NEW YORK (Reuters) - New Century Financial Corp. filed for bankruptcy protection on Monday amid a surge in homeowner defaults, the biggest mortgage lender to collapse in the slumping U.S. housing market.
The Irvine, California-based company fired 3,200 employees, or 54 percent of its work force. It plans to sell most of its assets within 45 days through the Chapter 11 process.
New Century was the largest independent U.S. provider of “subprime” mortgages, or home loans to people with poor credit histories. More than 30 rivals have sold or closed similar operations in the past year.
The demise of New Century came less than two months after the company first disclosed problems with delinquent and defaulted loans. It stopped making loans last month, after having made nearly $60 billion in 2006.
“We are only at the very beginning of the problems facing subprime,” said Sanford C. Bernstein & Co. analyst Brad Hintz. “This liquidity crisis is continuing.”
New Century filed for protection from creditors with the U.S. bankruptcy court in Wilmington, Delaware.
It said it agreed to sell its loan servicing business to hedge fund Carrington Capital Management LLC for $139 million, and some loans and other assets to Royal Bank of Scotland Plc’s Greenwich Capital Financial Products Inc. unit for $50 million.
“Without a prompt sale of the debtors’ mortgage loan servicing business and loan origination platform, those businesses will not be viable and the value will be destroyed,” New Century said in a court filing.
New Century also lined up $150 million of financing from CIT Group Inc. and Greenwich Capital to keep it operating while in bankruptcy.
In a statement, Chief Executive Brad Morrice said selling assets is “a very hard step for me personally and clearly not the outcome I would have preferred.”
He said it was necessary “given the sudden and significant challenges facing our industry and New Century specifically.”
Accredited Home Lenders Holding Co., Fremont General Corp. and NovaStar Financial Inc. are among other subprime lenders struggling with rising defaults.
U.S. homeowner delinquencies and defaults surged after many subprime lenders eased their lending standards too far.
Some of the lenders offered low initial rates, which later jumped beyond what customers could afford, or even made loans that customers could not afford in the first place.
New Century was founded in 1995 by Morrice and two others who had helped found Option One Mortgage Corp., a subprime lender that H&R Block Inc. is now trying to sell.
After surviving a subprime industry shakeout in the late 1990s, New Century’s business mushroomed as home prices rose, especially in its home state, and borrowing costs stayed low.
Its slide began in earnest after the company on February 7 said rising defaults would lead to a fourth-quarter loss and force a restatement of results for the three prior quarters.
Three weeks later, New Century said federal prosecutors had begun a criminal probe of accounting errors and securities trading. Lenders that had provided it the financing to make loans began cutting the company off. New Century stopped making loans, and at least 17 states told it to stop lending.
The company said it has about 100,000 creditors. Larger creditors include Bank of America Corp., Citigroup Inc., Countrywide Financial Corp., Goldman Sachs Group Inc. and Morgan Stanley, among others, court filings show.
Lazard Freres & Co., AlixPartners LLP and the law firm O’Melveny & Myers LLP are advising New Century. The company’s shares fell 14.5 cents to 91.5 cents on the Pink Sheets, but will probably be worthless following the reorganization.
Morrice said subprime loans remain a viable product.
“These loans have helped millions of Americans, many who might not otherwise have been able to access credit or to realize the benefits of home ownership,” he said. “The non-prime sector will remain an important part of the American economy.”
New Century won’t be part of it.
Additional reporting by Mark McSherry, Christian Plumb and Dan Wilchins