to keep up with mortgage and loan repayments. Analysts believe that the problem facing the sub-prime market is just the tip of the iceberg for the mortgage market as a whole.
David Shulman, senior economist, University of California's quarterly Anderson Report says he believes that the sub prime market is in the process of shutting down for all practical purposes.