New Century files for Chapter 11 bankruptcy
Troubled subprime mortgage to cut 3,200 jobs, sell servicing, seek funding while it reorganizes.
NEW YORK (CNNMoney.com) -- New Century Financial Corp. said Monday it will immediately cut 3,200 jobs, or 54 percent of its work force, as part of its Chapter 11 bankruptcy reorganization.
The Irvine, California-based company also said it agreed to sell its servicing assets and platform to Carrington Capital Management LLC for $139 million, subject to bankruptcy approval.
Separately, New Century said CIT Group Inc (up $0.67 to $53.98, Charts). and Greenwich Capital Financial Products have agreed to provide up to $150 million of debtor-in-possession financing to keep the company in business as it reorganizes.
But after defaults started rising last year, the subprime mortgage market imploded in February, contributing to a sell off in the stock market and fueling fears that more weakness in housing, and tighter credit in general, would hurt the economy, and possibly even spark a recession.
Poster child for subprime mortgages
New Century, based in Irvine, Calif., could be the poster-child for the meltdown in subprime mortgages. Few of its problems were known in January, but since then it has announced criminal probes into its practices, a cut-off of financing by lenders and questions by its auditors about its ability to stay in business. Its shares are being delisted by the New York Stock Exchange.
New Century CEO Brad A. Morrice said in a statement: "The decision to pursue the sale of the company's assets and operations through the bankruptcy process was a difficult but appropriate decision for our Board to make."
"The Board and I particularly regret the impact that the bankruptcy filing will have on our dedicated associates. But after diligently exploring a variety of other potential solutions that would have enabled New Century to continue its operations, the chapter 11 process provides the best means for selling our servicing and loan origination operations to financially sound parties," Morrice said in a statement.
But New Century's problems are not its alone. It said in a filing on March 12 that its lenders, including major financial institutions, can demand $8.4 billion in loan repayments that it can't repay. Among its creditors are units of Bank of America (up $0.12 to $50.55, Charts), Morgan Stanley (Charts), Citigroup (up $0.41 to $51.46, Charts), Barclays Bank (up $0.07 to $57.65, Charts) and UBS (up $0.75 to $60.33, Charts).
And the problems in subprime lending extend beyond New Century.
Lenders made $640 billion in subprime loans last year, nearly twice the level just three years earlier, according to Inside B&C Lending, which tracks the mortgage business.
The Mortgage Bankers Association says subprime amounted to about 20 percent of the nation's mortgage lending and about 17 percent of home purchases in 2006. Financial firms and hedge funds likely own more than $1 trillion in securities backed by subprime mortgages.
The mortgage bankers group reported in early March that about 13 percent of subprime loans are now delinquent, more than five times the delinquency rate for home loans to borrowers with top credit. In addition, more than 2 percent of subprime loans had foreclosure proceedings start in the fourth quarter.
Just how much the problems in subprime have hurt the already struggling real estate market remain to be seen. But the subprime mess is already leading to tighter lending standards, and that alone could further depress home prices, which are already undergoing their steepest, widespread decline in history.
Dr. Greg Hallman, who lectures on real estate finance at the University of Texas, said the New Century bankruptcy put an exclamation point on the era of investing in securitized subprime debt.
"It's probably over for time being," said Hallman. "That market worked for as long as investment banks provided funding."
"[The banks] have cut the money off."
New Century's problems started to spiral out of control early in March. On March 2 it announced it was the subject of two criminal probes and that its outside auditor, KPMG, had doubts about its ability to stay in business.
Its stock lost 78 percent of value the following week as its problems mounted. On March 8 it announced it was no longer accepting applications for subprime mortgages. Early March 12 it said most of its creditors had cut off financing or planned to do so. It also warned it was in default of many of its loan obligations.
The New York Stock Exchange suspended trading in New Century's stock.
The next day it said it was the subject of an SEC probe, and that it had been required to turn documentation over to a grand jury looking into its operations.
The quick fall at New Century comes after an equally rapid rise. New Century began originating and purchasing loans in 1996 employing 50 people. The company converted to a real estate investment trust in 2004. By 2006, the company employed 7,200 people. From June 1997 to December 2004, the companies stock rose from $9.67 to $66.95 or 561 percent.
But then in the second half of last year, as the economy slowed and the impact of rising mortgage rates started to bite, business began to slow. It generated $3.7 billion in loans in February 2007, 84 percent of them subprime, down from $4.2 billion in new loans in January 2007, 81 percent subprime.
As of last Monday its Web site was still highlighting this ironically proud claim "Where does a company go after its rapid growth to the ranks of the nation's top mortgage lenders? Back to work." By Wednesday, the boast about its growth and future plans was missing.
Geographically, California's overheated housing market figured centrally to New Century's business. In 2005, according to its annual report, 37 percent of New Century's business was in California.
Florida - another overheated market - contributed 8.6 percent of its business in 2005, followed by New York and then Arizona. Those states have seen some of the biggest declines in home prices after the building boom of recent years led to a glut of new homes on the market.
Of the subprime debt itself, Hallman predicts investment banks will see losses from the fees they generated in packaging and selling the debt.
And of the increasingly crippled debt itself?
"We don't know who has it," Hallman said. "It's going to pop up somewhere."
Hallman points out that the debt has been spread pretty thin. "We shall see."
--from wire and staff reports.