LOS ANGELES – For years, mortgage banker New Century Financial Corp. was flying high amid the strong housing market and a seemingly insatiable demand by borrowers for subprime home loans to chase the American Dream.
Riding historically low mortgage interest rates, the Irvine-based company became the second-largest provider of expensive home loans to borrowers with less-than-perfect credit.
Just four months ago, CEO Brad Morrice gave a roundly positive outlook at an investors’ conference.
Despite acknowledging the challenges of subprime lending, Morrice said it was “an excellent business for the long term.”
“We don’t have a great crystal ball. I can’t tell you when everybody gets healthier,” he said. “What I can tell you is we’re going to be there when it happens and ready to profit on the next up cycle.”
Now, faulty accounting and rising mortgage defaults have left New Century on the brink of bankruptcy. Its stock has collapsed and creditors are pressuring it to buy back billions of dollars in loans.
“They don’t have the liquidity to operate the business,” said Matthew Howlett, an analyst with Fox-Pitt, Kelton in New York. “Clearly, it’s in rough shape.”
New Century was founded as a mortgage lender in 1995 by Morrice, Robert Cole and Edward Gotschall.
Its primary focus was providing subprime loans that it then sold to investment banks, using that revenue to fund more consumer loans. In 2003 and 2004, Fortune magazine listed New Century on its list of 100 fastest-growing companies.
Like other subprime lenders, New Century profited during the real estate boom, when appreciation rates soared and equity protected most home buyers from defaulting on their loans. Most could simply refinance or sell homes at a big enough profit to pay off mortgages and move on.
Investment banks also jumped in, eager to buy loans from subprime lenders then slice them up into bond products to sell on Wall Street.
“New Century was the prime beneficiary of it, as they were sort of in the sweet spot, having the sales force out there to capture the growing market,” Howlett said.
That helped New Century stock hit its historic high of $65.95 in December 2004. Its earnings a year later also reflected a company that was riding high, despite mounting concerns over the weakening housing market. New Century posted net earnings that year of $411.1 million, or $7.17 a share, up from $375.6 million, or $8.29 a share, in 2004.
Its loan production for 2005 hit a record $56.1 billion as it racked up four consecutive dividend increases. However, it held off on providing Wall Street with full-year guidance for earnings per share or loan production.
By 2006, the housing downturn had led to weaker price growth and even declines in some pricier markets. Homeowners were left with few options if they fell behind on payments.
Default rates and foreclosures shot up as a result. New Century, like other subprime lenders, began to see loans go bad.
That spelled trouble, as New Century’s deals with investment banks required the company to buy the loans back if borrowers defaulted early in the loan.
“Now that housing is flattening or declining, all the problems in the industry are coming to the surface,” said Chris Brendler, an analyst with Stifel Nicolaus.
Talk to us
> Give us your news tips.
> Send us a letter to the editor.
> More Herald contact information.
