Irvine’s New Century Financial Corp. has been a hot company in a hot industry, subprime lending.
Though its profit growth has hit a snag lately, the real estate investment trust saw loan volume balloon during the past few years.
Homeowners with imperfect credit have taken advantage of rising home prices and low interest rates to swap pricey credit card debt for a second mortgage.
The subprime lending boom helped New Century report annual revenue growth of 363% in the three-year period ended June 30, improving from $434 million in 2002 to $2 billion in the past 12 months.
The company ranks No. 4 on this year’s Business Journal list of fastest-growing companies. It took the No. 2 spot on last year’s list.
New Century’s profit has skyrocketed along with its revenue.
The company’s 12-month net profit through June 30 was $366 million, up 221% from $114 million three years earlier.
Orange-based Ameriquest Capital Corp., the largest subprime lender in the nation and New Century competitor, is privately held and therefore not ranked.
Despite the huge growth in the past few years, the subprime lending industry appears to have passed its peak.
Lately, lenders have seen profits squeezed, partly because of rate hikes by the Federal Reserve Bank.
Analysts, as well as the mortgage companies themselves, say there are too many lenders chasing fewer borrowers in the market. An industry correction could be in the cards.
New Century last month lowered its profit forecast for 2005,the second time it has done that this year.
“Recent trends in interest rates, coupled with concerns over housing prices, energy costs and other inflationary pressures, have caused a significant deterioration in the secondary market for loans, causing our projected operating margins to fall to unanticipated levels,” said Chief Executive Robert Cole in a September statement.
How loans are funded has fundamentally changed since the heyday of the savings and loan. Back then, thrifts and banks funded loans with deposits.
Loans today are held not by banks but by investors in mortgage-backed securities. Companies like New Century make loans, stick them in billion-dollar pools, and issue bonds backed by those large pools.
The system worked well as long as rates were low and home prices were rising. Today there are some glitches for lenders.
As short-term rates rise, investors are demanding higher returns on mortgage-backed securities. Mortgage companies, however, are unable or unwilling to significantly raise rates they charge borrowers.
The result: lower profits.
So far New Century has maintained its dividend for the year, and plans to raise it by 12% next year.
Two other Orange County lenders last month slashed their dividends: Irvine-based subprime investor ECC Capital Corp. and Newport Beach-based Impac Mortgage Holdings Inc., which invests in loans between prime and subprime.
New Century last year became one of a handful of mortgage companies to adopt what’s known as a hybrid REIT structure. Impac Mortgage became a hybrid REIT in 1995.
New Century’s parent company gets a tax break in return for paying out at least 90% of its taxable income to shareholders.
Unlike traditional REITs, New Century’s mortgage unit, which originates loans, keeps some profits for operations. Hence the hybrid.
New Century last month held an investor conference in New York aimed at shoring up faith in its stock, which recently traded at half its value of late 2004.
The subprime lender said it intended to take several steps to keep costs down and boost sales.
The company is set to go after borrowers with better credit, thanks to its recent acquisition of Royal Bank of Canada’s U.S.-based RBC Mortgage Co.
New Century also said it is cutting costs by lowering its commissions to brokers and plans to keep its support staff at 3,000 workers. It may add to its sales force of 2,000 workers, according to officials.
Ed Gotschall, vice chairman of finance and a cofounder of New Century, dropped a bomb at the conference when he said the company could split in two if all else fails to boost the stock.
New Century could spin off the part of the company that makes loans from the part that holds them as investments, he said.
Like some other big mortgage companies, New Century has become a big taker of office space here.
In 2007, New Century plans to move to a 20-story office tower being built at Maguire Properties Inc.’s Park Place complex at Michelson Drive and Jamboree Road.
The company, which currently is based a couple of blocks away in Irvine, signed a lease for 190,000 square feet at the planned building.
New Century also signed a lease with Maguire for another 179,000 square feet of space at Park Place in other buildings. The subprime lender already has moved more than 1,000 workers to those buildings.
THE NUMBERS
Employees: 7,397
Market value: $1.8 billion
3-year sales growth: 363%
Annual sales through June 30: $2 billion
Annual net income: $365.8 million
Company: mortgage loan lender, investor
