By Bradley Keoun and Steven Church
April 2 (Bloomberg) – New Century Financial Corp., overwhelmed by rising defaults from borrowers with poor credit records, became the largest subprime mortgage lender ever to fail as it filed for bankruptcy today.
New Century plans to sell most of its assets within 45 days, said the Chapter 11 filing in federal court in Wilmington, Delaware. About 3,200 people, more than half the workforce at the Irvine, California-based company, will be fired. New Century said it already agreed to sell its mortgage billing and collections unit to Carrington Capital Management LLC for $139 million.
The company rode the U.S. housing boom to become the largest independent mortgage lender to subprime borrowers, only to collapse as interest rates rose and home prices fell. New Century’s market value soared to more than $3.5 billion in December 2004, and last year it made about $60 billion in loans. Like rival firms, the company lowered its lending standards to keep business flowing after demand slumped.
They're clearly going to be the poster child for bad practices in the mortgage industry,'' said Matthew Howlett, an analyst at Fox-Pitt Kelton in New York.When all is said and done, the management team will be to blame.’’
The court filing protects the company’s assets from creditors. They include many of the Wall Street firms that financed its mortgage loans, such as Morgan Stanley, Goldman Sachs Group Inc. and Credit Suisse Group.
The company’s shares fell 14.5 cents, or 14 percent, to 91.5 cents at 3:59 p.m. New York time in over-the-counter trading. They’ve fallen 97 percent this year.
Late payments on U.S. subprime mortgages reached a four-year high in last year’s final quarter, the Mortgage Bankers Association reported. At least 30 home lenders halted operations or sought buyers in the past 12 months, including four that went bankrupt since last November, according to Bloomberg data.
New Century ranked second only to London-based HSBC Holdings Plc last year in total U.S. subprime mortgages granted. HSBC said last week it’s planning to slash subprime lending operations.
The California company said in a statement it obtained $150 million in financing from CIT Group Inc. and Royal Bank of Scotland Group Plc’s Greenwich Capital unit. Lazard Ltd., New Century’s investment banker, has been shopping the remaining businesses to potential buyers. The loan agreement requires the bankruptcy court to approve procedures for selling New Century’s assets by April 10.
New Century also agreed to sell Greenwich a portfolio of loans and interests in mortgage-backed securities for $50 million.
Quick asset sales may be the only means of ``maximizing returns for stakeholders,’’ Holly Etlin, a managing director from AlixPartners LLP, New Century’s financial adviser, said in an affidavit filed with the bankruptcy court.
In addition to the billing and collections unit, New Century’s largest assets include its lending platform. That business consists of a network of 57,000 independent mortgage brokers who locate borrowers and the employee loan officers who handle applications and approvals.
The platform also includes computer software and equipment used to analyze applications, as well as 262 retail branches and 34 regional operations centers in 20 states.
They have an enormous platform, so it wouldn't be a surprise me to see someone come in and take this over,'' Fox-Pitt Kelton's Howlett said.You could realize value down the road when market conditions improve.’’
The job cuts aim to ``better align the company’s cost structure with the current operating environment and to properly size these businesses in preparation for possible sale,’’ New Century said in the statement. The company employed about 7,200 people at the end of 2005.
For the lending platform to attract an offer, New Century will need to keep as many of the loan officers as possible, said Ron Greenspan, a financial adviser to the creditors of three other subprime mortgage lenders that filed for Chapter 11.
``The value is absolutely contingent on them being able to maintain the key employees,’’ said Greenspan, senior managing director in FTI Consulting’s Los Angeles office.
New Century said in court papers it created a bonus plan that may pay 1,300 employees in the lending unit $7.34 million to stick with the company, and asked permission to pay $15 million owed to workers for regular wages by April 6.
``It is essential that the human beings who are maintaining these businesses for sale have the resources to keep them operating,’’ the company said in court papers.
Harvey Miller, a partner at the Weil, Gotshal & Manges law firm in New York, said New Century likely will be liquidated.
Finance companies just do not do well in Chapter 11,'' he said, adding that at New Century,there isn’t much to reorganize around.’’
Ownit Mortgage Solutions Inc. of Agoura Hills, California; Mortgage Lenders Network USA Inc. of Middletown, Connecticut; ResMae Mortgage Corp. of Brea, California; and People’s Choice Financial Corp. of Irvine are among rival companies that filed for bankruptcy.
The Wall Street firms that backed New Century probably will have limited losses, Miller said, because their loans were secured by the company’s loans and other assets.
``The major institutional holders have said they’re over- collateralized,’’ he said. Stockholders and junior creditors may be wiped out, he said.
U.S. prosecutors opened a criminal probe of accounting errors and trading in securities at New Century, the company said March 2 in a filing with the U.S. Securities and Exchange Commission. Since then, more than a dozen states have told the company to halt operations, citing complaints from borrowers that their loans weren’t being funded.
Subprime mortgages are made to people with blemished credit records or heavy debts. The loans typically charge 2 to 3 percentage points more than those to people with less-risky credit profiles, and often carry adjustable interest rates that can cause payments to jump in later years.
Securities firms and banks financed New Century and other mortgage lenders to create a steady flow of mortgages they could package into bonds. With delinquent home loans rising nationwide, those firms have cut back credit to mortgage lenders.
The Wall Street firms that provided about $17.4 billion in credit lines to New Century after March 2 demanded that the company post $150 million in cash as additional collateral. The company had to halt new loans after it failed to make the payment and couldn’t persuade the Wall Street firms to keep the credit lines open.
New Century was founded in 1995 by a trio of former managers at Option One Mortgage – now a unit of H&R Block Inc. – including current Chief Executive Officer Brad Morrice. In the late 1990s the company survived an industry shakeout that led to the bankruptcies of bigger rivals including United Cos.
Since then its growth had surpassed that of all other subprime underwriters. In the past two years, New Century underwrote about $120 billion of loans, or more than half the total since its inception. Subprime loans accounted for 86 percent of all New Century loans last year, the company said in today’s court filings.
Morrice, 50, praised the subprime mortgage industry in New Century’s statement today and said he was proud of the company’s legacy. Since inception, employees have made about 1.4 million loans totaling more than $225 billion, the statement said.
``These loans have helped millions of Americans, many who might not otherwise have been able to access credit or to realize the benefits of home ownership,’’ Morrice said in the statement.
New Century may have compounded its losses by lowering underwriting standards to keep business flowing in 2005 and 2006 as interest rates rose and home sales slumped.
``As a management team, they were just probably a little too focused on pleasing the market with growth, introducing more and more new products and hiring more people when in reality they should have been tightening,’’ Howlett said.
They were trying to correct themselves toward the end,'' he said,but it was just too late.’’
The case is New Century TRS Holdings Inc., 07-10416, U.S. Bankruptcy Court, Wilmington, Delaware.