Capital Markets

Fannie Mae Backs Away from New Century

The struggling subprime lender had already warned that it is not making new loans.
Stephen TaubMarch 21, 2007

Fannie Mae will no longer buy mortgage loans directly from New Century Financial, according to a regulatory filing by the struggling subprime lender. The mortgage giant alleged a number of contractual breaches, New Century stated.

With its sibling, Freddie Mac, Fannie Mae plays a major liquidity role in the mortgage market by purchasing loans from lenders, which can then use those funds to make additional loans.

Fannie’s decision was just a formality, however, since New Century had already warned that it is not making new loans and that it is the target of criminal and civil investigations.

New Century’s filing stated that on March 16, it received a cease-and-desist order from the state of California, and that certain of its subsidiaries entered into consent agreements with regulators in Florida and Washington. New Century had previously received cease-and-desist orders from several other states and cautioned that it expects more to come.

Meanwhile, People’s Choice Financial, which operates a subprime mortgage unit, filed for bankruptcy protection on Tuesday, according to the Associated Press.

Market observers also suggest that the crisis in the subprime mortgage industry will weigh on the Federal Reserve’s next decision on interest rates, to be announced Wednesday afternoon at the conclusion of the two-day meeting of the Federal Open Market Committee.