Mortgage firm New Century files Chapter 11

April 03, 2007|By E. Scott Reckard | E. Scott Reckard,Los Angeles Times

New Century Financial Corp., once the largest independent maker of mortgages to high-risk borrowers, sank into bankruptcy proceedings yesterday, swamped by demands that it buy back defaulted loans.

The Irvine, Calif., company said it would eliminate 3,200 jobs, or about half its work force.

Its fall epitomizes the collapse of the subprime lending business, which made $1.3 trillion in higher-cost mortgages over the past two years to shaky borrowers. In recent months, forced sales and outright shutdowns of lenders have beset the industry - woes that threaten to depress the entire housing market.

"They were big, strong, gigantic - and arrogant, too cocky," said analyst Matthew Howlett at the investment firm Fox-Pitt, Kelton.

The filing for Chapter 11 bankruptcy protection was made in federal court in Wilmington, Del., and had been anticipated for nearly a month.

New Century had stopped lending March 9 after its Wall Street partners cut off its funding. More recently, at least two of the firms, Barclays and Morgan Stanley, had moved to seize and sell pools of its mortgages to satisfy their claims against the mortgage lender.

The bankruptcy gives New Century breathing room from demands that it buy back its loans and enables it to break leases on its offices in 35 states.

The company advised current customers to continue making loan payments as scheduled. For information, customers can call New Century at 800-561-4567, or visit its Web site at www.ncen.com.

New Century originated $51.6 billion in mortgages last year. At the start of this year it had 7,200 employees in 216 sales offices in 35 states, funding loans primarily through independent mortgage brokers and also through Home 123, a direct-to-consumer business.

Striving to take its image mainstream, New Century had adopted the slogan "A New Shade of Blue Chip." But analyst Howlett said its loans performed no better than average for a subprime lender. And its operational safeguards, from guarding against inaccurate appraisals to accounting for losses, appear to have been inadequate, he said.

"It just seems like the whole operation was fast and loose, and it finally caught up with them," Howlett said.

Amid rising delinquencies and foreclosures, regulators and loan buyers have cracked down on subprime mortgage originators.

These loans, including simultaneous first and second mortgages adding up to 100 percent of the home's appraised value, had kept subprime volumes high over the past two years even as the housing markets weakened.

In addition to a contracting market for its loans, New Century has said the Securities and Exchange Commission and federal prosecutors are looking into its accounting oversights, including failure to establish reserves for its mounting losses as loan buyers sent back defaulted mortgages.

Investigators also are looking into stock sales at New Century, whose executives are accused in private lawsuits of cashing in stock options for millions of dollars while misleading other shareholders about the condition of the company.

The company has said it is cooperating with federal authorities and will contest the private lawsuits vigorously.

Founded in 1994, the company went public in 1997, rode out the last big downturn in subprime in the late 1990s and began growing in earnest.

In 2004, arguing that Wall Street was undervaluing the company, New Century restructured itself as a real estate investment trust - a structure that would require it to pass most profits on to shareholders as dividends. Shortly thereafter, in December 2004, its stock peaked at an all-time high of $65.95 a share.

Its founders, mortgage industry veterans Robert K. Cole, Brad A. Morrice and Edward F. Gotschall, grew wealthy as the stock price rose, each taking home nearly $8.4 million in salary and bonuses from 2003 through 2005, and cashing in about $13 million in stock options apiece in 2005.

The sudden collapse of their company has hammered their personal fortunes, with each losing well over $50 million since May 11, when New Century stock hit a more recent high of $51.45. Delisted from the New York Stock Exchange, New Century shares were trading over the counter at $1.41 a share on March 27.

Yesterday, the shares traded below $1 in the over-the-counter market.

E. Scott Reckard writes for the Los Angeles Times.

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