New Century Financial
| Company type | Public (until 2007) |
|---|---|
| Industry | Real estate investment trust, Mortgage lending |
| Predecessor | Option One Mortgage (management origin) |
| Founded | 1995 |
| Founder | Brad Morrice (CEO), former management from Option One Mortgage |
| Defunct | 2007 (bankruptcy filing) |
| Fate | Filed for Chapter 11 bankruptcy; assets sold; brand acquired by private company |
| Successor | Home123 Corporation (subsidiary relaunched separately) |
| Headquarters | Irvine, California , United States |
Area served | United States |
Key people | Brad Morrice (President and CEO), Frederic J. Forster (Chairman) |
| Products | Mortgage loans, subprime mortgages |
Number of employees | 7,200 (early 2007) (2007) |
New Century Financial Mortgage Corporation operated as a real estate investment trust focused on originating mortgage loans across the United States via its subsidiaries, New Century Mortgage Corporation and Home123 Corporation.
Established in 1995, the company transitioned into a real estate investment trust in 2004. By 2006, it had become the second-largest issuer of subprime mortgages, surpassed only by HSBC Finance.
In early 2007, financial challenges forced New Century to suspend trading of its shares on the NYSE. On April 2, 2007, it filed for Chapter 11 bankruptcy protection. Subsequently, in July 2010, three executives agreed to settlements totaling $90 million and were prohibited from serving as directors of public companies for five years.
Company Formation
The firm was founded in 1995 by former management from Option One Mortgage, including CEO Brad Morrice, with headquarters located in Irvine, California. Starting operations with a staff of 50 in 1996, it engaged in loan origination and acquisition. Between 1997 and 2004, its stock price surged by 561 percent.
In 2004, the company converted to a real estate investment trust and commenced trading on the New York Stock Exchange. That year, mortgage originations totaled $42.2 billion, and its share price reached nearly $64. Net income for fiscal year 2005 was $417 million. By late 2005, New Century operated 35 regional offices while maintaining its headquarters in Irvine; California represented 37% of its business volume.
As of September 30, 2006, the company reported assets of $25.1 billion against liabilities of $23 billion, concluding the year with $350 million in cash and liquid assets. In 2006, it ranked second to HSBC Finance in issuing subprime mortgages, originating $51.6 billion in loans targeted at borrowers with limited or poor credit profiles and higher risk pricing. The Home123 Mortgage division featured Bob Vila as a spokesperson and sponsored NASCAR’s Chip Ganassi Racing team.
By early 2007, New Century was the largest independent subprime mortgage lender in the United States, employing around 7,200 full-time staff and holding a market capitalization of $1.75 billion as of January 1. Brad Morrice held the roles of president and CEO, with Frederic J. Forster serving as chairman.
Emergence of Financial Struggles
Loan origination activity slowed toward the end of 2006. By spring 2007, New Century entered a critical decline phase; on March 8 it announced cessation of accepting new loan applications. Four days later, trading of its shares on the NYSE was suspended.
On March 2, 2007, disclosures revealed ongoing federal criminal investigations and auditor KPMG's doubts regarding the company’s solvency. Over the next week, its stock value plummeted by 78%. Early March filings indicated failure to comply with lender financial covenants.
Although publicly traded at that time, insiders within the mortgage industry had suspected since late 2006 that New Century had lost access to warehouse credit lines. On March 8 it halted new loan funding requests; by March 12 most creditors withdrew financing and warned about impending loan defaults. One financier demanded repurchase of loans under contractual clauses.
A filing dated March 12 disclosed that lenders could demand repayment of $8.4 billion in loans—a sum New Century was unable to cover—pushing the company toward insolvency. The NYSE delisted New Century on March 13 after shares lost 89% value during that month; market capitalization dropped below $55 million. Subsequently, shares traded over-the-counter at approximately $0.10 each.
On March 13, New Century announced receipt of a grand jury subpoena alongside an SEC preliminary inquiry concerning securities transactions and accounting irregularities related to repurchase loss reserves.
By March 14, Barclays Bank demanded immediate repayment of $900 million in mortgage loans; at that time New Century’s cash reserves were under $60 million.
The company and its affiliate Home123 were issued cease and desist orders by Connecticut authorities for failing to adhere to regulatory agreements. Lending activities were blocked by New Hampshire and New Jersey due to undisclosed financial issues. By mid-March similar orders extended across eight states including California, Maryland, Rhode Island, Tennessee, and Pennsylvania. New Century expressed intentions to comply while pursuing appeals.
On March 20, New Century announced termination "for cause" by Fannie Mae of contracts allowing loan sales and mortgage servicing due to breaches identified by Fannie Mae.
Bankruptcy
On April 2, 2007, New Century Financial Corporation initiated Chapter 11 bankruptcy proceedings in the United States Bankruptcy Court for the District of Delaware. The company reported liabilities surpassing $100 million and announced the dismissal of approximately 3,200 employees, which accounted for more than half of its staff. These layoffs had already taken place prior to the bankruptcy filing, alongside plans for a swift asset sale. To sustain operations during the bankruptcy process, New Century obtained $150 million in financing from CIT Group Inc. and Greenwich Capital. The company was believed to have nearly 100,000 creditors.
On May 25, 2007, New Century disclosed in an 8-K filing that it had probably inflated its earnings for the year 2005.
By June 8, 2007, New Century cautioned that GE Capital's efforts to reclaim leased equipment valued at $8.7 million could interfere with its asset liquidation and debt repayment activities. This leased equipment included vital computer servers housing critical accounting information. Preserving this infrastructure was essential to maintain the loan-servicing operations—which had recently been sold to Carrington Capital Management for $188 million—as a viable ongoing business.
In March 2008, amid liquidation proceedings, a private company based in Northern Illinois acquired only New Century’s brand assets, including Home123. Home123 was subsequently relaunched as a real estate marketing and technology enterprise aimed at facilitating connections between people and resources. As of 2008, the New Century brand itself was available for sale.
Lawsuits and settlements
A bankruptcy court examiner’s report released on March 26, 2008, identified "significant improper and imprudent practices" within New Century Financial’s loan origination processes, operational management, accounting methods, and financial disclosures. The report also implicated auditor KPMG in assisting the company’s concealment of these issues during 2005 and 2006.
On December 7, 2009, federal regulators filed lawsuits against three former executives—Brad Morrice, Patti M. Dodge, and David N. Kenneally—alleging they deceived investors regarding the company’s outlook amid widespread mortgage industry fraud.
In July 2010, these executives consented to pay $90 million in settlements and were prohibited from serving on public company boards for five years. This settlement resolved claims brought by the SEC as well as investor class representatives. Although financial penalties and profit disgorgements were imposed, none of the defendants admitted to any wrongdoing.
The SEC did not pursue legal action or impose bans on New Century’s directors. Nevertheless, co-founders Robert K. Cole and the estate of Edward Gotschall, along with other former board members—including Fredrick J. Forster, Michael M. Sachs, Harold A. Black, Donald E. Lange, Terrence P. Sandvik, Richard A. Zona, Marilyn A. Alexander, hedge fund manager David Einhorn, and William J. Popejoy—were participants in the civil class action settlement alongside the officers.
In popular culture
In The Big Short (2015), investors Charlie Geller and Jamie Shipley place significant bets against subprime mortgage bonds. They endure a period of uncertainty as defaults increase but housing prices remain steady. On April 2, 2007, they discover New Century’s bankruptcy announcement through CNN, marking a pivotal moment indicating the collapse of the market.
See also
- Articles with short description
- Real estate investment trusts based in the United States
- Financial services firms founded in 1995
- Companies that declared Chapter 11 bankruptcy in 2007
- Financial services providers in the United States
- Formerly listed companies on the New York Stock Exchange
- Lenders specializing in subprime mortgages
- Subprime mortgage crisis
- Financial services companies of the United States