Shady Practices Led to New Century Financial's Fall

Two years ago, New Century Financial was the country's second largest subprime mortgage lender. Now, it's in bankruptcy, and a new report mandated by the bankruptcy court shines light on the company's shady practices.

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RENEE MONTAGNE, host:

And a new report slams the accounting practices of a company that used to be one of the country's biggest subprime mortgage lenders, until it went bankrupt. The report says New Century Financial took risky products and made them riskier. All in the name of making more loans.

NPR's Carrie Kahn has details.

The 550-page report was unsealed yesterday and paints a poor picture of New Century Financial, at one time the country's second largest subprime mortgage lender. Examiner Michael Mizell, a former senior counsel at the Security and Exchange Commission, authored the report.

Mr. MICHAEL MIZELL (Security and Exchange Commission): What we found was it really shows the embryo of the credit crisis and how easy it was to originate very risky loans and put them into the financial system.

KAHN: He says New Century had a brazen obsession with making loans. It would let applicants just declare income without asking for proof, and frequently used deficient appraisals to value homes.

Mr. MIZELL: While I don't disagree that a goal of any mortgage company should be to increase sales, you need to do that in a way in which you manage the risk, and that wasn't done here.

KAHN: Mizell also faults New Century's auditor, KPMG, with lax oversight, a charge the accounting firm denies. A New Century spokesman would only say that it is pleased that the examiner's report is completed and looks forward to concluding the company's bankruptcy process.

Carrie Kahn, NPR News.

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New Century's Risky Lending Practices Detailed

Before the mortgage company New Century went bankrupt last year, it was the second-largest sub-prime lender in the country. A court-appointed examiner released a new report Wednesday that finds widespread wrongdoing at the company and also alleges negligence by the company's auditor KPMG.

The report says New Century had a brazen obsession with selling more loans without due regard to the risks.

Michael J. Missal, the examiner appointed to dig into New Century's collapse as part of the bankruptcy process, says, "What we found was it really shows the embryo of the credit crisis and how easy it was to originate very risky loans and put them into the financial system."

In its quest for new customers, New Century made increasingly unwise loans, according to the report. Borrowers incomes weren't documented. Loans were offered for the full value of a house. Missal adds, "They took risky products — made them that much riskier — and essentially created a ticking time bomb that exploded in 2007 as the market was changing."

Missal was also charged with finding causes for lawsuits that creditors might pursue. He named New Century's accounting firm, KPMG:

"Their independent auditors, KPMG, were supposed to be there to test and be skeptical of the way New Century was doing business. I found that KPMG failed to do so and a cause of action may exist."

A spokesman for KPMG says the report needs to be reviewed.

Missal says executives at New Century also failed in their oversight responsibilities and engaged in improper accounting. He says top executives were paid millions of dollars in bonuses that were calculated based on inaccurate financial statements.

The SEC and Department of Justice are both investigating New Century.

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