Stock of the Day
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New Century Financial (NEW)
Party's Over at New Century Financial
New Century Financial, the second largest lender in the subprime mortgage market, announced late yesterday that it will not be accepting any new loan applications. The company hopes the move is temporary but cautioned that it may not be. It can't accept any new applications and originate additional loans because New Century's creditors are closing the funding faucet rapidly and are essentially forcing the company to put a halt to its operations. Its stock is in the midst of a bloodbath at the stock exchanges as it has fallen 80% since the beginning of the month. Until a couple of weeks ago, the $1.3 trillion subprime market was considered to be the 'party of century' but things have soured extremely quickly. So where does the overall subprime market go from here and can New Century actually rebound?
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| Stock Analysis |
Subprime loans are loans that are given to borrowers with a weak credit history and a poor FICO score. They carry with them a much higher interest rate (often greater than 10%) than the regular prime loans (whose interest rate levels are usually in the 6-8% range). The high interest levels mean handsome rewards for the parties funding these loans. These rates of return along with the recent real estate boom had attracted a number of different players to the subprime party. One of the major figures was New Century Financial which made these loans to the so-called risky borrowers and then turned around and sold those loans to major Wall Street banks which in turn securitized these loans (i.e. sold securities to investors which were backed by portfolios consisting of the aforementioned loans). Investors (a number of them institutional) were attracted to these investments because they offered much higher rates of return than the typical government and corporate bonds. Wall Street firms also provided substantial levels of financing to New Century and other such lenders in order to enable them to make more loans (which could in turn be packaged into more securities). So basically everybody won, from the risky borrower with the spotty credit track record who just realized the quintessential American Dream by becoming a home owner to the large Wall Street establishments.
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That is until the other side of the high reward equation kicked in – i.e. high risk. The level of defaults on these loans started increasing as some newly minted homeowners realized that they may have overreached with their purchases and the cooling real estate market precluded them from turning around and selling their houses without taking a substantial hit. For New Century, this meant setting aside more money to deal with delinquencies as a higher percentage of people it had lent money to were not paying. But, as mentioned earlier, New Century turns around and sells a lot of its loan portfolio to Wall Street firms. Therefore, the impact of delinquencies should be limited as New Century is no longer the creditor. The problem with that is, a number of contracts that New Century entered in to sell its loans specify that it has to buy them back if the borrower defaults within a certain initial time period (typically ranging from 90 days to 6 months). Consequently, in a lot of these delinquencies, New Century is left holding the bag as the Wall Street firms are forcing the former to buy back these loans. In addition to dealing with these loans which have often lost 15-20% of their value, New Century is faced with the prospect of its major creditors (believed to be Morgan Stanley (MS: Charts, News, Offers), Goldman Sachs (GS: Charts, News, Offers) and Credit Suisse) withdrawing the credit lines previously extended to the firm. Therefore, New Century has no money to generate additional business. Plus, the Calif. based company is also the subject of a federal probe into its accounting and trading practices.
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So can New Century recover and return to its 52 week high of $51.97? Most analysts doubt it as the company is facing the double whammy of deteriorating assets and a liquidity crunch. Most people agree the two options for the company now are either a Chapter 11 bankruptcy filing or a sale (if there are any buyers left). However, if the company can somehow manage to survive, however unlikely that sounds right now, it will find itself in a business with much reduced competition. Most companies in the subprime market are heading for the exit sign right now but the ones that can weather the storm will be left to enjoy a market which will no doubt be lucrative once again down the road, once the current cycles play out, all by themselves.
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Profile |
New Century Financial Corporation operates as a real estate investment trust in the United States. It originates and purchases mortgage loans through two divisions, Wholesale and Retail. The Wholesale division provides loans through a network of independent mortgage brokers and correspondent lenders. It also originates mortgage loans through its FastQual Website at www.newcentury.com, where a broker uploads a loan request. The Retail division operates and originates loans through a consumer-direct channel and a builder/realtor channel, including radio, direct mail, telemarketing, television advertising, and the Internet. As of December 31, 2005, the company had 35 regional operating centers located in 18 states and originated and purchased loans through its network of 47,000 mortgage brokers, as well as operated a central retail telemarketing unit, 2 regional processing centers, and 222 sales offices. New Century Financial Corporation qualifies as a REIT under the Internal Revenue Code. As a REIT, it would not be subject to federal income tax to the extent it distributes 90% of taxable income to its shareholders. The company was co-founded by Robert K. Cole, Brad A. Morrice, and Edward F. Gotschall in 1995 and is based in Irvine, California.
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