Subprime Lenders Starting to Explode

During the housing boom, many banks devised “creative” loans allowing people to borrow money with no down payment and pay low interest rates for the first few years on adjustable mortgages. Now, as interest rates reset higher, more borrowers are missing payments stressing the lender’s books.  Remember this article from a month ago – Subprime Lenders Gone Too Far: A Time Bomb Waiting to Explode.  Today the stock price of one subprime lender exploded.  The others were wounded.  Here is the damage:

  • New Century Financial   -36.21%
  • Accredited Home Lenders -6.03%
  • Country Wide Financial -2.57%
  • HSBC Holdings -1.50%

HSBC, one of the world’s largest banks, started today’s party by announcing its bad debt charge would be about $1.8 billion higher than expected.  In total, its 2006 charge for bad debts would be about $10.6 billion — or 20 percent above analyst consensus forecasts.  It attributed the losses to problems in its mortgage lending to lower quality U.S. borrowers. 

Not being one to miss a party – New Century, a big California subprime lender,  said accounting errors caused it to lose track of how drastically some of its mortgage loans are losing value.  It will restate results for the first three quarters of 2006 and expects to post a loss for the fourth quarter. The lender also said new loans this year will fall 20 percent as the company becomes more selective about which borrowers it lends to.

What is a stock to do with such news?  New Century’s stock fell off a cliff.  It closed on yesterday at $30.16 and today opened at $22.87.  If you owned the stock, your best case scenario was selling at loss of 24%.  I doubt many little guys were able to get out at $22.87.  If you had an active stop loss order – more than likely you were stopped out around $21 and some change. 

I can understand the pain of New Century shareholders. A few months ago I took a 14% shellacking,  when a wise Canadian politician had a brain-fart and announced a change in the tax laws of Income Trusts. Not only did it come out of the blue, but it broke a pledge not to change the trust taxation rules.  Unfortunately, I was holding the granddaddy of Income Trusts – Enerplus Resources that day. Read Navigating Thru a Trading Fiasco.  Three months later and that dog still can’t hunt.  

If you are holding on to shares of any subprime lender – SELL and move on.  

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