New Century Financial

New Century Financial was a major American subprime mortgage originator based in Irvine, California. Founded in 1995, it grew rapidly to become the second-largest provider of subprime loans in the United States by 2006. The company's aggressive lending practices and reliance on the secondary market for funding made it a central player in the subprime mortgage crisis. Its spectacular collapse in early 2007, culminating in a Chapter 11 bankruptcy filing, is widely considered a key early event that signaled the onset of the broader global financial crisis.

History

The company was founded in 1995 by former managers from Fleet Mortgage Group, including Brad Morrice, Robert K. Cole, and Patti M. Dodge. It conducted an initial public offering in 1997, becoming a public company traded on the NASDAQ under the symbol NEW. Fueled by the housing boom of the early 2000s, the company expanded aggressively through acquisitions like the 2004 purchase of Home123 Corporation. By 2006, it operated a national network of loan officers and was originating billions of dollars in loans annually, reporting record profits that year. Its rapid ascent was emblematic of the shadow banking system that proliferated during the period.

Business model

The company operated primarily as a mortgage real estate investment trust (REIT), which provided certain tax advantages. Its core business involved originating subprime mortgage loans through its own sales force and a network of independent mortgage brokers. Unlike traditional banks, it did not hold these loans to maturity but instead sold them as mortgage-backed securities (MBS) to investment banks like Lehman Brothers and Goldman Sachs on the secondary market. This "originate-to-distribute" model generated fee income and shifted the credit risk of the loans to investors. The company also maintained lines of credit from major Wall Street firms to fund its operations.

Subprime mortgage lending practices

The company was known for offering a wide array of high-risk loan products. These included adjustable-rate mortgages (ARMs) with low introductory "teaser rates," interest-only mortgages, and loans with minimal documentation requirements, often called "liar loans" or stated income loans. It heavily promoted 2-28 loans, where a low fixed rate for two years would adjust to a much higher rate for the remaining 28 years. Underwriting standards were frequently relaxed, with loans often made based on the inflated appraised value of the property rather than the borrower's ability to repay, a practice that increased loan-to-value ratios.

Financial decline and bankruptcy

The company's decline began in late 2006 as the housing market cooled and mortgage delinquency rates rose. In February 2007, it announced it would have to restate its 2006 financial results due to a surge in loan repurchase demands from its Wall Street partners, who required the company to buy back defaulted loans. Major lenders, including Bank of America and Citigroup, subsequently cut off its lines of credit. The New York Stock Exchange delisted its stock in March 2007 after it failed to file its annual report with the Securities and Exchange Commission. On April 2, 2007, it filed for Chapter 11 bankruptcy protection in the United States District Court for the District of Delaware, one of the largest corporate casualties of the emerging crisis.

Aftermath and legacy

The bankruptcy led to the liquidation of its remaining assets and the loss of thousands of jobs. Its failure sent shockwaves through the financial markets, eroding confidence in mortgage-backed securities and exposing the vulnerabilities of other lenders like Countrywide Financial and IndyMac. The Securities and Exchange Commission later charged its founders and senior executives with securities fraud, alleging they misled investors about the company's deteriorating financial health. The Department of Justice also reached a settlement with its auditing firm, KPMG. The collapse is extensively analyzed in reports by the Financial Crisis Inquiry Commission and remains a textbook case of the reckless lending and systemic risk that precipitated the Great Recession.

Category:Defunct companies based in California Category:Subprime mortgage crisis Category:Companies that filed for Chapter 11 bankruptcy in 2007