New Century's collapse illustrates how the residential real-estate market was fueled through generous credit. Now that the flow of cash has been stopped, more than two dozen subprime lenders have been forced to close shop.
By extending generous credit to subprime lenders, Wall Street firms financed the borrowing binge that helped fuel the housing boom.
Those firms now are turning off the money spigot.
They see more borrowers having trouble paying off those mortgages in a slowing economy, which has made investors less willing to pour money into the sector.
Subprime lenders sell many of their loans to Wall Street banks, which package them into securities to be sold to bond investors. The appetite for these bonds grew when interest rates were falling and investors wanted high-yield alternatives. The riskier the customer, the higher the interest rate, so subprime bonds were in demand.
Though banks make money lending to subprime companies, packaging the bonds produces hefty fees -- an estimated $2.3 billion last year, up from about $500 million five years ago, according to Thomson Financial data. Fees for other services added to the windfall.
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