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Galvin wants data on subprime lenders

State to look at ratings by 2 Wall Street firms

Massachusetts Secretary of State William F. Galvin said yesterday his staff has demanded documents from two Wall Street firms over their recommendations on subprime lenders such as New Century Financial Corp. of California, questioning whether analysts remained too positive on the faltering companies to prop up other financial relationships.

Separately, mortgage delinquencies in Massachusetts rose nearly half a percentage point in the last three months of 2006, according to data released yesterday, with subprime mortgage holders at higher risk of falling behind. For all mortgage loans in Massachusetts, 4.5 percent were past due at least 30 days, placing it 26th worst among the 50 states. Among subprime loans in the state, 15.4 percent were past due.

Together the developments show the deepening scrutiny facing companies that underwrote millions of loans to people whose credit was considered too poor for traditional mortgages. The lending helped fuel a boom in housing prices by increasing the number of home buyers, but only by putting many into risky loans they now are having trouble sustaining.

One financial consequence has been a sharp decline in the value of the companies that made these loans. Shares in Accredited Home Lenders Holding Co., of San Diego, lost more than half their value yesterday, for instance, while New Century, of Irvine, Calif., was suspended from the New York Stock Exchange. Both have said they can't meet bankers' demands for cash. New Century also said it faces probes from regulators. The woes among subprime lenders contributed to a down day on Wall Street, with the Dow Jones industrial average losing 242.66 points, or 2 percent, to close at 12,075.96.

Yesterday, Galvin said he has also subpoenaed documents from UBS Securities LLC and Bear Stearns & Co. concerning their research on New Century and other firms. In an interview, Galvin noted analysts for both Wall Street firms had upgraded their recommendations on New Century at key points since February even as the California lender's woes piled up and it said it would restate earnings.

One goal of the probe, he said, is to see whether other factors could have influenced the analysts' actions, such as investment banking relationships or the dealings of certain hedge funds with the companies. Both UBS and Bear Stearns were part of a 2003 settlement with Galvin and other regulators in which 10 firms promised to avoid future conflicts. But the case of New Century and others now suggests the terms of that deal haven't been met, he said.

"Our instincts were right in the past. We'll see if they're right this time," he said.

The office of the Bear Stearns analyst who follows New Century, Scott Coren, referred questions to the company's public relations staff. A spokeswoman there provided several skeptical recent reports Coren wrote, such as one dated March 5 titled "Odds of Liquidation Increase as Criminal Investigation Launched and 5 Warehouse Lenders Still Not Committed."

A spokeswoman for UBS, Rohini Pragasam, said in a statement that "UBS just received the subpoena and is reviewing it. It is too early for us to comment. As a general matter, the firm is proud of its track record in research." It's analyst, Omotayo Okusanya, wasn't available to comment, she said.

Delinquency of loan payments are tracked by the Mortgage Bankers Association, a Washington trade group representing mortgage lenders, brokers, banks, and others. In a quarterly survey released yesterday it found delinquencies on residential properties nationwide rose to 5.0 percent of all loans as of Dec. 31, 2006, up from 4.7 percent a year earlier. Among subprime loans, 13.3 percent were past due, up from 11.6 percent a year earlier.

The higher delinquency rates have prompted calls for new rules to favor borrowers facing foreclosures. The trade group said it opposes such steps. Said Doug Duncan, the association's chief economist, in a statement, "[As] recent events have made clear, market discipline in this industry is swift, can be severe, and is more effective at changing lending practices than any potential changes in regulation."

Ross Kerber can be reached at kerber@globe.com.

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