A Troubled Niche in Lending About to Shrink Further
New Century Financial Corp., one of the last remaining independent players in an increasingly beleaguered lending niche, said Friday that it is seeking a buyer for all or part of the company.
Shares in the Irvine mortgage lender, which specializes in home loans for people with bad credit or low income, rose 8% on news that the company retained investment advisor PaineWebber Inc. to explore its options.
The stock closed Friday at $8.66, up 66 cents in Nasdaq trading.
“Our continuing objective is to maximize the value of New Century for our stockholders, and we believe that raising additional capital could further that goal,” said Chairman Robert Cole. He said the company needs the new capital to fund growth.
Company officials would not comment on potential buyers, but U.S. Bancorp, which already controls a 27.5% stake in New Century, is a strong candidate. The Minneapolis bank has invested $40 million in New Century since late 1998 through a combination of debt and equity.
Officials at U.S. Bancorp declined to comment.
New Century originated about $4 billion in mortgages last year, earning a profit of nearly $40 million. But despite its strong growth, the 4-year-old company now finds itself in a hotly competitive and troubled industry.
The recent bankruptcy of First Alliance Corp. in Irvine set off a firestorm of criticism over the fees and practices of sub-prime mortgage companies. First Alliance went out of business in March amid a wave of lawsuits and investigations into allegations of predatory lending. The company denies any wrongdoing.
Now legislators, regulators and consumer groups are calling for tougher regulations for all sub-prime lenders. Earlier this week, the Clinton administration unveiled a variety of measures designed to protect borrowers. And investors on Wall Street, who fueled the industry’s growth by purchasing sub-prime loans on the secondary market, are backing away from the business.
Analysts said these issues probably contributed to New Century’s decision to seek a buyer.
“Even if a company has done nothing wrong, the investigations are casting aspersions on the general business practices of the entire industry,” said Merrill Ross, analyst at Friedman, Billings, Ramsey in Virginia. “Whenever you have increased scrutiny and oversight, it’s going to increase the cost of doing business.”
New Century is also facing tough new competition from traditional banks and financial institutions, which have invaded the profitable sub-prime industry over the past two years. Washington Mutual, for instance, swallowed one of New Century’s rivals, Long Beach Financial Corp. in Orange, in a $350-million deal last year.
But it’s unlikely that New Century would fetch the same price, given the industry’s growing problems, analysts said. An unnamed money manager in New York, quoted Thursday in Business Week, said the company could sell for $15 a share.
Besides U.S. Bancorp, other top shareholders include Brookhaven Capital Management in Menlo Park and Foundation Cos., a subsidiary of the Baptist Foundation of Arizona.
Company executives, including Cole, own nearly a 40% stake.
