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New Century Files for Bankruptcy

By Mark Huffman
ConsumerAffairs.com

April 2, 2007

Living in a Bubble? Mortgage Crisis? Act Now to Avoid Foreclosure • Avoiding Foreclosure Takes More Than Hope --- • Mortgage Applications Surged 112 Percent Last Week • GAO Calls for Better Bailout Oversight • Homes Lose More Value In Third Quarter • Home Prices Post Record Decline • Fed Throws $800 Billion Lifeline to Consumers • Existing Home Sales Drop in October • When in Doubt, Leave Nothing Out • Fannie Mae and Freddie Mac Suspend Foreclosures • Consumer Prices Plunge in October • Paulson Rejects Bailout Money for Detroit • Another Glimmer of Hope in The Housing Market • Buyers' Beware Market • FDIC Backs More Aggressive Loan Modification Plan • Housing 2009 Forecasts Mixed, But Mostly Grim • Foreclosures Up Five Percent in October • Feds Shift Gears On Bailout, Puts Focus On Consumers • More Homeowners Under Water in Third Quarter • Feds Mount New Effort to Help Struggling Homeowners • Lenders Embrace Workouts for Struggling Homeowners • Obama Can't Quickly Raise Homebuyers' Hopes • At Last: Bailout Trickling Down to Struggling Homeowners • New Home Sales Rise in September • How to Appeal Your Property Tax Bill • Existing Home Sales Rise in September • Administration Considers More Help for Homeowners • Foreclosure Activity Drops in September • Southern California Home Sales Surge 65 Percent in September • HOEPA: New Hope for Outlawing Abusive Mortgages • FDIC Chief: Not Enough Help for Homeowners --- • More ...

Two months after it first sounded the alarm over rising defaults, subprime lender New Century Financial Corp. has filed for Chapter 11 bankruptcy protection. The company fired more than 3,000 employees and said it plans to sell off most of its assets in the next six weeks.

More than 30 subprime lenders have gone under in the last 12 months, but New Century is the largest of the group. It suspended its loan operations in March.

Subprime loans are made to consumers with little or poor credit. Not long ago these consumers would have not been able to get a home loan, but subprime loans -- loans that carry higher rates and fees, ostensibly to compensate lenders for the increased risk -- have extended credit to them.

At the same time, subprime lending allowed the mortgage and real estate industries to boom, bringing a whole new category of customer and driving up prices and profits. New Century reported profits of $60 billion in 2006.

Critics of subprime lending, like William Cunningham of Washington, D.C.-based Creative Investment Research, says most subprime lenders engaged in predatory practices, and outright fraud, against this new group of consumers.

"Things like credit life insurance policies, disability insurance, these are some of the things that are added to a mortgage to inflate its price. They're fraudulent because they either aren't needed or they don't exist," Cunningham told ConsumerAffairs.com.

Other subprime critics point to over-leniency in lending rules for the collapse. As real estate values continued to skyrocket, they say lenders were blind to the risk, assuming values would always increase. They say many delinquencies and defaults are up become lending standards fell too low.

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