New Century files for Chapter 11
By Saskia Scholtes and Richard Beales in New York
Copyright The Financial Times Limited 2007
Published: April 2 2007 18:22 | Last updated: April 3 2007 02:29
New Century Financial, the US subprime mortgage lender, on Monday filed for Chapter 11 bankruptcy protection in the wake of a liquidity crisis triggered by a spike in problem loans.
The company is the biggest casualty of the turmoil in the market for home loans made to Americans with weak credit histories.
The sharp slowdown in the US housing market coupled with lax lending practices in recent years has produced an unusually rapid rise in mortgage payment problems over the past several months. Defaults on US subprime mortgages rose to a four-year high in the fourth quarter.
New Century stopped making loans last month after it was cut off by many of its lenders, including Bank of America, Barclays, Citigroup, Credit Suisse, Goldman Sachs and Morgan Stanley.
Lenders had also demanded that the company accelerate buying back outstanding mortgages that had turned sour.
“This was a very hard step for me personally and clearly not the outcome I would have preferred,” said Brad Morrice, chief executive. “However, given the sudden and significant challenges facing our industry and New Century specifically, bankruptcy is the best means available to allow the company’s assets and operations to be sold through an orderly process.”
New Century, which had billed itself as “a new shade of blue chip”, said it would immediately cut 3,200 jobs, more than half its staff.
A bankruptcy was widely expected, even though some of the dozens of smaller subprime lending specialists that have been forced out of business have been able to find buyers.
Richard Shane, analyst at Jefferies & Company, said potential “white knights” would have been put off by “the overhang of potential loan repurchase obligations and criminal and civil legal issues”.
New Century faces federal investigations into its activities and has lost the right to operate in several US states.
The fallout from payment problems on subprime mortgages has prompted a flurry of activity across Wall Street to stem the tide of losses.
Bear Stearns, the biggest US underwriter of bonds backed by home loans, yesterday said its EMC Mortgage unit had created a specialist team to travel the country helping restructure loans for distressed borrowers. The scheme is intended to stave off foreclosures, in which lenders on average lose 40 per cent of the money they lent.
SouthStar Funding, a small Atlanta, Georgia-based lender that originated $6bn of subprime and slightly less risky ”Alt-A” home loans in 2006, ceased operations on Monday.