Question marks are hanging over the US mortgage market
New Century has stopped making loans and its shares have tumbled, with some analysts now predicting bankruptcy.
The firm also said it had received a grand jury subpoena for documents.
Sub-prime lenders provide money to clients with a poor credit history, and the current problems have been sparked by a rise in defaults and bad loans.
These, in turn, have been triggered in part by a relentless rise in interest rates from rock-bottom levels in the past four years, and falling house prices and rates of homebuilding in many parts of the US.
Ripple effect
The problems, which have seen default levels on sub-prime mortgages hit a seven-year high, are not limited to New Century, and other lenders have also announced that they have been caught up by the downturn in the sector.
Another sub-prime company Accredited Home Lenders Holding said on Monday that it may have to raise extra funds, seek debt waivers, cut jobs and put back its earnings announcement. Its shares fell by 28% on Monday.
Countrywide Financial, the biggest US mortgage company, warned that the current problems would hurt profit in the short-term and added that it would cut 108 jobs.
New Century shares were suspended on Monday after tumbling almost 50% in pre-market electronic trading. The stock is down 90% this month.
The company has warned that it may have to buy back more than $8bn (£4.2bn) in loans, and its creditors are claiming that the company is in default of loan agreements and have halted financing.
New Century now has less than $60m in cash, according to the SEC.
Creditors include Morgan Stanley, Barclays, Bank of America and Citigroup.
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New York Stock Exchange. 
Just two weeks after China sent global markets into a tumble, growing worries about sub-prime mortgage lenders in the United States are sending jitters through stock exchanges around the globe. The three major US stock market indices each fell two percent from Monday's closing price, marking the second-biggest loss of 2007. London's FTSE 100, Paris' CAC 40 and Frankfurt's DAX 30 indices each closed down more than 1 percent.

As the Mortgage Bankers Association reported that late payments on mortgages and home foreclosures in the US homes rose in the fourth quarter to their highest level in years, investors are concerned that not only US banks but also multi-national banks around the globe could have exposure.

More than two dozen sub-prime lenders have closed or sold operations as defaults on those mortgages have risen. "The delinquencies and defaults have started to soar," said Nicolas Retsinas, director of Housing Studies at Harvard University. "A lot of these lenders started to make loans and lost track of some of the fundamentals." 

New Century Financial Corporation, the second largest sub-prime lender in the US, has recently revealed that its creditors were no longer providing funds and, further, it has become subject of an SEC investigation. The New York Stock Exchange has said it will delist New Century. Accredited Home Loan Lending, another major sub-prime mortgage specialist, said it was seeking fresh capital and waivers on its lending covenants.

Sub-prime lenders provide mortgages to people who do not qualify for loans from mainstream lenders, typically due to their credit histories. The lenders then bundle these mortgages as collateral for loans that they obtain from other financing firms, such as GMAC. Such firms can then repackage these loans and sell them as mortgage-backed securities. These securities may end up in the hands of major multi-national banks such as Citibank, HSBC, and Commerzbank. Each level of lending assumes a level of financial risk, but trouble can arise when the risk tolerances are exceeded. If too many homeowners default on their mortgages, the sub-prime lender can end up defaulting. If too many of these lenders default, as it is feared may be happening now, the defaults can cascade upward. While no one is predicting major bank failures at this point, it is feared that their profits could be hurt.