Sub-prime lender on the brink
New Century Financial Corp. effectively gave up the ghost Thursday, laying off most of its remaining staff after the troubled sub-prime lender failed to find a taker for its mortgage origination unit.
Once the largest independent mortgage lender to risky borrowers, New Century had retained the unit’s 2,000 workers since its bankruptcy filing April 2, hoping someone would buy the loan-making operation. It was a tough sell: The company had quit lending March 8 after Wall Street cut off its funding, had been expelled from several states and was under criminal investigation for accounting that failed to acknowledge a mounting tide of loan losses before the company’s collapse.
The Irvine company’s chief executive, Brad Morrice, said a Bankruptcy Court deadline for a sale of the unit had passed and creditors would not allow New Century to continue the search for a buyer. As a result, the unit’s staff was being let go.
“I would be remiss if I did not apologize,” Morrice told employees Thursday, his voice faltering at times. He described it as “a day I never could imagine facing.”
The layoffs leave New Century with about 750 employees, down from 7,200 last year. About 500 work for a customer-service business that is being sold for $133 million to hedge fund Carrington Capital Management. About 250 workers in New Century’s headquarters operations remain on the payroll as the company completes its liquidation.
In the glass buildings that housed the company, “it’s absolute sadness. We were a family,” said Stanton Sasaki, a laid-off account executive from Huntington Beach. He said the atmosphere at the company was one of “shock and awe.”
“Even though we saw the wheels were coming off, we had a lot of faith that it would somehow work out -- until today,” he said, moving his boxed-up personal effects to his car at midday.
New Century was a leader in an industry that flourished during the housing boom by making higher-priced loans to borrowers with scarred credit, heavy debt or limited incomes. With home prices soaring, borrowers who had trouble making their payments could sell their homes at a profit or refinance with new low “teaser” rates.
As price increases began to taper off and customers became increasingly tapped out, the industry loosened its standards to keep its loan volume high. By last year, some borrowers with blotchy credit were getting 100% financing without having to prove they earned enough to make payments on these “stated income” mortgages.
When a wave of defaults ensued and foreclosures began to rise, New Century and dozens of smaller companies were unable to re-tighten lending standards fast enough to avoid disaster. Dozens of independent lenders have shut down this year as Wall Street firms that once provided credit lines, bought mortgages and packaged the loans for sale as securities have backed away from all but the safest forms of sub-prime lending.
Analyst Scott Valentin at investment bank Friedman Billings Ramsey & Co. said the market for even the safer sub-prime loans and mortgage-backed securities all but evaporated in late February and March but has improved somewhat of late.
In a positive sign for those remaining in the industry, he noted, Kansas City, Mo.-based sub-prime lender NovaStar Financial Inc. said Thursday that it had obtained $1.9 billion in financing from Wachovia Corp. that would allow NovaStar to continue making loans while looking for a buyer.
But even if investors now can be found for the less exotic forms of sub-prime loans and mortgage bonds, “it’s still not a profitable line of business to be in,” Valentin said.
Despite the woes, workers in the industry say there will always be a place for loans to people with less than perfect credit -- and jobs for people who can pitch the mortgages.
“If you are good at what you do, you will be highly marketable,” said Sasaki, the former New Century account executive.
He said he had been negotiating with several mortgage lenders still in business and was confident of landing a new job. “Hopefully the market is at its lowest point,” he said. “There is a need for the kind of financing we did at New Century.”
