New Century Financial

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Case 3 – New Century Financial Corporation

1. Describe and evaluate New Century’s business model?

New Century Financial Corporation, headed by founders Brad Morrice, Edward Gotschall, and

Robert, was a firm which specialized in subprime mortgages. The company originated, sold, and

serviced subprime home mortgage loans. New Century was structured as a real estate investment

trust (REIT) and was composed of two operating divisions. The Wholesale Loan Division,

known as New Century Mortgage Corporation, comprised 85% of the firm’s loan originations,

while the Retail Mortgage Loan Division operated under Home123 Corporation.

New Century Mortgage Corporation operated in 33 locations throughout 19 different states

and relied heavily on independent mortgage brokers to identify potential borrowers and assist

them through the loan process until the loans were closed by New Century. This division also

purchased funded loans from other lenders and expedited the loan underwriting process through

its web-based system known as FastQual. The Retail division was composed of 235 sales offices

throughout 35 states, a call center, and a web site. This division was aggressive in its approach to

seek out potential borrowers and close loans earning it the nickname “CloseMore University.”

The company typically originated loans and used short-term loans to fund new mortgages

until they were sold within 30 to 90 days of origination. New Century’s income was generated

from the difference between the lending rate and rate at which the loans could be sold or

financed and from servicing loans. Loans were sold either as whole loan sales where mortgages

were pooled together and sold to investors or as securitizations structured as sales. The company

also carried securitizations structured as financing as assets on their books and used the bonds

to finance the securitized loans as liabilities, thereby generating

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