'Death Spiral' for New Century

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Analysts warn New Century may not survive


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Several analysts agreed Monday that New Century Financial Corp., one of the nation's largest subprime mortgage lenders, likely faces liquidation or bankruptcy following revelations that it's under criminal investigation and in violation of debt covenants with several lenders.





http://www.marketwatch.com/news/story/new-century-said-facing-bankruptcy/story.aspx?guid=%7BCC3F81FC%2D1BDE%2D4410%2D8B0D%2D0E4210E07C52%7D&siteid=yhoo&dist=yhoo





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I saw it was down more than 50% in early trading today (3-5-2007).





Their name is prominently displayed on a high rise at Michelson and Von Karman. This can't be good for local employment and the economy.
 
I am very concern about the subprime lending industry to our local economy. By looking at the "huge" size of the mortgage buildings, and the how many at major street intersections and along the freeways. I used to hear that the loan brokers are the luxury item buyers! I just hope for the best.
 
<p>I have a feeling that after the subprime mortgages exploded, the "Alt-A" mortgages will be next.</p>

<p><em>"Alt-A" mortgages are mortgages made to people who fall in the gray area between "prime" and "subprime". The catch-all Alt-A category includes many of the innovative products that helped fuel the housing boom, such as mortgages that carry little, if any, documentation of income or assets, and so-called option adjustable-rate mortgages, which give borrowers multiple payment choices but can lead to a rising loan balance. Loans taken by investors buying homes they don't plan to occupy themselves can also fall into the Alt-A category.</em></p>

<p>http://www.realestatejournal.com/buysell/mortgages/20070302-simon.html?refresh=on</p>
 
<p>New Century is now down 70% today, and down 90% from 3 months ago. That's incredible.</p>

<p>IrvineMom: I understand your concern about the local economy, but I'm rather glad that what I think is an unsustainable business model may disappear. You just can't build a business around making ever ballooning loans to ever more leveraged buyers forever. Plus New Century must have seen it coming, and for them to face bankruptcy so suddenly reeks of bad management.</p>

<p>Irvine's economy is/was getting heavily tilted towards real estate directly and indirectly, in a self-perpetuating frenzy of credit spawning more credit. I would rather welcome a shift back to a more normal economy, i.e. production of goods and of services not directly related to ownership/development of real estate/land.</p>
 
Muzie - Please tell me the worst is over as the largest subprime, NEW, is heading BK(?) It soundsmore or less like Enron's. Big fish eat little fish. I just do not like where our society is heading. May be I am too short sighted.
 
NEW is headed towards bankruptcy. They are going to have a hard time getting through the investigations and answering questions regarding questionable (illegal) accounting practices.
 
I only hope that not many ppl in this forum own shares of that company because they are worth nothing now and will be really worth nothing in about two weeks.
 
<p>IrvineMom: I think this is a change for the best for where society is heading, actually (well, society in Irvine, anyway).</p>

<p>I always viewed real estate as a less than ideal investment because the rising value is rarely caused by genuine wealth creation, but merely by the fact that developed areas will over-populate over time such that one generation needs to pay more (inflation-adjusted) than the one before to get the same quality of life. There is no collective benefit here - next thing you know your 2 kids need to pool their resources to enjoy the same quality of life you enjoyed. I contrast this with brick-and-mortar businesses/stocks where the whole idea is to generate greater value by combining things/systems together, a much more sane proposition in my view.</p>

<p>In Japan, in many case, kids, parents and grandparents have to pool their resources together to even have a chance to buy a house they can all live together in. Or wose yet, in some areas, the house market simply stalls as houses become clan affairs that get passed down through the generations.</p>

<p>Either way, I would hate for Irvine to move further in this direction, and the possible disappearance of NEW would help to reduce the problem. Irvine doesn't need any more jobs that amount to peddling credit around.</p>
 
<p>mino- Yeah when NEW dropped from 30$ to 20$ I bought some - at the time they had only stated they would restate their earnings and I thought a 50% drop from 6 months ago just from restating earnings was an overreaction by the market, even though I'm a housing market bear.</p>

<p>Fortunately, I covered my position once the stock went down further to 18$ so I was stinged a little bit but escaped this cliff fall today. Kinda wished I had shorted some subprime mortage stocks now, I never thought the fall would be so brutal. </p>

<p>Note to self: don't play contrarian to yourself :P</p>

<p>The fact that the subprime lender with the largest losses is based right here in Irvine gives a hint as to how bad the local housing market is gonna get.</p>

<p> </p>
 
Muzie...I am glad you got out while you could. How many ppl does New Century employee? I saw on CNBC where a few analyst believe this is just the beginning to many lenders getting creamed. They even included the likes of Merril Lynch, Goldman Sachs, and Lehman brothers b/c of their dealings in both the mortgage industry and buying up some of these loans.
 
<p><a href="http://www.nytimes.com/2008/03/26/business/26cnd-account.html?_r=1&ref=business&oref=slogin">Report Assails Auditor for Work at Failed Home Lender</a></p>

<p>"In a sweeping accusation against one of the country’s largest accounting firms, an investigator released a report on Wednesday that said “improper and imprudent practices” by a once high-flying mortgage company were condoned and enabled by its auditors.</p>

<p>KPMG, one of the Big Four accounting firms, endorsed a move by New Century Financial, a failed mortgage company, to change its accounting practices in a way that allowed the lender to report a profit, rather than a loss, at the height of the housing boom, an independent report commissioned by a division of the Justice Department concluded.</p>

<p>The result of a five-month investigation, the report is the most comprehensive and damning document that has been released about the failings of a mortgage business. Some accusations echoed claims that surfaced about the accounting firm Arthur Andersen during the collapse of Enron, the energy giant, more than six years ago.</p>

<p>The 580-page report documents how New Century lowered its reserves for loans that investors were forcing it to buy back even as such repurchases were surging. Had it not changed its accounting, the company would have reported a loss rather a profit in the second half of 2006. The company first acknowledged that its accounting was wrong in February 2007 and sought bankruptcy protection less than two months later as its lenders stopped doing business with it.</p>

<p>The profit was important because it allowed executives to earn bonuses and convince Wall Street that it was in fine shape financially when in fact its business was coming apart, the report contended. But the report stopped short of saying that the company “engaged in earnings management or manipulation, although its accounting irregularities almost always resulted in increased earnings.”</p>
 
<em>"But the report stopped short of saying that the company “engaged in earnings management or manipulation, although its accounting irregularities almost always resulted in increased earnings."</em>





The report may stop short of that, but a prosecutor might not. Also, this probably opens up the top executives from New Century to investor lawsuits.
 
<p>It goes back to another thread: </p>

<p><a href="http://forums.irvinehousingblog.com/discussion/1891/the-psychology-of-home-pricing-or-behavioral-econ-and-wtf-pricing/#Item_47">http://forums.irvinehousingblog.com/discussion/1891/the-psychology-of-home-pricing-or-behavioral-econ-and-wtf-pricing/#Item_47</a></p>

<p> </p>
 
<p>Wow, after reading that article I bet the folks who work at the OC office for that accounting firm are really sweating it out. Excuse me now, I need to go open a window --- its feeling really stuffy in here....</p>
 
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