Cityscape Financial Corp.'s problems are only going to get worse, according to some observers.

The subprime mortgage company, which put itself on the block last week after its stock lost more than 60% of its value in less than 10 days, is facing more severe problems with its United Kingdom loan portfolio than anyone realizes, said one West Coast short-seller.

The short-seller, who did not want to be identified, said he has already covered his position on the stock, but he's "sure it will go down to zero."

Short-sellers borrow stock and sell it immediately, hoping to cover their borrowings when the stock falls.

"There are a whole slew of loans being valued in the U.K. that were made on unregistered property," the short-seller said. Because U.K. lending laws do not allow mortgages to be made on property that is not registered, "these loans could be declared null and void."

Cityscape did not return calls.

Another area of concern is the company's growing high loan-to-value mortgage portfolio, said Lisa Archinow, a Standard & Poor's analyst. "High- LTV loans are about 42% of the company's domestic originations, and 25% of its domestic servicing portfolio," she said. "We don't particularly care for that product."

In addition, Cityscape is securitizing these loans, she said, and "that's pretty aggressive. We think it's a pretty risky product."

Several investors have filed class actions in the past few weeks, as the company's stock continued to slide.

According to the most recent filings with the Securities and Exchange Commission, Fidelity Management and Research, Franklin Investment Advisors, Aim Advisors Inc., Continental Casualty, and Vanguard Group were the top investors in the company's stock.

Cityscape's corporate debt is trading at 80 cents on the dollar, said one analyst, a discount that could be a good deal if the company is able to make payments. The Elmsford, N.Y.-based lender announced last week that it would only be able to meet operating expenses through the first quarter of 1998.

This year CIBC Wood Gundy has raised about $350 million for Cityscape through two private offerings. The future performance of the debt is hard to determine, analysts said.

Cityscape's market capitalization is about $84 million.

CIBC's Andrew Heyer, co-head of high-yield, did not return calls.

Analysts also questioned Cityscape chief executive Robert Grosser's pledge this summer to purchase 100,000 shares of stock to show his belief in the company. The transaction has yet to be filed with the SEC, which may signal that it never happened, they say.

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