NEW YORK (MarketWatch) -- Several analysts agreed Monday that New Century Financial Corp., one of the nation's largest subprime mortgage lenders, likely faces liquidation or bankruptcy following revelations that it's under criminal investigation and in violation of debt covenants with several lenders.

"New Century is more likely to enter the death spiral we had feared, as filing delays, financial difficulties, likely restricted liquidity and regulatory/criminal investigations could conspire to limit its options outside of bankruptcy," Merrill Lynch analysts wrote early Monday.

As troubles continue to roil the market for subprime mortgages, New Century NEW, -4.30% disclosed late Friday that it's technically in default with several lenders and that federal regulators have begun an investigation. See full story.

New Century's shares were down more than 69% at $4.53 in afternoon trades Monday, after dropping in Friday's session as well.

Subprime mortgages are offered to homebuyers who fail to meet the strictest lending standards. Lenders specializing in such loans, like New Century, rely in part on big banks to finance their operations. Known as warehouse lenders, these institutions require that subprime lenders meet certain minimum financial targets or they otherwise have the right to end the business relationship.

Analysts at Jefferies & Co. also said the company has moved into worst-case scenario territory with its Friday filing. They cut their rating on the shares to underperform from hold.

New Century said it had received waivers for being out of compliance with debt covenants from six of 11 lenders, but deals with others remain uncertain.

"New Century's situation is not unlike the 'Prisoners Dilemma.' If the majority of lenders stand pat, they can mitigate losses. However, if they believe that other lenders will pull their lines, those first to act will be best served," Jefferies analysts told clients.

The analysts said that while it's possible New Century would get more waivers, "it is impossible for us to reasonably predict the behavior of more than a dozen different financial institutions."

Analysts agreed that the chances of bankruptcy have increased as the firm's shares fell sharply and passed what might have been seen as a reasonable liquidation value.

Bear Stearns analysts noted this in their Monday research report, saying that they reduced their estimated liquidation value to $8 to $9 a share, down from $10 to $11 previously. They "expect the stock to trade toward this level as the odds of bankruptcy appear to have increased."

At the same time, analysts noted the possibility that New Century shares could see some upside in Monday trading as there is a large short position -- shares that were borrowed and then sold in the hopes they could be bought back cheaper later -- but said the bias remained strongly to the downside.

Indeed, Morgan Stanley advised caution for those investors tempted to buy on weakness to "take into account the full spectrum of potential outcomes."

Also Monday, analysts at JMP Securities downgraded New Century's shares to market underperform from market perform. The downgrade reflects a belief "the company is under severe liquidity pressure and that worsening industry conditions add to the risk that New Century's financial condition is deteriorating," they said.

'Downward spiral' seen for mortgage lenders

Analysts at Stifel Nicolaus cut their ratings on shares of several mortgage lenders Monday as more bad news hit the troubled market for subprime mortgages.

Aside from New Century's woes, the downgrade came as Fremont General Corp.'s FMT, stock plunged after the company said it plans to sell its subprime lending business after it received a proposed cease-and-desist order from the Federal Deposit Insurance Corporation.

Meanwhile, HSBC Holdings HBC, +0.48% announced a huge charge on bad loans in the subprime sector.

After meetings with mortgage lenders and "several recent negative developments in the sector, we are taking a significantly more bearish stance on the subprime mortgage industry," Stifel Nicolaus analysts wrote in a Monday note.

They downgraded shares of Accredited Home Lenders LEND, +0.41% , NovaStar Financial Inc. NFI, +1.80% and New Century to sell from hold.

"Specifically, despite valuations that are well below book value, we see increasing evidence that this industry is now in a downward spiral whereby each negative development fuels additional deterioration in key fundamentals including origination volume, pricing, credit -- and most importantly -- funding," Stifel Nicolaus said.

Investors are nervous about the potential fallout in credit markets now that the housing bubble has popped and mortgage lenders are tightening their standards.

"With housing prices now falling nationwide ... and almost daily evidence that the industry stressed underwriting too far, just how high delinquencies and losses go is very much unknown at this point, largely due to increased prospects for falling housing prices," the analysts wrote.

"As credit deteriorates further, we expect underwriting to tighten even more and secondary market demand to remain volatile," they added.

When asked Monday about the potential fallout from the troubled subprime mortgage market, luxury home builder Toll Brothers Inc.'s TOL, -4.51% chief financial officer said it's not a big part of the company's market, but that subprime jitters have "a big psychological impact" on homebuyers.

During a Web cast from an investment conference sponsored by Raymond James, Toll CFO Joel Rassman said negative headlines on the subprime market "make customers nervous" and added the housing market could feel significant impact in the next month, such as foreclosures and more speculators quitting the market.