New Century Rides Mortgage Boom to Solid Revenue, Income Advances
By MATHEW PADILLA
The party could be ending, but what a time it’s been.
New Century Financial Corp., a subprime lender, has posted annual revenue growth of 240% in the three-year period ended June 30, improving from $220 million in 2000 to $749.6 million in the past 12 months.
The Irvine-based company ranks No. 11 on this year’s Business Journal list of fastest-growing companies. It took the No. 19 spot on last year’s list.
New Century’s profit also has shot through the roof. As of June, the company’s 12-month net income was $212.3 million, up solidly from $17 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.
2001, 2002, and the first half of 2003 saw the biggest spike in revenue and profits for subprime lenders as interest rates fell.
But after some two years of steady decline, mortgage rates have bounced up and down since mid-June. Shares of New Century took a beating when mortgage rates began rising. The stock hit a peak of 33 in early June and then began falling until it bottomed out at 22 in early August.
New Century’s stock once again is trading around 33. 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 fantastic rise in home prices in Southern California has mirrored falling mortgage rates. Rising home equity has enabled many homeowners to consolidate debt. If mortgage rates rise, home price appreciation may stall, sources said.
Subprime lenders also are at the whim of Wall Street. That’s because companies like New Century package their loans in big pools and sell them as securities to investors.
The process has worked well as the stock market languished since the tech bubble burst.
But once stocks begin to shine, mortgage-backed securities may lose their luster.
It would not be the first time investors stopped buying riskier mortgages.
New Century is keeping more loans on its balance sheet instead of originating and selling them, according to its second-quarter earnings statement.
The company issues securities and accounts for them as financing.
“We plan to use on-balance sheet securitizations for up to 20% of our secondary marketing transactions,” said Edward F. Gotschall, chief financial officer. “We believe that this strategy will help protect future earnings from the impact of changing economic conditions.”
Meanwhile, New Century settled a lawsuit in September with competitor Encore Credit Corp., also based in Irvine.
The dispute started after Steven Holder left New Century to start Encore, according to Jon Daurio. Daurio cofounded Encore in late 2001.
Daurio said New Century filed its lawsuit in March 2002, alleging misappropriation of trade secrets and intentional interference with prospective economic advantage, among other things. Encore countersued.
But after New Century made its case in a jury trail in Orange County Superior Court, it struck a bargain to drop its suit if Encore did likewise, Daurio said.
