Subprime lender New Century Financial Corp. will restate results for the first three quarters of 2006 because it failed to properly account for expected losses on bad loans it was forced to repurchase, officials said.
New Century said it will postpone today’s planned announcement of fourth-quarter and 2006 earnings while it corrects accounting errors. The company said early payment defaults and loan repurchases have intensified, and the company expects to report a loss for the fourth quarter.
New Century — which is organized as a real estate investment trust — said the adjustments to its books are “non-cash in nature” and that the company had cash and liquidity in excess of $350 million as of Dec. 31.
The lender said it would restate its earnings for the first three quarters of 2006 because it underestimated the number of loans it would be forced to repurchase due to early payment defaults. New Century said it also failed to discount the value of loans it did repurchase to reflect their true market value. The company reported on Nov. 9 that the provision for repurchase loans as of Sept. 30 totaled $13.9 million.
New Century reported repurchasing $150.9 million in loans in the third quarter of 2006, or .9 percent of total sales. That compares with $102 million, or .7 percent of loan sales, in the third quarter of 2005. Repurchases for the first nine months of 2006 totaled $469.3 million, or 1.1 percent of sales, up from $241 million, or .7 percent, for the same period of 2005.
In a separate announcement, New Century said total mortgage loan production for January 2007 was up 5 percent from the same month a year ago, to $4.2 billion. But company officials say they now expect 2007 loan production to fall 20 percent from last year’s $59.8 billion total, as New Century tightens underwriting standards. The lender had previously said 2007 loan production would remain flat relative to 2006.
“Given the current environment and our recently tightened underwriting guidelines, we are pleased with the year-over-year loan production growth in January,” said Brad A. Morrice, president and chief executive officer, in a statement. “However, 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.”
New Century reported third-quarter results on Nov. 9, claiming earnings of $275.9 million, or $4.72 per share, for the first nine months of the year, compared with $299.9 million, or $5.18 per share, for the first nine months of 2005.
Loan production for the first nine months of 2006 totaled $45.4 billion, up from $40.4 billion in 2005. About 87 percent of those loans — a total of $39.4 billion — were subprime. Originations of interest-only mortgage loans totaled $7.7 billion, or 17 percent of total originations. Stated-income loans totaled $19.2 billion, or 42 percent of loan production.
New Century reported that it kept 7.5 percent of total loan production on its balance sheets. Allowance for losses on mortgage loans held for investment totaled $191.6 million as of Sept. 30, or 1.36 percent of the loan portfolio. The 60-day-plus delinquency rate on loans as of Sept. 30 was 5.95 percent, compared with 4.61 percent at the end of June.
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