Will New Century’s fall make waves?

Hillary Wicai Mar 12, 2007

Will New Century’s fall make waves?

Hillary Wicai Mar 12, 2007

KAI RYSSDAL: New Century didn’t actually have the money to make all those subprime mortgage loans. It borrowed. Heavily. From Wall Street firms whose names you’ll know. Morgan Stanley, Citigroup, Goldman Sachs to name just a few. New Century’s borrowers aren’t making their payments, so the company doesn’t have the money to pay back what it owes.

Today, Wall Street saw the handwriting on the wall. Morgan Stanley and all the rest who could be left with pennies on the dollar said there won’t be any more money coming. It all pushes New Century a step closer to bankruptcy. And if you follow the falling dominos.. it might push the whole economy lower, too. Marketplace’s Hillary Wicai reports.

HILLARY WICAI: New Century borrows money to make loans to folks who may have low credit scores or too much debt to qualify for a traditional mortgage.

Zach Gast with the Center for Financial Research and Analysis says it sounds like New Century’s pulse is weak.

ZACH GAST: The logical conclusion, if New Century isn’t able to sell itself in the next couple of days, is that they are gonna have to declare bankruptcy.

He says it’s the start of a major shakeout in the subprime lending industry. And that leads Gast to further pessimism about the housing market.

GAST: Subprime loans were about 20 percent of originations in 2006. And when you assume that half of those are gonna go away, that’s a lot of demand that’s not going to be there.

Economists are debating how weak the economy is and if it can handle a housing dip.

Mark Zandi is with Moody’s Economy.com. He predicts slower economic growth overall because of housing.

MARK ZANDI: It’s tentacles run deep into the economy not only through construction, but through home sales and all the ancillary consumer spending that occurs — because people’s wealth is wrapped up in the value of their home.

But Diane Swonk of Mesirow Financial argues the economy is less dependent on housing than it was.

DIANE SWONK: We now have trade helping us out, exports picking up keeping our factories humming even as housing market side of the equation is no longer placing that demand on the factories. Commercial construction activity is picking up.

A high-level Treasury official says the government’s monitoring the distress and that the current situation is manageable.

In Washington, I’m Hillary Wicai for Marketplace.

RYSSDAL: Shares of New Century didn’t budge today. Not because people didn’t want to sell. The Big Board delayed trading after that news lenders are turning off the tap.

We’re here to help you navigate this changed world and economy.

Our mission at Marketplace is to raise the economic intelligence of the country. It’s a tough task, but it’s never been more important.

In the past year, we’ve seen record unemployment, stimulus bills, and reddit users influencing the stock market. Marketplace helps you understand it all, will fact-based, approachable, and unbiased reporting.

Generous support from listeners and readers is what powers our nonprofit news—and your donation today will help provide this essential service. For just $5/month, you can sustain independent journalism that keeps you and thousands of others informed.