New Century Feels Crunch

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.