Magazine article American Banker

Common Issues for Nonprime Hit New Century

Magazine article American Banker

Common Issues for Nonprime Hit New Century

Article excerpt

Several trends that have plagued its nonprime rivals this year -- early payment defaults, forced buybacks and discounted sales of defective loans, and thinning margins -- caught up with New Century Financial Corp. in the third quarter.

"Current conditions in our sector are challenging," Brad A. Morrice, the Irvine, Calif., real estate investment trust's president and chief executive, said on a conference call with analysts Thursday evening. "I, too, am disappointed with the third-quarter results."

In a departure from past practice, New Century would not provide guidance on next year's dividends.

"I acknowledge this approach is unusual," Mr. Morrice said. "We are asking you to allow this management team to make smart financial decisions." (This year was the first for which the company did not provide earnings guidance.)

Its delinquency rate at the end of the quarter rose 134 basis points from a quarter earlier, to 5.95%. Higher loan repurchases and discounted mortgage sales reduced the gain-on-sale margin on nonprime loans by 48 basis points from a year earlier, to a lower-than-expected 1.77%.

Repurchases also caused New Century's nonprime net operating margin to fall 20 basis points, to 0.52%.

Bose George, an analyst at Keefe, Bruyette & Woods Inc., said losses related to repurchases were something that "hadn't showed up in New Century's numbers before."

Matthew Howlett, an analyst at Fox-Pitt, Kelton Inc. in New York, said he thought the REIT's management team "lost a little credibility," because they had told analysts that early payment defaults -- the reason for some of the buybacks -- would not hurt New Century as much as other companies.

"This basically takes New Century back down to Earth and puts them back with the pack in terms of overall execution and performance," Mr. Howlett said.

New Century shares fell about 4% Friday. …

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