Caught unprepared by a flood of loan repurchases, New Century Financial Corporation said late Wednesday that it will restate its consolidated financial results for the first three quarters of 2006 and will delay the release of fourth quarter results indefinitely as the subprime REIT looks to correct errors associated with its accounting for loan repurchases. In addition to failing to perform fair-value adjustments on its loan loss reserves after repurchases, New Century said repurchase allowances did not account for a growing volume of repurchase claims during 2006. Collectively, the errors suggest that as subprime market performance deteriorated throughout the year, repurchase volumes at the subprime morgage banking giant quickly outstripped originally-established loss reserves. New Century also suggested that many of the repurchases forcing the restatement were not solely first payment defaults, citing an increasing length of time between whole loan sales and receipt of repurchase requests from investors. While the company stressed the non-cash nature of the adjustments, it acknowledged that net income for each quarter of 2006 will be reduced, and that it expects to report a loss for the fourth quarter.
“In response to the level of early-payment defaults and loan repurchases, as well as changing secondary market demand for certain products and product changes likely to be required by regulatory authorities, we have intensified our focus on tightening our underwriting guidelines and taking other steps to further improve fraud detection and risk management,” said Brad Morrice, president and CEO. Morrice noted that New Century will be seeking to limit its future exposure to the subprime loan market, as it rolls out an Alt-A loan program into its wholesale channel during 2007. The company did not specify its future plans for its subprime origination platform, but said that it now expects 2007 loan production to be off 20 percent from the $59.8 billion originated by New Century in 2006. The company had originally said it expected origination volume to remain flat in 2007. New Century said it expects to file amended Quarterly Reports on Form 10-Q for the affected quarters by March 1, 2007. For more information, visit http://www.ncen.com.
