Irvine-based New Century Financial Corp. and other subprime lenders have become the stars of the mortgage industry.
While other mortgage companies were hit by a pullback in home loan refinancing last year, New Century and its rival, Orange-based Ameriquest Mortgage Co. posted record lending volume.
Soaring lending helped New Century report annual revenue growth of 651% in the three-year period ended June 30, improving from $180 million in 2001 to $1.4 billion in the past 12 months.
The company ranks No. 2 on this year’s Business Journal list of fastest-growing companies. It took the No. 11 spot on last year’s list.
New Century’s profit also has skyrocketed. As of June, the company’s 12-month net income was $329 million, versus a loss of $13.7 million three years earlier.
New Century and other subprime lenders make loans to people with less-than-perfect credit. The industry has boomed along with the housing market as borrowers trade credit card debt for bigger mortgages or second mortgages at lower interest rates.
Ameriquest is privately held and therefore not ranked. The company is roughly equal in size to New Century; they go back and forth in industry rankings as the top two subprime lenders in the country.
During the past three to four years, revenue and profits for subprime lenders have spiked as interest rates fell. Subprime lenders also have engaged in heavy marketing campaigns to reach a larger audience.
In early October, New Century raised $783 million in a stock offering related to its conversion to a real estate investment trust. It sold 13.5 million shares at $58 per share and switched from Nasdaq to the New York Stock Exchange.
The move was the culmination of plans detailed in April to convert to a REIT. The conversion helps the company end what some call “double taxation” of profits, with corporations paying income taxes and then shareholders anteing up on dividends they receive.
REITs don’t pay corporate income taxes. They must pay at least 90% of taxable income to shareholders as dividends.
Looking at Park Place Move
New Century also is in talks to lease 480,000 square feet of office space at Park Place in Irvine, just down the street from the company’s current headquarters on Von Karman Avenue.
Park Place is a sprawling 105-acre campus on Jamboree Road and Michelson Drive.
The question for New Century and Ameriquest: How long can the boom days last?
Mortgage rates have bounced around after hitting rock bottom last summer. Shares of New Century took a beating when mortgage rates began rising, then bounced back.
New Century’s stock has shot up this year, hitting 63 when shareholders approved the REIT conversion in September. The stock since has dipped a little to 58.
Company executives said New Century is protected from modest rises in mortgage rates since interest charges on home loans still would be much lower than credit card debt, even if rates were to rise a few percentage points.
But the robust housing market in Southern California appears to be slimming down.
Housing sales in September in Orange County fell 28% to 3,585 houses and condos, versus last year, according to market tracker DataQuick Information Systems in La Jolla.
The median price was up 24% to $533,000 in September, versus a year ago, but down from an earlier high this year. Prices may be eroding, brokers said.
As prices rose during the past four years, homeowners have been able to trade credit card debt for a bigger home loan at lower rates. Those days could be ending, especially if higher rates in the future actually push home prices down.
Subprime lenders also are at the whim of Wall Street. That’s because companies such as New Century package their loans in big pools and sell them as securities to investors.
The strategy has worked well in the past few years as investors sought more predictable returns in the wake of the technology bubble burst.
But if stocks regain favor, mortgage-backed securities may lose their luster.
The industry also is at risk if interest rates on short-term debt ever match rates on long-term debt. Mortgage experts call that a flat-yield curve and it draws investors to less risky short-term debt and away from long-term debt such as mortgages.
New Century is keeping more loans on its balance sheet instead of originating and selling them, according to the company.
