Resource, New Century Take Different Paths to Recovery

No two companies embody the wild swings of the mortgage industry quite like Resource Bancshares Mortgage Group and New Century Financial Corp.

Last year, with the mortgage market off 20% from 1999 and 32% from 1998, the two unrelated lenders had a combined net loss of $65.3 million, with Resource accounting for close to 65% of the red ink.

Yet after a sluggish first quarter — during which New Century lost $1.9 million, Resource eked out a $1 million profit, and the mortgage market started heating up — both companies have come roaring back.

Resource, of Columbia, S.C., reported net income of $7.8 million in the second quarter and $6.5 million in the third. New Century, of Irvine, Calif., fared even better, with net income of $9.9 million in the second quarter and $16.7 million in the third.

Their fortunes dramatically illustrate the treacherous landscape of the mortgage business. Fueled by activity in what is expected to be the industry’s best year on record, both have performed well this year.

The question is if they can remain in the black when the business eventually suffers a downturn.

The still-falling mortgage rates are feeding consumers’ seemingly endless appetite for refinancing. But the rates are expected to rise again even before the economy begins to recover — which several economists expect to occur as soon as the second half of next year — and that is expected to reduce home lending by roughly a third.

Douglas K. Freeman, the chief executive officer of Resource, attributes his company’s resurgence to several changes in strategy, but he acknowledges that even the most drastic transformation would not remove the industry’s cyclical challenges.

“We’re not interest rate cycle-proof, but what we are able to do now is prevent our financial results from deteriorating like they did last year,” he said.

Mr. Freeman, former president of Bank of America Corp.’s consumer finance group, joined Resource early last year to engineer the turnaround. When he arrived, the company offered primarily fixed-rate, conforming products. That strategy worked until the late 1990s, when margins contracted, and the company began to lose money on every loan it originated.

“When I first got here we were losing 80 basis points on every transaction we did,” he said.

Resource was like Ford Motor Co., which sold any color Model T customers wanted, as long as it was black, he said. His first move was to expand the product mix to include more profitable loans. Resource now offers adjustable-rate, jumbo, combination firsts and seconds, and subprime loans.

In addition, Resource has made a major investment in technology, and it has started a business that provides private-label mortgage banking for smaller banks, thrifts, and other originators, he said.

New Century’s CEO, Robert Cole, says his company’s strategy has been more basic but equally effective.

Executives at the company, a longtime subprime lender that relies heavily on debt consolidation and refinancing, said that its performance this year has not been surprising, given the vigorous market.

But Mr. Cole said that New Century will continue to have healthy refinancing business, because the subprime market is not as interest-driven as the prime market. More importantly, the economy’s impact on consumers will also keep demand for New Century’s products high, he said.

Homeowners’ credit will deteriorate as conditions weaken and layoffs increase, and many prime borrowers whose incomes are disrupted may become subprime, he said.

Ironically, rising unemployment presents an “opportunity and a silver lining” for New Century, Mr. Cole said. When homeowners with perfect credit miss a couple of payments, “we get a new generation of borrowers who fall into subprime,” he said.

There are also opportunities in the huge amount of debt consumers took on during the stock market boom of the late 1990s, New Century says.

Ed Gotschall, New Century’s chief financial officer, said that as a result of the economic downturn — which he believes was exacerbated by the Sept. 11 attacks — many borrowers will be forced to take out debt consolidation loans.

New Century is conducting a cost-cutting and capital-raising campaign to strengthen its financial footing. In April it sold most of its servicing portfolio to Ocwen Federal Bank of West Palm Beach, Fla., and it has conducted two stock offerings in the last four months: a 1.4 million-share sale to private investors in July and a 4 million-shares public offering last month.

The company is using some of the capital to pay off debt, specifically on the residuals of the loans it securitizes. It has retired more than $100 million of debt in the past 12 months, and it expects to be debt-free by the fourth quarter of next year.

Executives say they plan to use some of this year’s profits to expand to the East Coast, which it views as similar to its main market in California.

At Resource, Mr. Freeman said the changes he has made will minimize the impact of higher interest rates and lower margins. “In a rising rate environment, because of our expanded product line, we’re better positioned to weather the storm than we would have before. But it’s still going to be tougher, because the refis go away when rates go up, so then you have to look back at your cost structure.”

For now at least, the mortgage market remains strong, and Wall Street seems pleased with the two companies’ moves. New Century’s stock has risen almost 13% since the start of the year, while Resource’s has climbed 11% from Jan. 1 and almost 88% since Mr. Freeman took the helm.

However, Mr. Freeman said his team was not patting added itself on the back, and that its work is nowhere near completion.

“I used to use my golf game to keep my ego in check. Now I use the board of directors,” he said. “At the end of the day we run a company with leadership that will never be happy with our results. We’re always going to want to do more and do a better job for our shareholders, our employees, and our customers.”