New Century Financial Corporation (NYSE:NEW) confirmed yesterday that it has ceased funding new mortgage loans, as the troubled lender faces a liquidity crisis that may force the third largest subprime originator into bankruptcy. In a press statement, New Century said that one of its short-term credit providers had forced a full buyback of all loans funded by that creditor, forcing the company to buy back $710 million of its loans. One of the company's other creditors -- it would not name who, although some industry sources have suggested Morgan Stanley -- stepped in to fund the buyback, as well as providing New Century with an additional $265 million in short-term financing. New Century also said it has not yet obtained waivers of net income covenants from its remaining five short-term credit providers; the company first warned of liquidity problems associated with the five creditors on March 2 in a SEC filing. In addition, the company said it has received an aggregate of approximately $150 million of margin calls, and noted that only approximately $80 million of the outstanding amount has been satisfied. "While the company is currently facing many challenges, we continue to be focused on our mission of providing home loan financing to our borrowers and have adjusted our credit guidelines to focus on higher quality loans," said Brad A. Morrice, president and CEO at New Century. "Additionally, we are in active discussions with our lenders and other business partners to refinance our outstanding borrowings and are evaluating other alternatives to improve liquidity." Morrice's hope for continued operations may best be rooted in the possible sale of New Century, industry sources suggested to Housing Wire. Rumors suggest that the as-of-yet unconfirmed creditor who stepped in to provide nearly $1 billion in last-minute funding will likely end up acquiring the large subprime lender and servicer. "It may end up being another deal like Citi and ACC Capital," said one source, on the condition of anonymity. Citi recently agreed to provide additional working capital to finance operations at ACC Capital Holdings, parent of Ameriquest, Argent and AMC Mortgage Services, and entered into a conditional purchase agreement to acquire all warehouse lending operations at the subprime mortgage banking giant. New Century also said that it is seeing first payment default rates drop, as a result of stricter underwriting policies. The company is no longer originating mortgages with a 100 percent loan-to-value ratio or second liens, it said. Housing Wire reported Thursday that Option One -- along with numerous other subprime lenders -- recently made a similar move, pulling all 100 percent loan originations in both its subprime and Alt-A fundings. Not surprisingly given tighter underwriting standards, New Century saw its loan production drop 7.5 percent in February versus year-ago levels, funding $3.7 billion in originations. $3.1 billion of the company's February originations were classified as subprime. In spite of the problems now facing New Century, at least one source remained optimistic about the company's future. "When all is said and done, New Century will probably be purchased, but I don't know if that will really turn out badly for them in the long run," said an executive with a national mortgage banking operation, on the strict condition of anonymity. "I know it isn't popular to admit, but liquidity is a common problem for the industry right now. Those who survive, either through luck or through acquisition, will emerge stronger and smarter than they were before." For more information, visit http://www.ncen.com. Full disclosure: The author owns no securities associated with any of the companies mentioned in this story. Housing Wire will always disclose the financial interests of its authors.