NEW YORK (AFP) - A major player in the high-risk segment of the US mortgage market said Monday its credit was being cut off, prompting renewed concerns about fallout into the overall financial system.
New Century Financial, the second largest lender of so-called "subprime" mortgages, said all its lenders had cut off or announced their intention to cut off credit.
Shares in New Century, down 90 percent since the start of the year, were suspended on the New York Stock Exchange and other lenders in the sector saw their stocks tumble.
This means the company "will have to declare bankruptcy during the next few days as they have no means of financing," said Fred Dickson, analyst at DA Davidson.
Additionally, the news "could extend concerns from that troubled institution to its lenders," Dickson added.
The news was the latest shock for the subprime mortgage sector, comprising lenders that provide financing to people with below-average credit.
Companies like New Century benefited from a mass rush to buy property during a real-estate boom of recent years. Wall Street financiers were in turn eager to extend credit to such lenders to fuel the mortgage spree.
But these sometimes exotic loans, often with adjustable rates, are now seeing increased default rates. Earlier this month, US banking regulators called for new rules making such mortgages more difficult.
Federal Reserve chairman Ben Bernanke last month said central bank officials are monitoring the situation because of an increasing rate of defaults in this sector.
But analysts are split over whether a failure could have a wide impact on the financial system or lead to a credit crunch.
One consumer organization argued that some two million people could face foreclosures of the speculative loans.
Robert Froehlich at DWS Scudder said the economic impact is likely to be limited.
"The real concern is whether this subprime mortgage collapse can cause an overall credit crunch," he said.
"In order for all of this to occur, the subprime mortgage collapse has to be big enough and important enough to set the wheels in motion. And the fact that it isn't, suggests there is 'no beef' to the subprime mortgage scare."
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