Huge Lender New Century Files for Bankruptcy New Century, a subprime lender that was once the second-largest in the industry, has filed for bankruptcy. The company is joining the ranks of many other subprime lenders to crash and burn in the housing market downturn.
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Huge Lender New Century Files for Bankruptcy

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Huge Lender New Century Files for Bankruptcy

Huge Lender New Century Files for Bankruptcy

Huge Lender New Century Files for Bankruptcy

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New Century, a subprime lender that was once the second-largest in the industry, has filed for bankruptcy. The company is joining the ranks of many other subprime lenders to crash and burn in the housing market downturn.

MELISSA BLOCK, host:

From NPR News, this is ALL THINGS CONSIDERED. I'm Melissa Block.

One of the nation's largest providers of home loans to people with bad credit filed for bankruptcy today. The New Century Financial Corporation is laying off more than 3,000 workers and has begun to sell off parts of its business.

As NPR's Scott Horsley reports, the bankruptcy is the biggest yet in the meltdown of the so-called subprime mortgage industry.

SCOTT HORSLEY: New Century has written the subprime roller coaster up and now down. The Southern California company made nearly $60 billion in home loans last year to borrowers with less than perfect credit. Often those loans came with no down payment and sometimes no check of the borrower's income.

New Century's lending had mushroomed almost tenfold in the last five years. Employees reportedly were rewarded with lavish perks including a cruise in the Bahamas and trips to Porsche Driving School. David Olson, of the Mortgage Research from Wholesale Access, says New Century itself relied on money borrowed from Wall Street, which repackaged the mortgages and sold them to investors.

Mr. DAVID OLSON (Mortgage Researcher, Wholesale Access Mortgage Research & Consulting, Inc.): A lot of this is driven in the security market, which seemed to have an endless appetite for junk loans. They wanted high interest.

HORSLEY: So long as home prices were rising, nobody had to worry too much about the home loans being repaid. Now that the housing bubble has burst, though, Olson says more and more borrowers are defaulting on their mortgages.

Mr. OLSON: Property values are falling, so you can't sell your house and just pay off the loan. You can't get the quick fix.

HORSLEY: That problem of rising defaults was amplified last month when Wall Street suddenly lost confidence in subprime loans and demanded New Century buy them back. Now the company found itself in the same position as some of its subprime customers, faced with a huge bill and not enough money to pay up.

Three weeks ago, New Century announced that if it had to buy back all of its mortgages, it could be on the hook for nearly $8.5 billion, and all its Wall Street lenders had abruptly cut off funding.

Mr. OLSON: They get nervous and they say we don't want to take this risk anymore.

HORSLEY: New Century was facing other problems, including a class-action lawsuit by investors and a criminal investigation into its accounting and stock trades. By last week, bankruptcy was a foregone conclusion.

New Century CEO Brad Morrice said in a statement today, bankruptcy was a very hard step for me personally. But he said given the sudden and significant challenges facing our industry, bankruptcy offers the best chance for an orderly sale of the company's assets.

Bankruptcy expert Charles Tatelbaum, of the Florida law firm Adorno & Yoss, knows New Century has already lined up buyers for its loan servicing business and some of its mortgages.

Mr. CHARLES TATELBAUM (Attorney, Adorno & Yoss): What this does, and I suspect that the reason they've waited so long to file the Chapter 11, is they wanted to have the sales in place so they don't lose what value they do have in the good business.

HORSLEY: Together, the sales would generate less than $200 million, although higher bids could still come in. Even though New Century is laying off more than half its work force, CEO Morrice thinks the subprime industry will survive as an important part of the American economy.

Mortgage researcher Olson is not so sure. He thinks the roller coaster still has a long way to fall.

Mr. OLSON: The big issue for all of us to consider is how widespread will this be. Will it extend beyond the subprime mortgage industry? That's the $64,000 question.

HORSLEY: Already subprime credit is getting harder to come by. That could pose additional challenges for borrowers hoping to refinance out of the adjustable mortgages before higher payments kick in.

Scott Horsley, NPR News, San Diego.

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Rise and Fall of Subprime Lenders Began on Wall St.

Rise and Fall of Subprime Lenders Began on Wall St.

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Timothy O'Connor conducts a foreclosure auction in Miami. Florida had 19,144 homes enter foreclosure in February, the most of any state, according to RealtyTrac. Getty Images hide caption

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Subprime Rules?

It all started last November, when a relatively small lender — called Own-It Mortgage Solutions — defaulted on its loans to JP Morgan Chase & Co. Since then, more than 24 subprime lenders have folded, victims of rising default rates — but also of rising suspicions that the entire subprime market is teetering.

One of the nation's biggest subprime lenders, New Century Financial, is expected to file for bankruptcy any day now.

Like a lot of lenders in the subprime market, New Century specialized in zero-down and no-interest loans, which cater to people with credit problems. For years, the company was able to prosper because of the financial support of much bigger Wall Street banks.

But as the housing market has slowed, and regulations have tightened, that support has quickly dried up.

Subprime lending has long been the forgotten, low-rent corner of the mortgage business, touched by a down-market taint. But the image is deceiving, industry analysts say: Subprime lending is based on the support of Wall Street's old-line banking establishment.

"It encouraged it; it funded it," says Guy Cecala, publisher of the Inside Mortgage Finance newsletter. "Since the mid-90s, warehouse lending by Wall Street firms is what's kept companies like New Century in business."

Cecala says that at one time, companies that were in the mortgage business lent out their own money.

But in the mid-1990s, there was an explosion in mortgage-backed securities. Mortgages could now be repackaged as bond debt and sold to investors. Companies like Countrywide could now market and sell mortgages to their customers.

And that, in turn, led to spreading risk. But it also opened the door to a lack of certainty over borrowers' ability to repay loans that had been pooled together and sold to investors like mutual funds.

"These loans get sliced and diced, securitized and spread to the wind," former Federal Reserve Governor Edward Gramlich says, "and nobody has a clue who the ultimate — they know who the borrower is — but where the money comes from. It's all around the world."

Investors loved the securities, seeing them as a way to invest in mortgages when the housing market was strong. They even loved the risky subprime mortgages that came from customers with weak credit. Big banks like Wells Fargo and Citicorp started their own subprime divisions.

The big banks had another reason to like subprime lending. Keith Ernst of the Center for Responsible Lending says that many subprime companies are state-chartered, which means they aren't highly regulated.

"I certainly think this helped the volume grow as quickly as it did," Ernst says. "And I also think it's part of the reason the quality is not what anyone wishes it would be."

Ernst says that under federal law, banks have to meet certain safety and soundness regulations, so if they go out too far on a limb — by making too many questionable loans, for instance — the regulators will reel them in.

Guy Cecala echoes that view.

"What we're seeing now in the subprime market is, when the Wall Street firms get cool on the subprime market, they just cut the funding," Cecala said. "And the warehouse loans vanish overnight — and that's what puts a company like New Century out of business."

Analysts say that the upshot of the troubles in the subprime loan industry is that there will be fewer companies offering loans to people with weak credit scores — which means home ownership will get a little more elusive for low-income people.

But it should also wash a lot of risk out of the mortgage market, making it ultimately safer and more stable — at least until the next housing boom occurs.