Huge Lender New Century Files for Bankruptcy
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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