Two months after it first sounded the alarm over rising defaults, subprime lender New Century Financial Corp. has filed for Chapter 11 bankruptcy protection. The company fired more than 3,000 employees and said it plans to sell off most of its assets in the next six weeks.
More than 30 subprime lenders have gone under in the last 12 months, but New Century is the largest of the group. It suspended its loan operations in March.
Subprime loans are made to consumers with little or poor credit. Not long ago these consumers would have not been able to get a home loan, but subprime loans -- loans that carry higher rates and fees, ostensibly to compensate lenders for the increased risk -- have extended credit to them.
At the same time, subprime lending allowed the mortgage and real estate industries to boom, bringing a whole new category of customer and driving up prices and profits. New Century reported profits of $60 billion in 2006.
Critics of subprime lending, like William Cunningham of Washington, D.C.-based Creative Investment Research, says most subprime lenders engaged in predatory practices, and outright fraud, against this new group of consumers.
"Things like credit life insurance policies, disability insurance, these are some of the things that are added to a mortgage to inflate its price. They're fraudulent because they either aren't needed or they don't exist," Cunningham told ConsumerAffairs.com.
Other subprime critics point to over-leniency in lending rules for the collapse. As real estate values continued to skyrocket, they say lenders were blind to the risk, assuming values would always increase. They say many delinquencies and defaults are up become lending standards fell too low.
Copyright 2007  consumeraffairs.com
