Fear of securitization is why New Century Financial Corp. is still standing after the subprime industry wipeout of the late 1990s, its executives say.

Of course New Century, like many of its injured rivals, has continued to take licks since. After three quarters of profit, the company lost $25 million in the fourth quarter and $1.9 million in the first. But executives say they are upbeat about the rest of this year — enough to boost earnings-per-share guidance for 2001 to between $1.15 and $1.30.

They ascribed the turbulence to their complete restructuring of the company, particularly in the way it sells its loans into the secondary market.

Chief executive Robert K. Cole and chief financial officer Edward F. Gotschall said in an interview that New Century’s move from securitization to selling pools of loans has improved the quality of the loans, and enhanced earnings stability and liquidity.

In the first quarter, they said, New Century sold 31 pools of loans, totaling $954 million. New Century now sells its loans to several investors, including Credit Suisse First Boston, Deutsche Bank, Countrywide Credit Industries Inc., and Household International Inc., a spokeswoman said.

“The goal was to increase the quality of revenues to all cash,” Mr. Cole said. “We had to increase the quality of the product.”

Using securitization to fund originations turned out to be a death sentence for many of New Century’s competitors, which found themselves with nowhere to go when the market turned in 1999.

By employing a 100% securitization strategy to support high costs of acquisition with short-term financing on the residuals, Mr. Gotschall said, many originators put themselves at the mercy of the lending community — in their case, investment bankers.

When an investment banker calls the debt, Mr. Gotschall noted, the company goes out of business if it cannot pay it off.

In addition, the executives said, sales of loan pools, or whole-loan sales, require much stricter underwriting guidelines than securitizations, which can cause a host of problems, such as high rates of prepayment or delinquencies and defaults.

And though New Century has always sold at least 50% of its loans as whole-loan sales, it is now doing so almost exclusively.

“We have a clean balance sheet now through our restructuring,” said Mr. Gotschall. “Our aged loan inventory and our long-term debt are significantly reduced, and our liquidity has been increased.”

“We’re confident, enthusiastic, I’d even say excited about what the rest of the year holds,” said Mr. Cole. “As bad as it was in late 1998, 1999, and into 2000, for those of us that are survivors, it’s our turn to enjoy some of the good things happening.”

Michael McMahon, associate director at Sandler O’Neill & Partners, said he is cautiously optimistic about New Century’s chances. New Century’s change in its secondary market practices, he said, will ultimately generate positive cash flow and turn it into a more profitable company.

“I believe they will be able to survive, because they have an attractive production platform,” Mr. McMahon said. By selling their servicing and paying down the debt on their residual assets, he said, the company is likely to regain its financial footing.

But the key, according to Mr. McMahon, “is the credit performance on the existing residual interest portfolio and whether it will perform according to management’s expectations. And only time will tell.”

Vince Carrino, the president of Brookhaven Capital Management Inc. in Menlo Park, Calif., said that New Century has “done a lot of good things” and is “well managed.” Mr. Carrino, whose company owns stock in the lender, said that with its clean balance sheets and refinanced debt he expects better margins and more loan volume that will push earnings to meet management expectations.

Mr. Cole said that in its restructuring, the company also addressed its debt situation and loan-servicing process. New Century modified the terms of its several types of debt, he said, and struck a deal with Ocwen Federal Bank of Fort Lee, N.J., to service its loans.

On April 2, New Century completed the sale of $4.8 billion of its servicing portfolio to Ocwen for $19.7 million. Though New Century retained about $700 million of the portfolio, Ocwen assumed responsibility of all of New Century’s outstanding servicing and all future servicing related to the portfolio.

To be sure, the slowing economy plays a role in all lenders’ future, especially those in subprime. Many industry observers argue that companies like New Century are the most vulnerable to deteriorating credit quality, because subprime borrowers are the first to experience trouble paying their bills.

Actually, Mr. Cole said, a soft and gradual slowdown can increase business for New Century and its competitors.

As some families hit hard times, he said, their credit ratings will slip, shutting off some prime channels for credit — and turning them into customers for businesses like New Century.

“If some people have trouble handling all their monthly obligations, they may become, by definition, a less-than-prime or subprime borrower,” he said. “Therefore a softness in the U.S. economy caused by regional or even national recessions is a good thing for our business.” He added that he expects the trend to continue — and bode well for New Century for the rest of the year.

The executives also pointed to the company’s first-quarter production, which topped $1 billion for the first time in its history. Though they acknowledged that the four-month refinance boom hitting the entire mortgage industry has pushed their production up, they argued that the smaller roster of players in the subprime market has created more business for those still around.

“The reality is that with the few survivors, there’s a bigger market share for each of the competing players than we had before,” said Mr. Gotschall. “So we’ve been able to continue to increase market share because of the decreasing number of players.”

But despite the attrition of the subprime ranks, traditional lenders, including some financial giants, and the government-sponsored enterprises have been eyeing the subprime business and are increasing their lending activities there.

Citigroup Inc.’s purchase of Associates First Capital late last year has made it one of the largest subprime lenders in the country. And Chase Manhattan Mortgage Corp., the mortgage subsidiary of J.P. Morgan Chase & Co., recently bought of Advanta’s Corp.’s subprime lending arm.

Mr. Cole said he sees the entry of large banks too a positive development — and that he views their participation as validation for the sector.

Further, he said, when banks such as Chase, Citigroup, or Bank of America enter the market, they provide alternative channels through which New Century can sell its loans.

And though they pointed to securitizations as dangerous way to do business for many of their competitors, the New Century executives said that by surviving, they can now enjoy the benefits of that process: residuals. The company said it will use cash flows from the residuals to retire outstanding debt and then for strategic investment.

In each pool of loans that is securitized, New Century retained ownership of the residual tranche of most of the securitized pools, receiving the cash from payments of those underlying mortgages, after bond payment and transaction costs.

After four years of securitizing, Mr. Gotschall has valued the company’s residual pieces of the securitizations at $328 million. Though the company will pay off debt with that money through 2002, including $40 million in subordinated debt to U.S. Bank, it expects a cash windfall after that, they said.

Mr. Cole said: “The restructuring of the major components is all done, and we’re now fine-tuning the company. The work we’ve done in the last few quarters will start to produce great profitability in the second, third, and fourth quarters — that’s the game plan for the rest of the year.”

Tom Fernandez contributed to this article.

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