New Century Financial Essay

1435 WordsApr 9, 20146 Pages
Case 3 – New Century Financial Corporation 1. Describe and evaluate New Century’s business model? New Century Financial Corporation, headed by founders Brad Morrice, Edward Gotschall, and Robert, was a firm which specialized in subprime mortgages. The company originated, sold, and serviced subprime home mortgage loans. New Century was structured as a real estate investment trust (REIT) and was composed of two operating divisions. The Wholesale Loan Division, known as New Century Mortgage Corporation, comprised 85% of the firm’s loan originations, while the Retail Mortgage Loan Division operated under Home123 Corporation. New Century Mortgage Corporation operated in 33 locations throughout 19 different states…show more content…
As such, the company was exposed to risks related to internal controls in monitoring loan processing, underwriting, and closing which could cause a substantial loss in income due to increased kick-outs and repurchased loans. Further aggravating these risks were the company’s aggressive tactics in pursuing and closing subprime borrowers such as offering loans requiring only stated income and assets as opposed to full documentation loans. 3. What were New Century’s critical performance variables? How well was New Century performing with respect to these critical performance variables? New Century Financial had performance variables that critically affected its business and led to it’s eventual bankruptcy filing. These included liquidity, default rate, and forms of The overall rate of default is critical because of its compounding increase in liabilities with a decrease in assets. A default rate higher than the historic rate would adversely affect the valuation of many assets in the firm’s financial statements. It is also tied to the demand for mortgage backed securities, increased default reduces the demand for subprime securitization, thus reducing New Century Financial’s source of income at a time of increasing obligations. 4. What were the reporting errors identified by the bankruptcy examiner? The bankruptcy examiner noted several inconsistencies
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