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New Century Files for Bankruptcy

By LINGLING WEI and MARIE BEAUDETTE

April 2, 2007 11:26 a.m.

New Century Financial Corp., once a highflying subprime mortgage lender, filed for Chapter 11 bankruptcy protection Monday in the U.S. Bankruptcy Court in Wilmington, Del., becoming the biggest casualty of the turmoil in the U.S. market for high-risk home loans.

In its Chapter 11 filing, the Irvine, Calif., lender listed more than $100 million each in assets and debts.

Among its biggest creditors are Wall Street firms that have demanded that the lender buy back dud loans earlier sold to them, including Countrywide Financial Corp., Bank of America, Lehman Brothers Bank, Residential Funding Corp. and Goldman Sachs Mortgage Co.

The rapid descent of New Century encapsulates the broader struggles of a subprime-mortgage industry plagued by rising defaults and liquidity shortages. More than 30 independent, non-bank lenders catering to people with poor credit have gone belly up or been purchased since December. The contraction is making it harder for consumers to get credit and has stirred up concerns about the health of the U.S. economy.

New Century funded $51.6 billion of subprime loans last year and was second only to HSBC Holdings PLC in terms of loan volumes, according to trade publication Inside Mortgage Finance. It was founded in 1995 by three mortgage-industry veterans: Brad Morrice, the current chief executive; Bob Cole; and Ed Gotschall. The company went public two years later and was named to Fortune magazine's list of the 100 fastest-growing companies in 2003 and 2004.

New Century announced in early February that it would need to restate earnings for the first three quarters of 2006, partly to reflect the higher-than-expected costs of defaults. New Century also said it expects to report a loss for all of 2006, but couldn't yet quantify that loss. In addition, the company has announced it is the subject of a federal criminal investigation into its accounting and trading in its stock.

In early March, New Century stopped making loans after its lenders cut off funding. Investment banks and commercial banks such as Bank of America Corp., Citigroup Inc., Credit Suisse Group, Goldman Sachs Group Inc. and Morgan Stanley provide independent mortgage originators such as New Century short-term financing, buy loans from them, and pool those loans into tradable securities to sell to investors.

More than a dozen states, including its home state of California, have told New Century to halt its lending business.

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