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New Century Feels Crunch

Nicholas Yulico

Updated from 4:52 p.m.

New Century (NEW Quote) got $265 million in financing, calming rabid speculation on Wall Street that a bankruptcy filing was imminent.

But the Irvine, Calif., lender to homebuyers with poor credit histories said in a regulatory filing it had stopped accepting loan applications as its banks clamp down on the company's borrowing. New Century said it "has only been able to fund a portion of its loans this week," and "its capacity to fund new originations is substantially limited due to its lenders' restrictions or refusals" to extend credit.

Players in the mortgage industry expressed little suprise at the development.

"Our title agents have been getting indication that there have been dry closings," says Paul Lamparillo, CEO of Nationwide Mortgage Corp. "It's a clear indication of a company much impeded by cash flow. It's a clear indication that there's a problem."

"We've been hearing about delays [in loan funding] from New Century, and we've been warning our agents," adds Richard Gelfond, underwriting counsel at Fidelity National Title Insurance Company for New Jersey.

New Century said the new financing will be secured by New Century's REIT mortgage loan portfolio and certain residual assets. It will use the proceeds to refinance existing obligations.

New Century shares plunged 25% in furious trading Thursday amid rumors that the company was preparing a Chapter 11 filing. New Century shares have lost more than 80% of their value this year as delinquencies and defaults have risen in the so-called subprime mortgage sector.

New Century has not returned calls seeking comment.

After falling $1.29 in regular trading Thursday to $3.87, shares added 2 cents in after-hours action.

New Century said Thursday it was in talks with lenders to refinance and get liquidity. The company said it hasn't yet gotten waivers on five financing arrangements that New Century is in default on thanks to its recent losses and failure to file regulatory reports on time.

New Century said it also has gotten $150 million worth of margin calls, of which $80 million have been satisfied, the company said.

As margin calls become due, New Century must essentially contribute more cash to secure its lines of credit with warehouse lenders.

Investment banks that provide the credit lines had been lending New Century about 97 cents on the dollar, meaning New Century would contribute about 3% of equity for new home loans, says a source who closely follows the company and the lending industry.

Now, banks are likely asking for 5% to 6% equity on existing credit outstanding. This requires New Century to pony up more cash at a time when its cash flows are dwindling.

Over the past several years, New Century relied heavily on its warehouse loans from Wall Street banks to originate mortgages.

Essentially, the process went like this: When a subprime borrower purchased a home, New Century would borrow a certain amount of money from its warehouse line, say $320,000, and pay the seller of the home. The subprime buyer would then owe New Century $320,000 in the form of a mortgage.

New Century would then sell that mortgage to Wall Street banks, which would securitize the loans. New Century would sell the loan for 102 (par value equals 100) and net $326,400 in proceeds. The company would contribute maybe 3% of the equity on the loan to the warehouse lender, costing New Century $9,600.

The $326,400 in proceeds would be used to pay off the warehouse lender, and New Century would get its equity back. The spread would be profit for New Century.

Today, New Century can no longer originate loans for a profit. Because of its "current constrained funding capacity," the company said Thursday that it has elected to cease accepting loan applications from prospective borrowers.

That means the new $265 million of financing might simply be used to pay off an existing warehouse line.

Besides the margin calls, the other major cash drain at the company is that it is being forced to buy back bad mortgage loans from banks because of early defaults of borrowers.

Analysts estimate Wall Street banks might "put back" $4 billion worth of loans to New Century. If the company can resell those loans for only, say, 80 cents on the dollar, it will be forced to record a loss of around $800 million.

Shares lost more than half their value Monday after New Century said it was under investigation for its accounting and overtrading in its securities.

Earlier Thursday, David Einhorn of the New York-based hedge fund Greenlight Capital, one of New Century's largest investors, said he resigned from New Century's board. Greenlight Capital owns 6.3% of the lender's outstanding common stock.

Just in the last month, subprime lenders NovaStar (NFI Quote) and HSBC (HBC Quote) reported financial setbacks tied to rising delinquencies and defaults. The government and big mortgage buyer Freddie Mac (FRE Quote) announced rules aimed at tightening lending standards. Fremont General (FRE Quote) announced plans to leave the subprime lending business after getting a cease-and-desist order from the FDIC.

Lamparillo predicts New Century won't be the only mortgage lender to run into trouble.

"Some of these companies have liberal, liberal underwriting guidelines that are impractical," he says.