Mortgage lender begins bankruptcy proceedings
Mortgage lender New Century Financial Corp. proved the old adage Monday: the bigger they are, the harder they fall.
The Irvine, Calif., company was once the largest independent company specializing in "subprime" mortgages to borrowers considered high credit risks. And on Monday, it became the largest subprime lender to file for bankruptcy, firing 3,200 workers and saying it would aim to sell its remaining operations.
"It is our hope that potential buyers will be in a stronger position than we are to employ many of our associates on an on-going basis," Chief Executive Brad A. Morrice said in a statement.
The bankruptcy filing and layoffs of more than half of New Century's workforce is the latest sign of a larger subprime shakeout, which was triggered by a sharp rise in loan delinquencies. More than two dozen lenders have been closed, sold or forced to cease subprime operations.
Will Spires was among those laid off at New Century. As he sees it, he's not just leaving a company -- he's leaving an industry. He plans to look for work as a salesman or finance manager at a car dealership.
"We made decent money," selling New Century loans, said Spires, an account manager in Houston. "But people are still buying cars, the car dealers are still in business, and New Century is not."
Work throughout the sector is drying up. Many subprime borrowers obtained loans with no down payments, often without having to prove their income, and with low introductory teaser rates, hoping to refinance before their payments shot up.
But as lenders tighten standards amid rising defaults and weakening home prices, many of these borrowers won't qualify for new loans.
Countrywide Financial Corp. in Calabasas, Calif., the No. 1 U.S. mortgage lender, has estimated that 60 percent of its subprime customers have adjustable-rate loans that they would be unable to obtain under guidelines proposed by federal bank regulators, said analyst Zach Gast of the Center for Financial Research and Analysis, a Rockville, Md., company that advises big investors such as hedge funds.
Gast said that when the industry stabilizes, it will be dominated by large commercial and investment banks, such as Wells Fargo & Co. of San Francisco and London-based HSBC, the No. 1 subprime lender in the U.S. last year. For these banks, subprime lending is just one facet of their business.
New Century, by comparison, had all its eggs in the subprime basket.
The 12-year-old company weathered the last big shake-out in the industry during the late 1990s and then grew "gigantic -- and arrogant too, cocky," said analyst Matthew Howlett at the investment firm Fox-Pitt, Kelton.
Morrice and co-founders Robert K. Cole and Edward F. Gotschall made tens of millions of dollars each in salary, bonuses and stock options. Striving to take its image mainstream, New Century had adopted the slogan "A New Shade of Blue Chip."
But its loans performed no better than average for a subprime lender, Howlett said. 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.
Independent subprime companies generally sell their loans to Wall Street firms, which can force the lenders to buy back mortgages that go quickly into default. New Century stunned investors and triggered its eventual downfall on Feb. 7, when it announced it had grossly underestimated the losses it would suffer as a result of numerous loan repurchase demands.
It was hit almost immediately by a wave of shareholder lawsuits contending its top executives had made millions exercising stock options while concealing the company's troubles from other shareholders.
The company then disclosed that it was under investigation by federal prosecutors and the Securities and Exchange Commission for its accounting practices and stock sales by top executives.
The filing for Chapter 11 bankruptcy protection, made in federal court in Wilmington, Del., had been anticipated since March 9, when New Century stopped lending after its Wall Street partners cut off its funding. More recently, at least two of the partners, Barclays and Morgan Stanley, had moved to seize and sell pools of its mortgages to satisfy their claims against the Irvine-based mortgage lender.
The layoffs announced Monday comprised 54 percent of the company's staff, and came mainly at New Century's shuttered loan-origination arm, for which no buyer has emerged.
Carrington Capital Management, a Connecticut hedge fund, has agreed to pay US$139 million for a separate operation where about 550 other employees work, a servicing business that bills borrowers and collects payments, the company said.
New Century's remaining interests in loans, its only other significant asset, will be sold for a net gain of US$50 million, Morrice said.
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The Irvine, Calif., company was once the largest independent company specializing in "subprime" mortgages to borrowers considered high credit risks. And on Monday, it became the largest subprime lender to file for bankruptcy, firing 3,200 workers and saying it would aim to sell its remaining operations.
"It is our hope that potential buyers will be in a stronger position than we are to employ many of our associates on an on-going basis," Chief Executive Brad A. Morrice said in a statement.
The bankruptcy filing and layoffs of more than half of New Century's workforce is the latest sign of a larger subprime shakeout, which was triggered by a sharp rise in loan delinquencies. More than two dozen lenders have been closed, sold or forced to cease subprime operations.
Will Spires was among those laid off at New Century. As he sees it, he's not just leaving a company -- he's leaving an industry. He plans to look for work as a salesman or finance manager at a car dealership.
"We made decent money," selling New Century loans, said Spires, an account manager in Houston. "But people are still buying cars, the car dealers are still in business, and New Century is not."
Work throughout the sector is drying up. Many subprime borrowers obtained loans with no down payments, often without having to prove their income, and with low introductory teaser rates, hoping to refinance before their payments shot up.
But as lenders tighten standards amid rising defaults and weakening home prices, many of these borrowers won't qualify for new loans.
Countrywide Financial Corp. in Calabasas, Calif., the No. 1 U.S. mortgage lender, has estimated that 60 percent of its subprime customers have adjustable-rate loans that they would be unable to obtain under guidelines proposed by federal bank regulators, said analyst Zach Gast of the Center for Financial Research and Analysis, a Rockville, Md., company that advises big investors such as hedge funds.
Gast said that when the industry stabilizes, it will be dominated by large commercial and investment banks, such as Wells Fargo & Co. of San Francisco and London-based HSBC, the No. 1 subprime lender in the U.S. last year. For these banks, subprime lending is just one facet of their business.
New Century, by comparison, had all its eggs in the subprime basket.
The 12-year-old company weathered the last big shake-out in the industry during the late 1990s and then grew "gigantic -- and arrogant too, cocky," said analyst Matthew Howlett at the investment firm Fox-Pitt, Kelton.
Morrice and co-founders Robert K. Cole and Edward F. Gotschall made tens of millions of dollars each in salary, bonuses and stock options. Striving to take its image mainstream, New Century had adopted the slogan "A New Shade of Blue Chip."
But its loans performed no better than average for a subprime lender, Howlett said. 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.
Independent subprime companies generally sell their loans to Wall Street firms, which can force the lenders to buy back mortgages that go quickly into default. New Century stunned investors and triggered its eventual downfall on Feb. 7, when it announced it had grossly underestimated the losses it would suffer as a result of numerous loan repurchase demands.
It was hit almost immediately by a wave of shareholder lawsuits contending its top executives had made millions exercising stock options while concealing the company's troubles from other shareholders.
The company then disclosed that it was under investigation by federal prosecutors and the Securities and Exchange Commission for its accounting practices and stock sales by top executives.
The filing for Chapter 11 bankruptcy protection, made in federal court in Wilmington, Del., had been anticipated since March 9, when New Century stopped lending after its Wall Street partners cut off its funding. More recently, at least two of the partners, Barclays and Morgan Stanley, had moved to seize and sell pools of its mortgages to satisfy their claims against the Irvine-based mortgage lender.
The layoffs announced Monday comprised 54 percent of the company's staff, and came mainly at New Century's shuttered loan-origination arm, for which no buyer has emerged.
Carrington Capital Management, a Connecticut hedge fund, has agreed to pay US$139 million for a separate operation where about 550 other employees work, a servicing business that bills borrowers and collects payments, the company said.
New Century's remaining interests in loans, its only other significant asset, will be sold for a net gain of US$50 million, Morrice said.
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