Barclays tells US mortgage firm to repay 465m loans
Barclays Bank is demanding immediate repayment of $900
million (465 million) in mortgage loans from US housing
lender New Century Financial, which is on the verge of collapse.
The struggling US lender says Barclays, headed by chief
executive John Varley, has issued a notice of default under
a repurchase agreement and it must now buy back all loans
financed under the deal.
But it appears unlikely New Century, suspended from the
New York Stock Exchange, will be able to repay the money.
It has less than $60 million of cash on hand and the Barclays
demand could open the floodgates to demands of more than
$8 billion.
While Barclays insists it "does not contemplate material
losses" from its exposure to New Century, the unfolding
housing lending crisis in the US has weighed heavily on
UK banks and triggered a major sell-off on world stock markets.
Investors fear they could take a hit through the mortgage
securitisation market via which they repackage and sell
their existing loan portfolios.
The US housing market is in turmoil due to mounting bad
loans in the subprime sector, where lenders make home loans
to people with poor credit histories. Defaults on subprime
mortgages have risen to a seven-year high.
The only British lender with direct exposure to this market
is HSBC, which has already taken a $10.6 billion charge
against its subprime mortgage business. Its aggressive expansion
in the sector through its subsidiary HSBC Finance resulted
in its first-ever profit warning.
Apart from HSBC and Barclays, Royal Bank of Scotland is
the only other British bank with sizeable US operations.
While analysts say any exposure to New Century should be
contained by Barclays, the bank has not said whether it
is exposed to other subprime mortgage issuers.
Most analysts believe the subprime crisis will not cause
a general economic downturn.
"The question is will problems in the subprime market
spill over into the broader economy? We do not think that
will be the case," John-Paul Crutchley, banks analyst
at Merrill Lynch, wrote in a note. "The subprime sector
remains a small part of the overall mortgage market, highlighted
by the fact that overall mortgage delinquencies remain low
fundamentals now appear little different to what they were
just over a fortnight ago."
Lehman Brothers, the second-biggest US underwriter of mortgage-backed
bonds, said risks posed by rising home-loan defaults are
"well contained" and would have little effect
on its earnings.
