US mortgage lender New Century files for bankruptcy

New Century Financial, the giant US mortgage lender which rode the boom in the country's housing market, has filed for bankruptcy protection, engulfed by arrears in its customers' accounts and a collapse in confidence by its own creditors.

The Californian business, once the second-largest lender to Americans with poor credit histories - so-called "sub-prime" customers - bowed to the inevitable after teetering on the brink for several weeks, saying it would now conduct a fire sale of its loan portfolio and sack half its workforce.

"This was a very hard step for me personally and clearly not the outcome I would have preferred," said Brad Morrice, the chief executive and one of a triumvirate of entrepreneurs who founded the business in 1995. "However, given the sudden and significant challenges facing our industry and New Century specifically, bankruptcy is the best means available to allow the company's assets and operations to be sold through an orderly process."

The once high-flying company has become a symbol of the meltdown in the sub-prime mortgage market, and its agonisingly slow demise has triggered intermittent panic on global stock markets, which fear that troubles in the US housing market could spill over into the wider economy. New Century's collapse also puts the spotlight on other high-risk lending, such as junk bonds and credit for private equity deals, raising the possibility that lenders will withdraw funding for other types of business.

In its bankruptcy filing in Delaware yesterday, New Century posted a 1,749-page list of creditors, but Wall Street's focus is on the big-name institutions which have provided billions of dollars of funding for New Century's loans. Britain's Barclays is on the list, alongside the investment banks Goldman Sachs, Morgan Stanley and UBS, among others. The bankruptcy filing has been inevitable since these lenders withdrew their support for the company.

The papers do not show the exact scale of New Century's liabilities, or of its assets, which are detailed only as "more than $100m", the largest sum on a multiple-choice form. Barclays was among several banks to say it provided New Century with a credit facility of $1bn or more, but all its lenders say their liabilities are minimal. The debts are secured against the underlying mortgages and the homes they have funded, and in any case most have been parceled up and sold on to other investors.

New Century was named one of America's fastest-growing companies in 2003 and 2004, as a house-price boom tempted lower-income Americans on to the housing ladder and encouraged sub-prime mortgage firms to relax their lending criteria. New Century funded $51.6bn of sub-prime loans last year and was second only to HSBC's American division, HSBC Finance.

However, as the housing boom has run out of steam and prices have fallen across some parts of the country, debt-burdened customers have become financially stretched and arrears have soared. Around 30 non-bank lenders to sub-prime customers have gone under or been forced to put themselves up for sale, and even HSBC issued the first profit warning in its 142-year history, writing off $11bn of US loans.

While fears over the sub-prime lending market have built slowly over the past year, the uniquely troubling problems at New Century first came to light in February, when it admitted accounting errors. It said on 2 March that US prosecutors were examining its accounts, and it stopped taking new loan applications a week later, after its lenders cut off funding.