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Major Home Lender Files for Bankruptcy
By GARY GENTILE
AP Business Writer
LOS ANGELES (AP) -- Subprime lender New Century Financial
Corp., once the nation's second-largest provider of mortgages
to high-risk borrowers, filed Monday for bankruptcy protection
and immediately fired 3,200 workers, or 54 percent of
its work force.
The company said it intends to sell off its major assets.
"The Chapter 11 process provides the best means
for selling our servicing and loan origination operations
to financially sound parties," president and chief
executive Brad A. Morrice said in a statement.
"It is our hope that potential buyers will be in
a stronger position than we are to employ many of our
associates on an ongoing basis," he said.
New Century made the move after exploring a variety
of possible ways to stay in business, he said.
New Century was the latest subprime lender to fall on
hard times amid a spike in mortgage defaults caused by
borrowers unable to make payments.
Subprime loans target borrowers with low credit scores.
The mortgages carry relatively high interest rates but
can also offer low initial payments.
More than two dozen subprime lenders have shut down
in recent months and others are scrambling to stay in
business.
New Century said it had agreed to sell its loan servicing
business to Carrington Capital Management LLC and its
affiliate for about $139 million, subject to the approval
of the bankruptcy court.
CIT Group and Greenwich Capital Financial Products Inc.
have agreed to provide up to $150 million in working
capital to facilitate the reorganization process, the
company said.
New Century has also agreed to sell certain loans and
residual interest in some trusts to Greenwich Capital
for $50 million.
New Century, based in Irvine, filed for Chapter 11 protection
in U.S. Bankruptcy Court for the District of Delaware.
The move had been expected for several weeks.
"This was a very hard step for me personally and
clearly not the outcome I would have preferred," Morrice
said.
Like other subprime lenders, New Century profited during
the real estate boom, when appreciation rates soared
and equity protected most homebuyers from defaulting
on their loans. Most could simply refinance or sell homes
at a big enough profit to pay off mortgages and move
on.
Investment banks also jumped in, eager to buy loans
from sub-prime lenders then slice them up into bond products
to sell on Wall Street.
That helped New Century stock hit its historic high
of $65.95 in December 2004. Its loan production for 2005
hit a record $56.1 billion.
On Feb. 7, however, New Century informed the Securities
and Exchange Commission that it would have to restate
financial results for the first three quarters of 2006.
The company said it had failed to accurately tally losses
from loan repurchases.
It also faces federal probes by the SEC and the U.S.
Justice Department. And shareholders, angry over their
losses and alleging mismanagement by the company's directors
and officers, have fired off several lawsuits.
Last week, New Century said several of its lenders planned
to sell their outstanding mortgage loans and use the
proceeds to offset payment obligations by the company,
while retaining the right to recover the difference.
The company has signed consent agreements with several
states and received cease-and-desist orders from others
in recent weeks.
The state agreements are intended to keep New Century
from accepting new mortgage applications on grounds that
it has violated state laws, including failing to fund
mortgage loans after closing.
© 2007 The Associated Press.
All rights reserved.
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