New Century Buys Time
With Bankruptcy Filing

New Century Financial Corp.'s bankruptcy-court filing, announced yesterday, is the latest sign of a shakeout drastically shrinking the business of making home mortgage loans to people with weak personal finances.

After weeks of courting buyers for its main lending operation, which reaches consumers through brokers, New Century filed for protection from creditors under Chapter 11 of U.S. bankruptcy law. The filing gives the Irvine, Calif., company time to try to sell the lending business. But that is likely to be difficult amid soaring defaults on subprime loans and a loss of confidence among investors who buy such mortgages.

New Century recently negotiated with Bear Stearns Cos. about further financing but those talks fell through, and New Century directors, faced with an inability to meet the payroll this week, decided Sunday to make the bankruptcy filing, said a person close to the matter. A Bear Stearns representative declined to comment.

In another sign of falling values for subprime assets, Barclays PLC, a London banking company, said it will pay about $76 million to complete the previously announced purchase of the EquiFirst subprime mortgage unit of Regions Financial Corp., Birmingham, Ala. That's down from the $225 million Barclays agreed to pay in January.

The subprime business is dwindling as fast as it grew during the housing boom of the first half of this decade. The dollar value of subprime loans granted this year is likely to drop 30% from last year's total of around $600 billion, according to analysts at Bear Stearns.

A cutoff of funds from creditors forced New Century to suspend all lending in early March, and dozens of smaller subprime lenders have exited the business over the past four months. Yesterday, SouthStar Funding LLC, an Atlanta lender, became the latest to announce it was closing down. Lenders like SouthStar that make Alt-A loans, a category between prime and subprime, are starting to suffer some of the same symptoms that began killing off subprime lenders four months ago.

New Century, formed 11 years ago, expanded at a hectic pace and last year ranked second among U.S. subprime lenders, after HSBC Holdings PLC of London, according to trade publication Inside Mortgage Finance.

The retreat of subprime specialists like New Century and Fremont General Corp., which stopped making subprime home loans in March, leaves the business firmly in the hands of giant lenders like HSBC, Countrywide Financial Corp. and Citigroup Inc., as well as such Wall Street investment banks as Lehman Brothers Holdings Inc. and Merrill Lynch & Co.

The surviving subprime lenders have tightened their standards, generally eliminating no-money-down loans and requiring borrowers to provide more proof of income. This return to traditional practices is expected to make it hard for hundreds of thousands of potential home buyers to get loans, delaying a housing market recovery.

New Century is slashing its work force by 3,200 jobs, or 54% of the total, as it seeks a buyer for the lending business. The company hopes it can make the business more appealing to suitors by cutting overhead costs.

New Century also said it agreed to sell its servicing business, which handles loan payments and other administrative tasks, to Carrington Capital Management LLC, Greenwich, Conn., for $139 million, subject to bankruptcy court approval. New Century helped set up Carrington three years ago and owned a stake of 7% at the end of 2005, the latest disclosure. Carrington officials didn't respond to requests for comment.

Most of New Century's borrowings are short-term credits from such institutions as Morgan Stanley, Goldman Sachs Group Inc. and Barclays. Those credits are backed by mortgage loans, and the lenders have begun seizing that collateral and in some cases putting it up for sale.

In a bankruptcy filing, such lenders are "in a very protected position" and their losses "will be quite minor...assuming the collateral has decent value," said Ronald Greenspan, a senior managing director with FTI Consulting Inc., Annapolis, Md., which is acting as financial adviser to unsecured creditors in three subprime bankruptcies.

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