New Century Financial Corp. yesterday became the largest company in the troubled subprime mortgage industry to file for bankruptcy protection amid growing delinquencies by borrowers.
The nation's second-largest subprime lender last year and a major source of such mortgages in Massachusetts, New Century filed for Chapter 11 protection in US Bankruptcy Court in Delaware because it could no longer raise capital to fund new loans or sell its mortgages to investors.
The filing, which shields New Century from creditors while it reorganizes, is not likely to cause much disruption in Massachusetts. State regulators ordered New Century to cease all lending operations in mid-March, when the company began to experience financial problems, said David Cotney, Massachusetts deputy commissioner of banks. Since then, Cotney said his office has required the company to fund mortgage agreements or to find new lenders on behalf of more than 700 New Century borrowers.
"We've been working closely with the company to get everything taken care of," Cotney said.
As part of its proposed bankruptcy reorganization, New Century said yesterday it reached an agreement to sell its mortgage-servicing business to Carrington Capital Management LLC for $139 million and to sell a portfolio of mortgages to Greenwich Capital Financial Products Inc. for $50 million. The company needs bankruptcy court approval to complete the transactions.
A bankruptcy filing "is the best means available to allow the company's assets and operations to be sold through an orderly process," chief executive Brad Morrice said yesterday.
During the real estate boom earlier this decade, subprime lenders such as New Century, which is based in Irvine, Calif., made loans that carried high monthly payments to people with poor credit, making them far more likely to enter foreclosure. In Massachusetts, those subprime loans are being blamed for a sharp increase in foreclosure filings against homeowners last year. State and federal regulators said that many subprime borrowers were given loans for houses they could not afford.
New Century made $52 billion in subprime loans nationwide in 2006. In Massachusetts, New Century was the third largest subprime lender in 2005, according to the most recent available data.
In early February, some home buyers were left in the lurch when Connecticut-based Mortgage Lenders Network USA Inc. experienced a cash crisis and could not fund its loans. Some customers were eventually able to close on their loans, or find a new lender, but others were not able to complete their home purchases.
Mortgage Lenders Network eventually filed for bankruptcy protection, and regulators began closely monitoring other lenders in the state.
On March 13, the banking commission ordered New Century to cease selling mortgages in the state after the company said it expected to post a fourth-quarter loss and would restate earnings in the two prior quarters.
New Century's bankruptcy filings will not have any effect on its borrowers who are now facing foreclosure proceedings in Massachusetts, said Cotney, the state regulator. That's because New Century sells the loans it originates, and the foreclosure notice is coming the company that owns or is servicing the loan.
Rick Fedele, chief executive of the Boston lender Summit Mortgage, said his firm and other local lenders are already benefiting from New Century's collapse by pursuing customers in the subprime market. He said subprime-industry practices such as 100 percent financing for a house -- no down payment -- and loan applications that lacked verification of borrower's income are a thing of the past.
While lenders are now being more careful about making loans, the subprime market is still viable for some working people with substandard credit who can make a down payment, or who are considered reliable about making their monthly mortgage payment, he said.
"They deserve the opportunity to buy a home," he said, "and their credit score shouldn't prevent them if they're able to support the debt."
Kimberly Blanton can be reached at firstname.lastname@example.org.