Filed Pursuant to Rule 424(b)3
Registration Number 333-66694
PROSPECTUS
NEW CENTURY FINANCIAL CORPORATION
1,442,308 Shares of Common Stock
_________________
This prospectus relates to the public offering, which is not being
underwritten, of up to 1,442,308 shares of our common stock, $0.01 par value per
share, which are held by some of our current stockholders and may be offered and
sold from time to time by the selling stockholders following the effective date
of the registration statement of which this prospectus is a part.
The prices at which the selling stockholders may sell the shares will be
determined by the prevailing market price for the shares or in negotiated
transactions. We will not receive any of the proceeds from the sale of the
shares.
Our common stock is traded on the Nasdaq National Market under the symbol
"NCEN." On August 1, 2001, the last reported sale price of our common stock on
the Nasdaq National Market was $10.81 per share.
INVESTING IN OUR COMMON STOCK INVOLVES RISKS. WE REFER YOU TO THE DISCUSSION
OF CERTAIN RISKS THAT PURCHASERS OF OUR COMMON STOCK SHOULD CONSIDER CONTAINED
IN THE SECTION ENTITLED "RISK FACTORS" BEGINNING ON PAGE 1.
________________
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this prospectus. Any representation to the contrary is a
criminal offense.
_________________
The date of this prospectus is August 20, 2001
No person has been authorized to give any information or to make any
representations other than those contained in this prospectus in connection with
this offering, and if given or made, such information or representations may not
be relied upon as having been authorized by New Century Financial Corporation
(referred to in this prospectus as "New Century," "we," "us," "our," or the
"registrant"), any selling stockholder or by any other person. Neither the
delivery of this prospectus nor the sale made hereunder shall, under any
circumstances, create the implication that information herein is correct as of
any time subsequent to the date hereof. This prospectus does not constitute an
offer to sell or a solicitation of an offer to buy any security other than the
securities covered by this prospectus, nor does it constitute an offer to or a
solicitation of any person in any jurisdiction in which an offer or solicitation
may not lawfully be made.
TABLE OF CONTENTS
Page
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Risk Factors........................................................... 1
Incorporation of Certain Documents By Reference........................ 6
Business............................................................... 6
Forward-Looking Statements............................................. 29
Use of Proceeds........................................................ 29
Selling Stockholders................................................... 30
Plan of Distribution................................................... 31
Legal Matters.......................................................... 32
Experts................................................................ 32
Where You Can Find Additional Information.............................. 32
(i)
RISK FACTORS
You should carefully consider the risks described below before making a
decision to buy our common stock. If any of the following risks actually
occurs, our business could be harmed. In that case, the trading price of our
common stock could decline, and you may lose all or part of your investment.
When determining whether to buy our common stock you should also refer to the
other information in this prospectus, including our financial statements and the
related notes.
If we are unable to maintain adequate financing sources, our earnings and
financial position will suffer and jeopardize our ability to continue
operations.
We require substantial cash to support our operating activities and growth
plans, which is provided primarily by $1.4 billion in short-term warehouse and
aggregation credit facilities to fund loan originations and purchases pending
the pooling and sale of such loans. We also have residual financing agreements
that provide us with financing secured by residual interests we have retained in
certain securitization transactions and securitization transactions involving
net interest margin securities, or NIMs. If we cannot maintain or replace these
facilities on comparable terms and conditions, we may incur substantially higher
interest expense that would reduce our profitability.
During volatile times in the capital markets, access to warehouse,
aggregation and residual financing has been severely constricted. If we are
unable to maintain adequate financing or other sources of capital are not
available, we would be forced to suspend or curtail our operations, which would
have a material adverse effect on our results of operations, financial condition
and business prospects.
Most of our financing is subject to margin calls based on the lender's
opinion of the value of our collateral. An unanticipated large margin call
could adversely affect our liquidity.
The amount of financing we receive under our warehouse, aggregation and
residual financing agreements depends in large part on the lender's valuation of
the mortgage loans and residual interests that secure the financings. With the
exception of the residual financing facility with Salomon Brothers Realty Corp.,
each credit facility we have provides the lender the right, under certain
circumstances, to reevaluate the collateral that secures our outstanding
borrowings at any time. In the event the lender determines that the value of
the collateral has decreased, it has the right to initiate a margin call. A
margin call would require us to provide the lender with additional collateral or
to repay a portion of the outstanding borrowings. Any such margin call could
have a material adverse effect on our results of operations, financial condition
and business prospects.
A change in the assumptions we use to determine the value of our residual
interests could adversely affect our financial position.
As of June 30, 2001, the value of our residual interests from
securitization transactions on our balance sheet was $324.6 million. The value
of these residuals is a function of the delinquency, loss, prepayment and
discount rate assumptions we use to determine their value. During 2000, we
changed these assumptions to reflect trends in actual pool performance,
prepayment experience and the interest rate environment. As a result of these
changes, we recorded reductions in the value of our residuals by $67.0 million.
The reductions consisted of the following components:
. $25.6 million resulted from changes to the prepayment and loss
assumptions used in the valuation of the residual interests.
. $14.5 million resulted from our change in the discount rate on our
residuals from 12% to 13% and on our NIM bonds from 14% to 15%.
. $26.9 million of this adjustment related to the exercise by Salomon
Smith Barney, Inc. of the call provision for our 1998-NC5 security in
December 2000. We do not have any other residual interests t hat have a
call provision similar to 1998-NC5.
1
If our actual experience differs materially from the revised assumptions we
used to determine the value of our residual interests, future cash flows and
earnings could be negatively affected.
High delinquencies or losses on the mortgage loans in our securitizations may
decrease our cash flows or impair our ability to sell or securitize loans in the
future.
Loans we make to lower credit grade borrowers, including credit-impaired
borrowers, entail a higher risk of delinquency and higher losses than loans we
make to borrowers with better credit. Virtually all of our loans are made to
borrowers who do not qualify for loans from conventional mortgage lenders. No
assurance can be given that our underwriting criteria or methods will afford
adequate protection against the higher risks associated with loans made to lower
credit grade borrowers. We continue to be subject to risks of default and
foreclosure following the sale of loans through securitization. To the extent
such losses are greater than expected, the cash flows we receive through
residual interests will be reduced. Increased delinquencies or losses may also
reduce our ability to sell or securitize loans in the future. Any such
reduction in our cash flows or impairment in our performance could have a
material adverse effect on our results of operations, financial condition and
business prospects.
Our earnings may decrease because of increases or decreases in interest rates.
Our profitability may be directly affected by changes in interest rates.
First, these changes may reduce the spread we earn between the interest we
receive on our loans and our funding costs. Second, a substantial and sustained
increase in interest rates could adversely affect borrower demand for our
products. Third, during periods of rising interest rates, the value and
profitability of our loans may be negatively affected from the date of
origination or purchase until the date we sell or securitize the loan. Fourth,
our adjustable-rate mortgage loans have periodic and lifetime interest rate caps
above which the interest rate on the loans may not rise. In the event of
general interest rate increases, the rate of interest on these mortgage loans
could be limited, while the rate payable on the senior certificates representing
interests in a securitization trust into which these loans are sold may be
uncapped. This would reduce the amount of cash we receive over the life of our
residual interests, and require us to reduce the carrying value of our residual
interests. Fifth, a significant decrease in interest rates could increase the
rate at which loans are prepaid, which also could require us to reduce the
carrying value of our residual interests. If prepayments are greater than
expected, the cash we receive over the life of our residual interests would be
reduced. Any such change in interest rates could have a material adverse effect
on our results of operations, financial condition and business prospects.
In the event of a default on our subordinated debt, the collateral securing the
debt may not provide near-term cash sufficient to repay the debt.
In addition to financing that is secured by our loans and residual
interests, we have also borrowed $40 million in subordinated debt from U.S.
Bank. This debt is secured by a subordinated lien on the collateral that is
pledged under our warehouse credit facility with U.S. Bank as well as by certain
rights to our residual interests. Unlike our warehouse, aggregation and
residual financing borrowings, which are secured by assets that we believe would
cover the borrowings in the event of a default, we may not have a source of
funds to repay the subordinated debt in the event of a default. We intend to
use cash flows from our residual interests to repay this debt on or before its
December 31, 2003 maturity. To the extent our residual cash flows fall
significantly short of projections, it would be more difficult for us to repay
this subordinated debt when due. Our inability to obtain capital or financing
to repay the subordinated debt when due would have a material adverse effect on
our results of operations, financial condition and business prospects.
Our inability to realize cash proceeds in excess of the loan acquisition cost
could adversely affect our financial position.
The net cash proceeds received from loan sales consist of the premiums we
receive on sales of loans in excess of the outstanding principal balance, plus
the cash proceeds we receive from securitization, minus the discounts on loans
that we have to sell for less than the outstanding principal balance. If we are
unable to originate loans at a cost lower than the cash proceeds realized from
loan sales, our results of operations, financial condition and business
prospects could be materially adversely affected.
2
An interruption or reduction in the securitization and whole loan markets would
hurt our financial position.
We are dependent on the securitization market for the sale of our loans
because we securitize loans directly and many of our whole loan buyers purchase
our loans with the intention to securitize. The securitization market is
dependent upon a number of factors, including general economic conditions,
conditions in the securities market generally and conditions in the asset-backed
securities market specifically. In addition, poor performance of our previously
securitized loans could harm our access to the securitization market.
Accordingly, a decline in the securitization market or a change in the market's
demand for our loans could have a material adverse effect on our results of
operations, financial condition and business prospects.
Our operations could be hurt by an economic slowdown or recession particularly
if it results in a decline in the real estate market.
The risks associated with our business are more acute during periods of
economic slowdown or recession because these periods may be accompanied by
decreased demand for consumer credit and declining real estate values.
Declining real estate values reduce the ability of borrowers to use home equity
to support borrowings because they negatively affect loan-to-value ratios of the
home equity collateral. In addition, because we make a substantial number of
loans to credit-impaired borrowers, the actual rates of delinquencies,
foreclosures and losses on these loans could be higher during economic
slowdowns. Any sustained period of increased delinquencies, foreclosures or
losses could adversely affect our ability to sell loans, the prices we receive
for our loans, or the value of our residual interests in securitizations, which
could have a material adverse effect on our results of operations, financial
condition and business prospects.
Our business is dependent upon conditions in California where we conduct a
significant amount of our business.
For the six months ended June 30, 2001, approximately 44.0% of the mortgage
loans we originated or purchased were secured by property in California. An
overall decline in the economy or the residential real estate market, or the
occurrence of a natural disaster, such as an earthquake, in California could
adversely affect the value of the mortgaged properties in California and
increase the risk of delinquency, foreclosure, bankruptcy, or loss on mortgage
loans in our portfolio. This would negatively affect our ability to purchase,
originate and securitize mortgage loans, which could have a material adverse
effect on our business, financial condition, liquidity and results of
operations.
California is currently experiencing an energy crisis. As a result, energy
costs, including natural gas and electricity, may increase significantly in the
future. There may also be limitations in the amount of energy resulting in
power "blackouts" during short periods of time. Therefore, because our
headquarters, a substantial number of our branch offices and some of the
independent brokers in our wholesale network are based in California, our
operations may be disrupted and operating expenses may increase in the future.
Any such disruption or increase in expenses could be material and could
adversely affect our loan originations, margins and our profitability. To date,
we have not experienced material increases in our overall operating expenses.
However, if the power outages associated with the energy crisis continue or
become more severe, we could experience material disruptions or cost increases
in the future, which could have a material adverse effect on our results of
operations, financial condition and business prospects.
We are exposed to risk of environmental liabilities with respect to properties
to which we take title.
In the course of our business, we may foreclose and take title to
residential properties, and could be subject to environmental liabilities with
respect to these properties. We may be held liable to a governmental entity or
to third parties for property damage, personal injury, investigation, and clean-
up costs incurred by these parties in connection with environmental
contamination, or may be required to investigate or clean up hazardous or toxic
substances, or chemical releases at a property. The costs associated with
investigation or remediation activities could be substantial. In addition, as
the owner or former owner of a contaminated site, we may be subject to common
law claims by third parties based on damages and costs resulting from
environmental contamination emanating from the property. If we ever become
subject to significant environmental liabilities, our business, financial
condition, liquidity and results of operations could be materially and adversely
affected.
3
Many of our competitors are larger and have greater financial resources than we
do, which could make it difficult for us to compete successfully, and we could
face new competitors.
We face intense competition in the business of originating, purchasing and
selling mortgage loans. Many of our competitors are substantially larger and
have considerably greater financial, technical and marketing resources than we
do. In addition, certain government-sponsored entities, such as Fannie Mae and
Freddie Mac, are beginning to purchase some categories of non-prime loans, which
may cause new competitors to enter our market and reduce our profit margins.
Certain large finance companies and conforming mortgage originators also
originate non-prime mortgage loans to customers similar to the borrowers we
serve. Competitors with lower costs of capital have a competitive advantage
over us. In addition, establishing a wholesale lending operation such as ours
requires a relatively small commitment of capital and human resources. This low
barrier to entry permits new competitors to enter our markets quickly and
compete with our wholesale lending business, which could have a material adverse
effect on our results of operations, financial condition and business prospects.
Changes in the volume and cost of loans originated by our wholesale division may
decrease our loan production and decrease our earnings.
We depend primarily on independent mortgage brokers and, to a lesser
extent, on correspondent lenders for the origination and purchase of our
wholesale mortgage loans, which constitute the majority of our loan production.
These independent mortgage brokers have relationships with multiple lenders and
are not obligated by contract or otherwise to do business with us. We compete
with these lenders for the independent brokers' business on pricing, service,
loan fees, costs and other factors. Competition from other lenders and
purchasers of mortgage loans could negatively impact the volume and pricing of
our wholesale loans, which could have a material adverse effect on our results
of operations, financial condition and business prospects.
A decline in the quality of servicing of the loans that we have recently
transferred could lower the value of our residual interests and our ability to
sell or securitize loans.
We recently transferred our servicing portfolio to Ocwen Federal Bank FSB.
There is a risk that the transfer of servicing to a third party could result in
reduced collections and increases in delinquencies due to, among other things,
borrower confusion, data integrity problems, system integration issues and poor
customer service. A third party servicing agent may not have the incentive to
manage the servicing process in our best interests. Poor servicing and
collections could adversely affect the value of our residual interests and our
ability to sell or securitize loans, which could have a material adverse effect
on our results of operations, financial condition and business prospects.
We may be required to repurchase mortgage loans or indemnify investors if we
breach representations and warranties, which would hurt our earnings.
When we sell loans, we are required to make customary representations and
warranties about such loans to the loan purchaser. Our whole loan sale
agreements require us to repurchase or substitute loans in the event we breach a
representation or warranty given to the loan purchaser or make a
misrepresentation during the mortgage loan origination process. In addition, we
may be required to repurchase loans as a result of borrower fraud or in the
event of early payment default on a mortgage loan. Likewise, we are required to
repurchase or substitute loans if we breach a representation or warranty in
connection with our securitizations. The remedies available to a purchaser of
mortgage loans are generally broader than those available to us against the
originating broker or correspondent. Further, if a purchaser enforces its
remedies against us, we may not be able to enforce the remedies we have against
the sellers. The repurchased loans typically can only be financed at a steep
discount to their repurchase price, if at all. They are also typically sold at
a significant discount to the unpaid principal balance. Significant repurchase
activity could negatively affect our cash flow and results of operations.
New legislation could restrict our ability to make mortgage loans, which could
adversely impact our earnings.
Several states and cities are considering or have passed laws, regulations
or ordinances aimed at curbing predatory lending practices. The federal
government is also considering legislative and regulatory proposals in this
4
regard. In general, these proposals involve lowering the existing federal
Homeownership and Equity Protection Act thresholds for defining a "high-cost"
loan, and establishing enhanced protections and remedies for borrowers who
receive such loans. However, many of these laws and rules extend beyond curbing
predatory lending practices to restrict commonly accepted lending activities,
including some of our activities. For example, some of these laws and rules
prohibit any form of prepayment charge or severely restrict a borrower's ability
to finance the points and fees charged in connection with his or her loan.
Passage of these laws and rules could reduce our loan origination volume. In
addition, for reputational reasons and because of the enhanced risk, many whole
loan buyers elect not to purchase any loan labeled as a "high cost" loan under
any local, state or federal law or regulation. Accordingly, these laws and
rules could severely constrict the secondary market for a significant portion of
our loan production. This would effectively preclude us from continuing to
originate loans that fit within the newly defined thresholds and would have a
material adverse effect on our results of operation, financial condition and
business prospects.
A recent federal circuit court decision regarding the legality of yield spread
premiums could increase litigation against us and other mortgage lenders.
In June 2001, the Eleventh Circuit Court of Appeals issued a decision in
Culpepper v. Irwin Mortgage Corp. in which the court revisited the legality of
certain payments that lenders commonly make to mortgage brokers, often referred
to as yield spread premiums, under the federal Real Estate Settlement Procedures
Act. In 1999, the Department of Housing and Urban Development issued a policy
statement taking the position that lender payments to mortgage brokers,
including yield spread premiums, are not per se illegal. The Culpepper decision
apparently treats a much wider category of these payments as illegal. We and
other mortgage lenders now face inconsistent judicial decisions about such
payments. If the Culpepper decision is not overturned or otherwise superseded
by law or regulation, there could be a substantial increase in litigation
regarding lender payments to brokers and potential costs defending these types
of claims and in paying any judgments that might result. In July 2001, we were
served with a yield spread premium class action based on this decision. The
costs of a significant increase in litigation could have a material adverse
effect on our results of operation, financial condition and business prospects.
Our charter and bylaws and Delaware law contain provisions that could discourage
a takeover.
Our amended and restated certificate of incorporation and our amended and
restated bylaws include various provisions that could delay, defer or prevent a
takeover attempt that may be in the best interest of our stockholders. These
provisions include the existence of a classified board of directors, the ability
of our board of directors to issue additional shares of our preferred stock up
to 7,460,000 shares without any further stockholder approval and requirements
that (i) our stockholders give advance notice with respect to certain proposals
they may wish to present for a stockholder vote, (ii) our stockholders act only
at annual or special meetings and (iii) two-thirds of all directors approve a
change in the number of directors on our board of directors. Issuance of our
preferred stock could also discourage bids for the common stock at a premium as
well as create a depressive effect on the market price of our common stock. In
addition, certain provisions in our 1998 transaction with U.S. Bancorp may
discourage takeover attempts by third parties.
We are also subject to Section 203 of the Delaware General Corporation Law
which, subject to certain exceptions, prohibits a Delaware corporation from
engaging in any business combination with any interested stockholder for a
period of three years following the date that the stockholder became an
interested stockholder. The preceding provisions of our charter and bylaws, as
well as Section 203 of the Delaware General Corporation Law, could discourage
potential acquisition proposals, delay or prevent a change of control and
prevent changes in our management.
The concentrated ownership of our voting stock by a small group of our
stockholders may have an adverse effect on your ability to influence the
direction we will take.
As of the date hereof, a small group of our stockholders, comprised of our
management team and directors, U.S. Bancorp and Brookhaven Capital, beneficially
owned an aggregate of approximately 81.2% of the total voting power of our
voting stock. These stockholders, if they were to act in concert, would have
majority control and would have the ability to control the approval of certain
fundamental corporate transactions (including mergers, consolidations and sale
of assets) and to elect all of the members of our board of directors, whether or
not their actions are in the best interests of our other stockholders.
5
Various factors may cause the market price of our common stock to become
volatile, which could adversely affect our ability to access the capital markets
in the future.
The market price of our common stock may experience fluctuations that are
unrelated to our operating performance. In particular, the price of our common
stock may be affected by general market price movements as well as developments
specifically related to the consumer finance industry and the financial services
sector. These could include, among other things, interest rate movements,
quarterly variations or changes in financial estimates by securities analysts,
or a significant reduction in the price of the stock of another participant in
the consumer finance industry. This volatility may make it difficult for us to
access the capital markets through secondary offerings of our common stock,
regardless of our financial performance.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The SEC allows us to "incorporate by reference" the information that we
file with it, which means that we can disclose important information to you by
referring you to other documents filed with the SEC. The following documents
which have been filed by us with the SEC pursuant to the Securities Exchange Act
of 1934, as amended, or the Securities Act of 1933, as amended, are incorporated
by reference in this prospectus:
. The description of our common stock contained in our Registration
Statement on Form 8-A filed with the SEC on June 2, 1997;
. Annual Report on Form 10-K for the year ended December 31, 2000; and
. Quarterly Reports on Form 10-Q for the quarters ended March 31, 2001 and
June 30, 2001, and Amendment No. 1 to Quarterly Report on Form 10-Q/A
for the quarter ended June 30, 2001.
The information incorporated by reference is considered to be part of this
prospectus, and later information that we file with the SEC will automatically
update and may supersede this information. In addition, all documents we file
pursuant to Section 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act
subsequent to the date of this prospectus and before the termination of the
offering of the common stock offered hereby are incorporated herein by reference
and will be a part hereof from the date of filing of such documents.
You may obtain copies of all documents that are incorporated in this
prospectus by reference (other than the exhibits to those documents that are
specifically incorporated by reference herein) without charge by writing or
calling Mr. Stergios Theologides, at New Century Financial Corporation, 18400
Von Karman, Suite 1000, Irvine, California 92612, telephone number (949) 440-
7030.
You should only rely on the information incorporated by reference or
provided in this prospectus. We have not authorized anyone else to provide you
with different information. If anyone provides you with different or
inconsistent information, you should not rely on it. We are not making an offer
of these securities in any state where the offer is not permitted. You should
not assume that the information in this prospectus or any supplement is accurate
as of any date other than the date on the front of those documents. Our
business, financial condition, results of operation and business prospects may
have changed since that date.
BUSINESS
General
We are a leading nationwide specialty mortgage banking company that
originates, purchases and sells residential mortgage loans secured primarily by
first mortgages on single-family residences. We offer a broad array of mortgage
products focused on the needs of borrowers who generally do not satisfy the
credit, documentation or other underwriting standards prescribed by conventional
mortgage lenders and loan buyers, such as Fannie Mae or Freddie Mac. We have
been originating these types of loans since 1996 and believe we have developed a
comprehensive and sophisticated process for credit evaluation and risk-based
pricing that allows us to effectively manage the potentially higher risks
associated with this segment of the mortgage industry.
6
Our borrowers generally have considerable equity in the property securing
their loan, but have impaired or limited credit profiles or higher debt-to-
income ratios than traditional mortgage lenders allow. Our borrowers also
include individuals who, due to self-employment or other circumstances, have
difficulty verifying their income through conventional methods, and who prefer
the prompt and personalized service we provide.
We originate and purchase approximately 75% of our loans through our
wholesale network of 7,200 independent mortgage brokers, and the remainder
through our retail network of 66 branch offices located in 26 states and through
our anyloan.com website. We are authorized to do business in all 50 states and
regularly originate and purchase loans throughout the country. Wholesale
originations and purchases occur through independent mortgage brokers who
provide loans to the Wholesale Division of one of our subsidiaries, New Century
Mortgage Corporation, as well as through its subsidiary, Worth Funding. Retail
originations occur through New Century Mortgage's network of branch offices,
through its Central Retail Division and from applicants directed to New Century
Mortgage through another one of our subsidiaries, The Anyloan Company, including
its anyloan.com website.
Our loan sale strategy has historically included both securitizations and
whole loan sales in order to achieve our goal of enhancing profits while
managing cash flows. Our previous securitizations required us to make
significant investments of cash at the time of securitization, and were not
expected to generate significant cash flow to us for an extended period. In
fiscal 2000, we transitioned our loan sales strategy to selling substantially
all of our loans in a way so as to generate cash revenue and liquidity. Whole
loan sale transactions enable us to generate current cash flow, protect against
the potential volatility of the securitization market and reduce the risks
inherent in retaining residual interests. In our most recent securitization, we
employed a securitization structure that allowed us to achieve cash proceeds
similar to those received through whole loan sales. We expect to continue to
employ a combination of whole loan sales and cash flow positive securitizations
in order to maximize our operating flexibility and to maintain multiple loan
sales channels.
Our principal executive offices are located at 18400 Von Karman, Suite
1000, Irvine, California 92612. Our telephone number is (949) 440-7030.
Industry Overview
The residential mortgage market is the largest consumer finance market in
the United States. Lenders in the United States originated over $1.02 trillion
in single-family mortgage loans in 2000, and are expected to originate
approximately $1.45 trillion in 2001. Generally, the industry is segmented by
the size of the mortgage loans and credit characteristics of the borrowers.
Mortgage loans that conform to the government-sponsored enterprise guidelines
for both size and credit characteristics are called "conforming mortgages." All
other mortgage loans are considered "non-conforming loans" because of the size
of the loans (referred to as "jumbo mortgages") or the credit profiles of the
borrowers (generally referred to as "Alt-A" and/or "sub-prime" mortgages).
Historically, non-conforming mortgage loans have represented approximately 27%
of total U.S. single-family mortgage originations. We believe this segment of
the mortgage industry can provide higher risk-adjusted returns on investment
than the traditional conforming mortgage loan market, provided the lender has a
comprehensive and sophisticated process for credit evaluation, risk-based
pricing, and diligent servicing.
Prior to the latter part of 1998, lenders such as us, typically referred to
as "sub-prime" lenders, routinely originated and securitized a substantial
amount of their mortgage loans, which allowed them to recognize significant
accounting gain on sale that exceeded the amount at which such loans could be
sold for cash. The securitization structures employed at that time required
significant allocations of capital and cash, resulted in significant delays in
the receipt of cash flows from the retained residual interests and exposed
lenders to earnings and book value volatility. These lenders were able to
readily raise capital and obtain financing to support this business strategy and
provide necessary cash flow. In late 1998, partly as a result of foreign
economic problems and the financial crisis of Long Term Capital Management, our
industry experienced a significant liquidity crisis resulting in substantially
decreased available financing, fewer whole loan buyers who sought to securitize
and, as a result, lower prices for whole loans. During these extreme market
conditions, a number of lenders implemented reduced pricing and other non-
economic strategies in an effort to stay in business. Many of our competitors
failed during this time period as a result of their inability to sell or
securitize their loans profitably and meet the payment demands on their
financing facilities.
7
Recent Operational Highlights
Starting in late 1998, the market for our loans and the availability of
capital and financing to mortgage lenders in our industry declined dramatically.
We also experienced significant changes in the general level of interest rates
and other economic conditions that adversely affected our business. In response
to these events, we implemented several strategic initiatives that have reduced
our risk profile and significantly improved our recent operating performance and
financial results. These initiatives have allowed us to achieve our goal of
positive cash flow from operations for the last two consecutive quarters. The
key initiatives include:
. Transition of Loan Sales Strategy. As part of our strategy to improve
cash flows, beginning in the first quarter of 2000, we transitioned from
securitizing the majority of our loans to selling the majority of
production for cash in whole loan sales and cash-flow positive
securitizations. To that end, during the second quarter of 2001, we
completed a securitization of $380 million of mortgage loans and issued a
net interest margin security. The net cash proceeds from the two
transactions resulted in cash proceeds in an amount similar to whole loan
sales. This transition increased our cash revenues and reduced our need
for additional capital or borrowings in order to fund operations. We
plan to continue to focus our loan sales strategies in order to optimize
cash revenues and liquidity.
. Restructured and Reduced Debt. In March 2001, we restructured on nearly
all of our residual financing, which eliminated our exposure to margin
calls on that debt. In addition, during 2001, we repaid $57.2 million in
residual financing and extended the maturity of our subordinated debt to
December 31, 2003, which allowed us to more closely match our payment
obligations with the projected cash flows from our residual interests.
. Reduction of Loan Acquisition Costs. We reduced our loan acquisition
costs to 2.37% of loan production for the quarter ended June 30, 2001
from 2.87% for the quarter ended June 30, 2000. Loan acquisition costs
are the fees paid to wholesale brokers and correspondents, plus direct
loan origination costs (including commissions and corporate overhead
costs), less the sum of points and fees received from borrowers, divided
by total production volume. We achieved this reduction in our loan
acquisition costs through a combination of: (i) decreasing corporate
overhead and commission expense; (ii) reducing marketing costs; (iii)
consolidating operations; (iv) reducing premiums paid to wholesale
brokers and correspondent lenders; (v) closing unprofitable branches;
(vi) reducing our staff from 1,654 at June 30, 2000 to 1,405 at June 30,
2001; and (vii) increasing our loan origination volume.
. Sale of Servicing Rights. In March 2001, we sold the servicing rights on
$4.8 billion of our servicing portfolio to Ocwen Federal Bank FSB, one of
the country's highest rated special servicers, for $19.7 million, which
was comprised of 25 separate asset-backed securities. Ocwen also
reimbursed us for our outstanding servicing advance receivables and
assumed responsibility for all future servicing advance obligations on
the purchased securities. We used the sale proceeds to: (i) repay the
portion of our warehouse line of credit that was secured by servicing
advances; (ii) repay the outstanding balance on our $22.5 million working
capital line of credit with U.S. Bank; and (iii) increase our liquidity.
. Improved Underwriting Controls. We have implemented a process designed
to monitor and adjust our underwriting guidelines to originate loans that
are widely accepted by loan buyers. We have also taken steps to further
reduce documentation errors, better identify borrower misrepresentation
and reduce early payment default with the goal of decreasing the number
of loans we sell at a discount.
. Management Reorganization. During the first quarter of 2001, we
announced several senior management changes designed to improve
accountability and increase the efficiency of our operations. Brad
Morrice, our Vice Chairman and President, assumed the additional role of
Chief Operating Officer and also became the sole Chairman and Chief
Executive Officer of our subsidiary, New Century Mortgage. In addition,
we promoted members of existing management to the newly-created positions
of corporate Chief Credit Officer and Chief Administrative Officer.
8
Growth and Operating Strategies
The following are our growth and operating strategies to increase earnings
and improve cash flow:
. Increase Loan Originations. We plan to pursue geographic expansion
particularly into the Northeast and Mid-Atlantic areas of the country.
Our wholesale division can expand quickly into new markets with limited
investment in infrastructure. For retail expansion, we will continue our
practice of reviewing demographic information about potential markets and
opening branches in markets that we conclude can support a retail branch.
We will continue to deploy new marketing and technology initiatives and
expand our product line in an effort to increase our existing market
penetration.
. Emphasize Cash-Flow Positive Operations. We plan to continue to focus
our secondary marketing on sales strategies that will optimize liquidity
and cash flow. We also intend to sell retained servicing rights and
utilize securitization structures that generate cash in excess of
origination costs.
. Increase Holding Period and Loan Pool Size. Increases in the amount of
credit and equity capital available to us will allow us to hold more
loans for a longer period of time prior to sale or securitization. We
generally earn net interest income on loans held for sale as a result of
the spread between the interest rate that we pay on our warehouse and
aggregation lines and the interest rate we receive on our loans. As a
result, if we modestly increase the number of days on average that we
hold the loans prior to sale, we will realize an increase in the amount
of interest income that we earn. In addition larger pools of loans sold
generally command a higher premium.
. Reduce Loans Sold at a Discount. We are devoting significant efforts
to reduce the losses that result from loans we sell at a discount to par
value. Loans are typically sold at a discount when (i) there are
technical deficiencies in the loan documentation, (ii) the loans have
characteristics that are outside the guidelines of whole loan buyers, or
(iii) the borrower defaults on the first payment. In order to accomplish
these objectives, we have appointed a corporate level Chief Credit
Officer, improved the analytics used in evaluating discount loans and
eliminated products resulting in disproportionately high levels of
discount loans.
. Further Reduce Loan Acquisition Costs. We continue to focus our efforts
on reducing our loan acquisition costs by improving efficiencies and
increasing loan original volume. In the second quarter of 2001, our loan
acquisition cost was 2.37% of loan originations and our goal is to
achieve a loan acquisition cost of 2.25% by the end of 2001 and 2.0% by
the end of 2003.
. Reduce Residual Financing. As of June 30, 2001, we owed approximately
$119.6 million in residual financing primarily to Salomon Smith Barney.
We expect to reduce residual financing to below $100 million by year-end
2001 and fully repay all outstanding residual financing by no later than
year-end 2002. Upon the full repayment of the residual financing, we
will be able to retain all of the cash flow from the residual interest.
This will reduce the interest expense that we incur and, as a result,
enhance our operating results.
Strengths and Competitive Advantages
We believe that we have several strengths and competitive advantages that
will allow us to compete effectively in our business, including:
. Management Experience and Depth. The members of our senior management
team have on average over 17 years of experience in the consumer finance
sector.
. High Quality Customer Service. We strive to make the origination process
easy for our borrowers and brokers by providing prompt responses,
consistent and clear procedures and an emphasis on ease of use.
9
. Strong Secondary Market Relationships. We have developed relationships
with a variety of large institutional loan buyers, including Salomon
Smith Barney, CSFB, Morgan Stanley and Deutsche Bank, who consistently
bid on and buy large loan pools from us.
. Advanced Technology for Credit Evaluation. The implementation of our
proprietary credit grading and pricing engines has allowed us to produce
a more consistent and predictable portfolio of loans.
. Award-Winning Website. Mortgage Technology Magazine awarded us its
Website of the Year award in 2000 for our Wholesale Division's website.
The site's features make the loan process easier for our brokers which in
turn helps to solidify our relationships with them.
. Significant Cash Flows from Residuals. Our residual interests provide
significant cash flows that we expect will allow us to repay our long-
term debt aggressively. Once the debt has been repaid, we expect that
the continued cash flow from the residuals interests will provide
significant growth and operating capital in the future.
Product Types
We offer both fixed-rate and adjustable-rate loans, or ARMS. We also offer
loans with an interest rate that is initially fixed for a period of time and
that subsequently converts to an adjustable-rate. Most of the ARMS that we
originate are offered at a low initial interest rate, sometimes referred to as a
"start rate." At each interest rate adjustment date, we adjust the rate, subject
to certain limitations on the amount of any single adjustment and a cap on the
aggregate of all adjustments.
Our borrowers generally fall into six risk classifications. In addition,
our products are available at different interest rates and with different
origination and application points and fees depending on the particular
borrower's risk classification (see "BUSINESS--Underwriting Standards").
Borrowers may choose to increase or decrease their interest rate through the
payment of different levels of origination fees. Many of our fixed-rate
borrowers, in particular, choose to "buy down" their interest rate through the
payment of additional origination fees. Our maximum loan amounts are generally
$500,000 with a loan-to-value ratio of up to 80%. We do, however, offer larger
loans with lower loan-to-value ratios on a case-by-case basis. We also offer
products that permit a loan-to-value ratio of up to 95% for selected borrowers
with a risk classification of "A+" or of up to 90% for selected borrowers with a
risk classification of "A-." We have also introduced our "Prime Alternative"
product (see "BUSINESS --Underwriting Standards") with unique grading designed
to appeal to borrowers with higher credit quality.
Loans originated or purchased by us during the first six months of 2001 had
an average loan amount of approximately $130,000 and an average loan-to-value
ratio of approximately 76%. If permitted by applicable law and agreed to by the
borrower, our loans may also include a prepayment charge that is triggered by
the loan's full or substantial prepayment early in the loan's term.
Approximately 84% of the loans we originated or purchased during the first six
months of 2001 included some form of prepayment provision.
Loan Originations and Purchases
We originate and purchase loans through New Century Mortgage's Wholesale
Division, Retail Branch Division, its subsidiary, Worth Funding and through our
Central Retail Division. Our divisions originate and purchase loans as follows:
. The Wholesale Division originates and purchases loans through a network
of independent mortgage brokers and correspondents solicited by our
account executives. These account executives provide on-site customer
service to the broker to facilitate the funding of the loan.
. Worth Funding originates and purchases loans by soliciting and servicing
brokers through its centralized telemarketing approach, which operates
from one central office where all decisions can be made promptly.
10
. The Retail Branch Operations Division originates loans directly to the
consumer through our 66 retail branch offices located in 26 states.
. The Central Retail Division originates, processes and underwrites home
mortgage loans nationwide. Loan officers fulfill customer requests from
one central office. Leads are generated through radio, direct mail,
telemarketing and our anyloan.com website.
Characteristics of the loans we originated and purchased during the first
six months of 2001 include:
. 68.9% were to borrowers within our three highest credit grades even
though our underwriting guidelines include six levels of credit risk
classification;
. 92.7% were secured by the primary residences of our borrowers;
. the average loan-to-value, or LTV, ratio was 78.3%;
. 98.5% were secured by first mortgages and the remainder were secured by
second mortgages; and
. 82.3% were refinances of existing loans, while the remaining 17.7%
represented loans for a borrower's purchase of a residential property.
Wholesale and Worth Funding
During the first six months of 2001, our wholesale originations and
purchases totaled $1.9 billion, or 79.3% of our total loan production, including
$151.2 million, or 6.3%, which originated through Worth Funding. As of June 30,
2001, the Wholesale Division operated through five regional operating centers
located in Southern California, Northern California, Schaumburg, Illinois,
Englewood, Colorado, and Tampa, Florida. The Wholesale Division also operated
through 31 additional sales offices located in Alabama, California, Florida,
Georgia, Idaho, Indiana, Louisiana, Massachusetts, Michigan, Minnesota, Missouri
(2), Nevada, New Jersey, New Mexico, Ohio (3), Oklahoma, Oregon, Rhode Island,
Tennessee, Texas (2), Utah, Virginia, Washington (2), West Virginia and
Wisconsin (2). As of June 30, 2001, the Wholesale Division employed 174 account
executives.
As of June 30, 2001, approximately 7,200 mortgage brokers were approved by
us to submit loans. We originated loans through approximately 3,700 brokers
during the first six months of 2001. During this period, our ten largest
producing brokers originated 5.2% of our loans, with the largest broker
accounting for 1.1% of the total production of the Wholesale Division.
In wholesale originations, the broker's role is to identify the applicant,
assist in completing the loan application form, gather necessary information and
documents and serve as our liaison with the borrower through the lending
process. We review and underwrite the application submitted by the broker,
approve or deny the application, set the interest rate and other terms of the
loan and, upon acceptance by the borrower and satisfaction of all conditions
imposed by us, fund the loan. Because brokers conduct their own marketing and
employ their own personnel to complete loan applications and maintain contact
with borrowers, originating loans through the Wholesale Division allows us to
increase our loan volume without incurring the higher marketing, labor and other
overhead costs associated with increased retail originations.
Mortgage brokers generally submit loan applications to an account executive
in one of our sales offices. The sales office then forwards the application to
the closest regional operating center where the loan is logged in for regulatory
compliance purposes, underwritten and, in most cases, conditionally approved or
denied within 24 hours of receipt. Because mortgage brokers generally submit
individual loan files to several prospective lenders simultaneously, we attempt
to respond to each application as quickly as possible. If approved, we issue a
"conditional approval" to the broker with a list of specific conditions that
have to be met (for example, credit verifications and independent third-party
appraisals) and additional documents to be supplied prior to the funding of the
loan. An account manager and the account executive who originated the loan work
directly with the submitting mortgage broker to collect the requested
information and to meet the underwriting conditions and other requirements. In
most cases, we fund loans within 30 days following approval of the application.
11
The Wholesale Division also purchases closed loans on an individual or
"flow" basis from independent mortgage brokers and financial institutions. We
review an application for approval from each lender that seeks to sell us a
closed loan. We analyze the mortgage broker's underwriting guidelines and
financial condition, including its licenses and financial statements. We
require each mortgage broker to enter into a purchase and sale agreement with
customary representations and warranties regarding the loans the mortgage broker
will sell to us. These representations and warranties are comparable to those
given by NC Capital to its loan purchasers.
The following table sets forth selected information relating to loan
originations through the Wholesale Division and Worth Funding during the periods
shown:
For the Three Months Ended
-------------------------------------------------------------------------------------------
March 31, June 30, September 30, December 31, March 31, June 30,
2000 2000 2000 2000 2001 2001
-------------- -------------- --------------- --------------- -------------- --------------
Principal balance (in thousands)....... $709,480 $793,172 $766,680 $772,429 $807,953 $1,103,236
Average principal balance per loan
(in thousands)........................ $ 106 $ 113 $ 118 $ 133 $ 140 $ 143
Combined weighted average initial
loan-to-value ratio................... 78.8% 79.4% 78.1% 78.9% 78.4% 78.8%
Percent of first mortgage loans........ 97.0 95.9 95.9 97.9 98.7 99.5
Property securing loans:
Owner occupied......................... 93.2 93.9 95.0 93.7 91.9 91.5
Non-owner occupied..................... 6.8 6.1 5.0 6.3 8.1 8.5
Weighted average interest rate:
Fixed-rate............................. 10.9 11.5 11.5 11.3 10.5 9.7
ARMs................................... 10.3 10.5 10.5 10.5 9.9 9.6
Margin--ARMs........................... 6.1 6.1 6.1 6.3 6.5 6.6
Retail Branch Operations Division and Central Retail Division
During the first six months of 2001, the Retail Branch Operations Division
originated $385.5 million in loans, or 16.0% of our total loan production. As
of June 30, 2001, the Retail Branch Operations Division employed 255 retail loan
officers. These employees were located in 66 sales offices in Arizona (3),
California (18), Colorado, Florida (4), Georgia, Hawaii, Illinois (2), Kentucky,
Louisiana, Massachusetts, Michigan, Minnesota (2), Missouri (2), Montana, Nevada
(2), New Jersey, New Mexico, Ohio (3), Oklahoma, Oregon (2), Pennsylvania (2),
Tennessee, Texas (8), Utah, Virginia (2), and Washington (3).
During the first six months of 2001, the Central Retail Division originated
$113.8 million, or 4.7%, of our total loan production. As of June 30, 2001, the
Central Retail Division employed 61 loan officers at its offices in Irvine,
California.
By creating a direct relationship with the borrower, retail lending
provides a more sustainable loan origination franchise and greater control over
the lending process. Loan origination fees contribute to profitability and cash
flow and offset the higher costs of retail lending.
12
The following table sets forth selected information relating to loan
originations through the Retail Branch Operations Division and Central Retail
Division during the periods shown:
For the Three Months Ended
----------------------------------------------------------------------------------------
March 31, June 30, September 30, December 31, March 31, June 30,
2000 2000 2000 2000 2001 2001
----------------------------------------------------------------------------------------
Principal balance (in thousands).......... $246,981 $317,204 $284,084 $262,327 $218,580 $280,684
Average principal balance per loan (in
thousands)............................... $ 90 $ 88 $ 87 $ 96 $ 95 $ 104
Combined weighted average initial
loan-to-value ratio...................... 78.6% 78.6% 77.8% 77.1% 76.1% 78.2%
Percent of first mortgage loans........... 92.7 88.3 91.3 95.3 95.2 96.9
Property securing loans:
Owner occupied............................ 94.1 94.8 96.2 96.1 96.3 96.5
Non-owner occupied........................ 5.9 5.2 3.8 3.9 3.7 3.5
Weighted average interest rate:
Fixed-rate................................ 10.6 10.7 11.0 10.8 10.8 10.6
ARMs...................................... 10.0 10.1 10.4 10.5 10.1 9.6
Margin--ARMs.............................. 6.1 6.2 6.2 6.4 6.4 6.5
Marketing
Wholesale Marketing
The marketing strategy of the Wholesale Division of New Century Mortgage
focuses on the sales efforts of its account executives, and on providing prompt,
consistent service to brokers and their customers. These efforts are
supplemented with the Wholesale Division's e-commerce website, direct mail and
fax programs to brokers, advertisements in trade publications, in-house
production of collateral sales material, seminar sponsorships, tradeshow
attendance and periodic sales contests.
Worth Funding Marketing
The marketing strategy of New Century Mortgage's subsidiary, Worth Funding,
relies on direct broker solicitation, fax programs as well as convention and
conference attendance.
Retail Branch Marketing
The Retail Branch Operations Division of our subsidiary, New Century
Mortgage, relies primarily on targeted direct mail and outbound telemarketing to
attract borrowers. New Century Mortgage's direct mail programs are managed by a
centralized staff who create a targeted mailing list for each branch market and
oversee the completion of mailings by a third party mailing vendor. All calls
or written inquiries from potential borrowers that result from the mailings are
tracked centrally and then forwarded to each branch location and handled by
branch loan officers. This division's website (www.newcenturymortgage.com) is
used in the direct mail program to provide information to prospective borrowers
and to allow them to complete an application online. Under the Central
Telemarketing Program, the telemarketing staff solicits prospective borrowers,
makes a preliminary evaluation of the applicant's credit and the value of the
collateral property and refers qualified leads to loan officers in the retail
branch closest to the customer.
Central Retail Marketing
The Central Retail Division of our subsidiary, New Century Mortgage,
engages in a variety of direct response advertising, such as purchased leads
from aggregators, radio advertising, direct mail, search engine placement,
banner ads, e-mail campaigns and links to related websites. The Central Retail
Division also markets to the current customer base of New Century Mortgage
through direct mail and outbound telemarketing. In addition, this division
maintains a comprehensive database on all customers with whom it has had contact
and markets to these potential customers in an effort to convert them to
application.
13
Financing Loan Originations and Loans Held for Sale
We require access to credit facilities in order to originate and purchase
mortgage loans and to hold them pending their sale or securitization. In
particular, we rely on a $300 million syndicated warehouse credit facility led
by U.S. Bank and a $200 million warehouse and aggregation facility with CDC
Mortgage Capital to fund our originations and purchases. We also rely on
aggregation financing facilities totaling $900 million with Salomon Brothers
Realty and Morgan Stanley Dean Witter Mortgage Capital to finance the loans
pending their sale or securitization.
Underwriting Standards
We originate or purchase our mortgage loans in accordance with the
underwriting guidelines described below. The loans we originate or purchase
generally do not satisfy conventional underwriting standards, such as those
utilized by Fannie Mae or Freddie Mac. Therefore, our loans are likely to have
higher delinquency and foreclosure rates than portfolios of mortgage loans
underwritten to Fannie Mae and Freddie Mac standards.
Our underwriting guidelines take into account the applicant's credit
history and capacity to repay the proposed loan as well as the secured
property's value and adequacy as collateral for the loan. Each applicant
completes an application that includes information on the applicant's
liabilities, income, credit history, employment history and personal
information. Based on review of the loan application and other data from the
applicant against the Underwriting Guidelines, we determine the loan terms,
including the interest rate and maximum loan-to-value ratio.
During the third quarter of 2000, we implemented an automated credit
grading process designed to reduce errors in reading and interpreting credit
reports and assigning the correct grade to individual loans. This process was
completely integrated into our underwriting process during the fourth quarter of
2000.
Credit History
Our underwriting guidelines require a credit report on each applicant from
a credit reporting company. In evaluating an applicant's credit history, we
utilize credit bureau risk scores, or a FICO score, which is a statistical
ranking of likely future credit performance developed by Fair, Isaac & Company
and the three national credit data repositories--Equifax, TransUnion and
Experian.
Collateral Review
All mortgaged properties are appraised by qualified independent appraisers
prior to the loan's funding. The appraiser inspects and appraises the property
and verifies that it is in acceptable condition. Following each appraisal, the
appraiser prepares a report that includes a market value analysis based on
recent sales of comparable homes in the area and, when deemed appropriate,
replacement cost analysis based on the current cost of constructing a similar
home. All appraisals are required to conform to the Uniform Standards of
Professional Appraisal Practice adopted by the Appraisal Standards Board of the
Appraisal Foundation and are generally on forms acceptable to Fannie Mae and
Freddie Mac. Our underwriting guidelines require a review of the appraisal by
one of our qualified employees or by a qualified review appraiser that we have
retained. Our underwriting guidelines then require our underwriters to be
satisfied that the value of the property being financed, as indicated by the
appraisal, currently supports the outstanding loan balance.
Income Documentation
Our underwriting guidelines include three levels of income documentation
requirements, referred to as the "full documentation," "limited documentation"
and "stated income documentation" programs. Under the full documentation
program, applicants generally are required to submit two written forms of
verification of stable income for at least twelve months. Under the limited
documentation program, applicants are generally required to submit twelve
consecutive monthly bank statements on their individual bank account. Under the
stated income documentation program, an applicant may be qualified based upon
monthly income as stated on the mortgage loan application if the applicant meets
certain criteria. All of these documentation programs require that, with
respect to salaried employees, the applicant's employment be verified by
telephone. In the case of a purchase money loan,
14
verification of the source of funds, if any, to be deposited by the applicant
into escrow is required. Under each of these programs, we review the applicant's
source of income, calculate the amount of income from sources indicated on the
loan application or similar documentation, review the applicant's credit
history, calculate the debt service-to-income ratio to determine the applicant's
ability to repay the loan, review the type and use of the property being
financed, and review the property. In determining the applicant's ability to
repay the loan, our underwriters use a qualifying rate that is equal to the
initial interest rate on the loan, in the case of other LIBOR-based loans.
Underwriting Requirements
In general, the maximum loan amount for mortgage loans originated under the
programs is $500,000. Our underwriting guidelines permit loans on one-to-four-
family residential properties to have:
. a loan-to-value ratio at origination of up to 95% with respect to non-
conforming first liens;
. a combined loan-to-value ratio at origination of up to 100% with respect
to non-conforming second liens; and
. a combined loan-to-value ratio at origination of up to 100% with respect
to conforming second liens.
The applicability of the above ratios depends on, among other things, the
purpose of the mortgage loan, a borrower's credit history, the borrower's
repayment ability and debt service-to-income ratio, and the type and use of the
property. The loan-to-value of a mortgage loan that is secured by mortgaged
properties acquired by a borrower under a "lease option purchase" is determined
in one of two ways. If the "lease option price" was set less than twelve months
prior to origination, the loan-to-value of the related mortgage loan is based on
the lower of the appraised value at the time of origination of the mortgage loan
or the sale price of the related mortgaged property. If the "lease option
price" was set twelve months or more prior to origination, the loan-to-value of
the related mortgage is based on the appraised value at the time of origination.
Our underwriting guidelines for first lien mortgage loans have the
following categories and criteria for grading the potential likelihood that an
applicant will satisfy the repayment obligations of a mortgage loan:
15
SUMMARY OF PRINCIPAL UNDERWRITING GUIDELINES/(1)/
Prime Alternative A+ Risk A- Risk
------------------------------------------------------------------------------------------------------------------------------------
Existing mortgage Maximum one 30-day Maximum one 30-day Maximum three 30-day
history late payment within late payment and no late payments and no
the last 12 months. 60-day late payments 60-day late payments
w/in last 12 mos.; w/in last 12 mos.;
must have an LTV of must have an LTV of
90% or less. 90% or less.
Other credit FICO score of 650 or 4 accts w/30-day Past/Present 30-day
higher. late payments or late payments and 4
FICO score of 620 or accts w/60-day late
higher; no more than payments and 2 accts
$500 in open w/90-day late
collection accounts payments or FICO
or charge-offs open score of 570 or
after funding. higher; some prior
Past/Present 30-day defaults acceptable;
late payments and 1 no more than $2,500
acct w/60 day late in open collection
payment or FICO accounts or
score of 590 or charge-offs open
higher; no more than after funding.
$1,000 in open
collection accounts
or charge-offs open
after funding.
Bankruptcy filings Generally, no Generally, no Generally, no
Chapter 7 or 13 Chapter 7 or 13 Bankruptcy filings
Bankruptcy discharge Bankruptcy discharge in last 2 years or
in last 2 years or in last 2 years or Notice of Default
Notice of Default in Notice of Default filings in last 3
last 2 years. filings in last 3 years.
years.
Debt service to up to 50% 45% to 55% 50% to 55%
income Ratio
Maximum
loan-to-value
ratio:/(2)/
Owner occupied: 90% 95% 90%
single family
Owner occupied: Not applicable 85% 85%
condo/three-
to-four unit
Non-owner Not applicable 85% 80%
occupied
B Risk C Risk C- Risk
------------------------------------------------------------------------------------------------------------------------------------
Existing mortgage Maximum one 60-day Maximum one 90-day Maximum of two
history late payment within late payment within 90-day late payments
last 12 months; must last 12 months; must and one 120-day late
be less than 90 days be less than 120 payment w/in last 12
late at funding. days late at funding. months; less than
150 days late at
funding. No current
Notice of Default.
Other credit Significant prior Significant defaults
defaults acceptable; acceptable;
Generally, no more collection accounts
than $5,000 in open may remain open
collection accounts after funding.
or charge-offs open
after funding; on a
case by case basis.
Bankruptcy filings Generally, no Generally, no Generally, no
Bankruptcy discharge Bankruptcy filings Chapter 7 Bankruptcy
in last 18 months or or Notice of Default discharge in last 12
Notice of Default filings in last 12 mos. or Chapter 13
filings in last 2 months. Bankruptcy filing
years. allowed in last 12
months and no
current NOD in last
12 months.
Debt service to 55% to 59% 55% to 59% 50% to 59%
income Ratio
Maximum
loan-to-value
ratio:/(2)/
Owner occupied: 80% 75% 70%
single family
Owner occupied: 75% 70% 65%
condo/three-to-
four unit
Non-owner 75% 70% 65%
occupied
____________________
/(1)/ The letter grades applied to each risk classification reflect the
Company's internal standards and do not necessarily correspond to the
classifications used by other mortgage lenders.
/(2)/ The maximum LTV set forth in the table is for borrowers providing full
documentation. The LTV is reduced 5% for stated income applications, if
applicable. Additionally, if the borrower's FICO score meets or exceeds
the risk category and debt ratio guidelines, consumer credit may be
disregarded.
16
Prime Alternative Program
We have introduced our "Prime Alternative Program" to attract higher
quality "Alternative-A" types of borrowers. We assess the borrower's mortgage
repayment history, any incidents of bankruptcy, mortgage default, or major
derogatory credit, and call for a minimum FICO score of 650, which is
substantially higher than our "core" product requirements. This program is
restricted to owner-occupied properties; single unit, two unit, or detached
PUD's, with highly conforming property characteristics. We have limitations on
loan amount, loan-to-value ratio, income documentation type, and the amount of
"cash out" allowed on refinances. We assign a unique 4-level grade
classification based on the FICO score range for the primary borrower.
Mortgage Credit Only Program
In addition to the five risk grade categories described above, New Century
Mortgage also has a Mortgage Credit Only program. This program uses the
applicant's mortgage payment history as the primary factor in qualifying the
applicant's ability to repay the loan. The Mortgage Credit Only program allows
no more than three 30-day late payments and no 60-day late payments within the
last 12 months on an existing mortgage loan and must be current at funding. An
existing mortgage loan is not required to be current at the time the application
is submitted. Derogatory credit report items are allowed as to non-mortgage
credit. In order to qualify for a Mortgage Credit Only loan:
. The borrower is not a participant in our Stated Income Documentation
program;
. No bankruptcy or notice of default filings have occurred during the
preceding two years, unless the borrower's bankruptcy has been
discharged during the past two years and the borrower has re-established
a credit history that otherwise complies with the credit parameters set
forth above; and
. The mortgaged property is in at least average condition. A maximum loan-
to-value of 85% is permitted for a mortgage loan on a single-family
owner-occupied property. A maximum loan-to-value of 80% is permitted for
a mortgage loan on a non-owner occupied property, second home, owner-
occupied condominium, or two- to four-family residential property. The
debt service-to-income ratio is generally limited to a maximum of 55%.
Home Saver Program
We have established a sub-category of our C- credit grade for borrowers
faced with at least one of the following credit scenarios: (i) the borrower has
an existing mortgage currently in foreclosure; (ii) the borrower is subject to a
notice of default filing; or (iii) the borrower has had a serious mortgage
delinquency for more than one 120 day period in the last 12 months or is more
than 90 days late at the time of funding. This sub-category is known as our
Home Saver Program. The Home Saver Program is available only to Full
Documentation borrowers and permits a maximum loan-to-value of 65% and a maximum
debt service-to-income ratio of 55%. The maximum loan is $300,000 and all
derogatory credit report items must either be brought current or paid through
the loan proceeds. A maximum of 3% of the loan proceeds may be paid to the
borrower in cash. If the borrower is in an open Chapter 13 or Chapter 11
bankruptcy, the bankruptcy must be discharged through the proceeds of the loan.
For the six months ended June 30, 2001, Home Saver loans accounted for 2.3% of
total loan originations and purchases.
Exceptions
The categories and criteria described in our underwriting guideline table
above are guidelines only. On a case-by-case basis, we may determine that an
applicant warrants a loan-to-value exception, a debt service-to-income ratio
exception, or another exception. We may allow such an exception if the
application reflects certain compensating factors such as low LTV, a maximum of
one 30-day late payment on all mortgage loans during the last 12 months, and
stable employment or ownership of current residence. We may also allow an
exception if the applicant places a down payment through escrow of at least 20%
of the purchase price of the mortgaged property or if the new loan reduces the
applicant's monthly aggregate mortgage payment by 25% or more. Loans containing
at least one exception declined to 28.2% in the second quarter of 2001 from
36.6% in the second quarter of 2000. Our
17
automated credit grading system aids in identifying and managing underwriting
exceptions. Certain of our loan programs and risk grade classifications limit
the approval of exceptions to higher loan approval authority levels.
We evaluate our underwriting guidelines on an ongoing basis and
periodically modify them to reflect our current assessment of various
underwriting issues. We also maintain separate underwriting guidelines
appropriate to our non-conforming second lien mortgage loans and adopt new
underwriting guidelines appropriate to new loan products we offer.
Loan Production by Borrower Risk Classification
The following table sets forth information concerning the characteristics
of our fixed-rate and adjustable-rate loan production by borrower risk
classification for the periods shown:
For the Quarters Ended
----------------------------------------------------------------------------------
March 31, June 30, September 30, December 31, March 31, June 30,
2000 2000 2000 2000 2001 2001
--------------- -------------- ------------- ------------- ---------- ------------
Prime Alternative Risk Grade:
Percent of total purchases and
originations.................. 0.9% 6.9% 5.9% 4.5% 1.9% 3.1%
Combined weighted average
initial loan-to-value ratio.. 86.3 84.9 83.6 85.2 80.0 79.9
Weighted average interest
rate:
Fixed-rate................... 10.7 10.7 10.5 10.6 9.7 9.9
ARMs......................... 9.3 9.7 9.6 9.4 8.9 8.7
Margin--ARMs................. 5.3 5.0 4.9 5.0 5.3 5.9
A+ Risk Grade:
Percent of total purchases
and originations............. 31.8% 32.7% 31.5% 34.8% 39.2% 44.0%
Combined weighted average
initial loan-to-value ratio.. 82.5 82.8 81.5 82.5 81.1 81.4
Weighted average interest
rate:
Fixed-rate................... 10.4 10.8 10.8 10.7 10.3 9.6
ARMs......................... 9.8 10.0 10.0 10.2 9.5 9.2
Margin--ARMs................. 5.8 5.8 5.8 6.0 6.2 6.3
A- Risk Grade:
Percent of total purchases
and originations............. 30.9% 27.3% 27.6% 29.0% 26.9% 22.6%
Combined weighted average
initial loan-to-value ratio.. 80.5 80.2 79.3 78.5 78.1 78.5
Weighted average interest rate
Fixed-rate................... 10.4 10.8 11.0 10.9 10.6 10.1
ARMs......................... 10.0 10.2 10.2 10.3 9.8 9.5
Margin--ARMs................. 6.2 6.2 6.2 6.4 6.6 6.6
B Risk Grade:
Percent of total purchases
and originations............. 22.5% 20.7% 21.9% 20.1% 21.9% 21.8%
Combined weighted average
initial loan-to-value ratio.. 76.6 76.5 75.4 75.3 75.8 77.1
Weighted average interest
rate:
Fixed-rate................... 10.9 11.3 11.3 11.2 10.9 10.4
ARMs......................... 10.3 10.5 10.6 10.7 10.1 9.8
Margin--ARMs................. 6.3 6.4 6.4 6.6 6.8 6.8
C Risk Grade:
Percent of total purchases
and originations............. 9.4% 8.1% 7.9% 7.4% 6.5% 5.9%
Combined weighted average
initial loan-to-value ratio.. 71.9 71.3 71.8 71.9 71.5 71.3
Weighted average interest
rate:
Fixed-rate................... 11.8 12.8 12.5 12.3 12.3 11.5
ARMs......................... 11.3 11.6 11.7 11.6 11.2 10.8
Margin--ARMs................. 6.6 6.7 6.7 6.9 7.0 7.1
C- Risk Grade:
18
For the Quarters Ended
----------------------------------------------------------------------------------
March 31, June 30, September 30, December 31, March 31, June 30,
2000 2000 2000 2000 2001 2001
--------------- -------------- ------------- ------------- ---------- ------------
Percent of total purchases
and originations............. 4.5% 4.3% 5.2% 4.2% 3.6% 2.6%
Combined weighted average
initial loan-to-value ratio.. 64.5 64.6 63.8 64.1 64.0 61.4
Weighted average interest
rate:
Fixed-rate................... 13.0 13.4 13.4 13.1 12.8 12.8
ARMs......................... 12.6 13.1 12.9 12.7 12.4 12.1
Margin--ARMs................. 6.7 6.7 6.7 6.9 7.1 7.2
Geographic Distribution
The following table sets forth aggregate dollar amounts (in thousands) and
the percentage of all loans we originated or purchased by state for the periods
shown:
For the Quarters Ended
---------------------------------------------------------------------------------
September 30, December 31, March 31, June 30,
2000 2000 2001 2001
--------------------------------------------------------------------------------
$ % $ % $ % $ %
--------- ------ --------- ------- --------- ------- --------- ----------
California.................. $ 414,639 39.5% $ 423,712 40.9% $ 446,880 43.5% $ 613,953 44.4%
Texas....................... 75,219 7.2% 69,081 6.7% 57,979 5.6% 69,379 5.0
Florida..................... 59,305 5.6% 57,895 5.6% 59,743 5.8% 73,877 5.3
Illinois.................... 55,864 5.3% 49,271 4.8% 58,690 5.7% 71,378 5.2
Michigan.................... 39,986 3.8% 36,624 3.5% 46,486 4.5% 67,328 4.9
Massachusetts............... 30,003 2.8% 44,437 4.3% 39,577 3.9% 52,055 3.8
Colorado.................... 37,972 3.6% 41,113 4.0% 39,476 3.8% 46,560 3.4
Minnesota................... 31,388 3.0% 25,396 2.5% 22,414 2.2% 23,013 1.7
Washington.................. 27,806 2.6% 22,813 2.2% 14,277 1.4% 32,355 2.3
Arizona..................... 29,787 2.8% 24,370 2.4% 24,353 2.4% 21,607 1.6
Other....................... 248,795 23.8% 240,044 23.1% 216,658 21.2% 312,414 22.4
---------- ------ ---------- ------- ---------- ------ ---------- -------
Total....................... $1,050,764 100.0% $1,034,756 100.0% $1,026,533 100.0% $1,383,919 100.0%
=========== ====== ========== ======= ========== ====== ========== =======
Our loan production in California increased noticeably from the third
quarter of 2000 to the second quarter of 2001 due primarily to the consolidation
of our production units on the East Coast, the curtailment of unprofitable
products in several other states and an increase in our presence on the West
Coast.
Loan Sales and Securitizations
Our subsidiary, NC Capital Corporation, performs our secondary marketing
functions. First, NC Capital buys loans from New Century Mortgage within a week
or two after origination, paying a price that approximates the loans' secondary
market value. NC Capital then sells the loans through both securitizations and
bulk whole loan sales to institutional purchasers. NC Capital is responsible
for determining when and through which channel to sell the loans, and bears the
risks of market fluctuations in the period between purchase and sale.
Whole Loan Sales
During the first six months of 2001, whole loan sales accounted for $1.8
billion, or 82.9%, of our total loan sales. Of this amount, 56.5% were sold
servicing-retained and 43.5% were sold servicing-released. In the servicing-
retained sales, we agreed to service the loans for a fee of 0.50% per year of
the outstanding principal balance of the loans. The weighted average sales
price of our premium whole loan sales during the first six months of 2001 was
equal to 103.92% of the original principal balance of the loans sold, including
premiums paid by investors for servicing rights.
We seek to maximize our premium on whole loan sale revenue by closely
monitoring the requirements of institutional purchasers and focusing on
originating or purchasing the types of loans that meet those requirements and
for which institutional purchasers tend to pay higher premiums. During the six
month period ended June 30,
19
2001, we sold $606.8 million in loans to Credit Suisse First Boston Mortgage
Capital LLC and $421.9 million in loans to Morgan Stanley Dean Witter Mortgage
Capital Inc., which represented 46.6% and 19.0%, respectively, of total loans
sold.
Whole loan sales are made on a non-recourse basis pursuant to a purchase
agreement in which we give customary representations and warranties regarding
the loan characteristics and the origination process. Therefore, we may be
required to repurchase or substitute loans in the event of a breach of these
representations and warranties. In addition, we generally commit to repurchase
or substitute a loan if a payment default occurs within the initial months
following the date the loan is funded, unless we make other arrangements with
the purchaser.
Securitizations
In a securitization, we sell a pool of loans to a trust for a cash purchase
price and a certificate evidencing our residual interest ownership in the trust.
The trust raises the cash portion of the purchase price by selling senior
certificates representing senior interests in the loans in the trust. Following
the securitization, purchasers of senior certificates receive the principal
collected, including prepayments, on the loans in the trust. In addition, they
receive a portion of the interest on the loans in the trust equal to the
specified "investor pass-through interest rate" on the principal balance. We
receive the cash flows from the residual interests, after payment of servicing
fees, guarantor fees and other trust expenses, and provided the specified over-
collateralization requirements are met.
During the second quarter of 2001, we completed a securitization of $380
million of mortgage loans (the New Century Home Equity Loan Trust, Series 2001-
NC1). Following the securitization, we issued a net interest margin security.
The net cash proceeds from the two transactions yielded cash proceeds to us
comparable to cash proceeds we receive through whole loan sales. Credit
enhancement for the securitization was provided through a fully-funded over-
collateralization account of 0.75%. The securitization closed in May and the
net interest margin portion closed in June. Approximately 86% of the mortgage
loans in the pool were covered by a lender paid private mortgage insurance
policy for the excess of the LTV over 60%.
20
The following are the material assumptions used to record gain on sale for
the New Century Home Equity Loan Trust, Series 2001-NC1:
2-Year 3-Year Combined
ARM ARM Fixed Pool
-------- -------- -------- ----------
% of Pool................................................ 78.20% 6.30% 15.50% 100.00%
Weighted Average Life (in years)......................... 2.55 2.90 3.64 2.74
Static Pool Losses....................................... 2.68% 2.26% 2.60% 2.64%
Prepayment Penalty Coverage
1 year................................................. 4.20% 4.11% 0.90% 3.69%
2 years................................................ 74.70 2.51 2.66 58.99
3 years................................................ 6.61 61.52 6.65 10.07
4 years................................................ 0.05 14.90 0.89 1.11
5 years................................................ 0.76 1.43 53.97 9.06
----- ----- ----- -----
Total.................................................. 86.32% 84.48% 65.08% 82.91%
===== ===== ===== =====
A summary of gain on sale and cash flow from the New Century Home Equity
Loan Trust, Series 2001-NC1 is presented below:
Gain on Sale Summary:
Loans (thousands)............................................................ $380,242
NIM Bonds.................................................................... 4.08%
Residual..................................................................... 0.97
Less: Transaction and Other Costs............................................ (1.30)
Less: O/C Accounts........................................................... (0.75)
--------
Subtotal................................................................. 3.00
Interest-Only Certificate.................................................... 1.43
Servicing Rights............................................................. 0.48
--------
Net Gain on Sale Recorded................................................ 4.91%
========
Cash Flow From:
NIM Bonds.................................................................... 4.08%
Interest-Only Certificate.................................................... 1.43
Servicing Rights............................................................. 0.48
Less: Transaction and Other Costs............................................ (1.30)
Less: O/C Accounts........................................................... (0.75)
--------
Net Cash Flow At Closing................................................. 3.94%
========
Loan Servicing and Delinquencies
Servicing
Loan servicing includes collecting and remitting loan payments, making
required advances, accounting for principal and interest, holding escrow or
impound funds for payment of taxes and insurance and, if applicable, contacting
delinquent borrowers and supervising foreclosures and property dispositions in
the event of unremedied defaults.
As of June 30, 2001, our servicing portfolio consisted of 9,619 loans with
an aggregate principal balance of approximately $1.3 billion, of which 4,290
loans with an aggregate principal balance of $586.1 million were held for sale
and serviced on an interim basis, and 5,329 loans with an aggregate principal
balance of $753.2 million were serviced on behalf of the whole loan purchasers
thereof.
In March 2001, we sold the servicing rights on approximately $4.8 billion
of our servicing portfolio to Ocwen Federal Bank FSB for $19.7 million. The
initial transfer of $242.1 million of our servicing portfolio to Ocwen was
completed in June 2001, and the balance is scheduled to be completed by August
1, 2001. As part of the transaction, we also agreed to sell Ocwen servicing
rights with respect to up to $3 billion in mortgage loans between
21
March 2001 and December 31, 2002 at a price to be determined based on the
characteristics of those servicing rights. Pursuant to this agreement, as of
June 30, 2001, we have sold servicing rights on an aggregate of $1.2 billion of
mortgage loans to Ocwen. Concurrent with the completion of the transfer of our
servicing portfolio to Ocwen, we intend to reduce our staffing by approximately
140 employees.
Starting in August 2001, Ocwen Federal Bank FSB will sub-service all of our
newly originated loans and loans that we have repurchased from buyers. Ocwen
will also service some loans we sell to purchasers on an interim basis following
the sale. According to Ocwen's Form 10-K for the year ended December 31, 2000,
Ocwen's servicing portfolio at December 31, 2000 was approximately $10.8 billion
in loans.
Ocwen is one of the country's highest-rated specialty servicers and has a
strong capital position. Mortgage loan servicing operations are typically
highly capital intensive, and cost efficiencies are gained through economies of
scale. For securitized loans, the servicer is required to advance to the trust
the scheduled principal and interest payments for delinquent borrowers and are
reimbursed for those advances from future collections. We have been able to
eliminate this working capital requirement as a result of our transaction with
Ocwen and by utilizing Ocwen as a sub-servicer for all of our servicing needs.
The elimination of servicing advance obligations and the closing of our
servicing operations will allow us to re-deploy the capital required to support
servicing operations to support the growth of loan originations.
Delinquencies and Foreclosures
The loans we originate or purchase are secured by mortgages, deeds of
trust, security deeds or deeds to secure debt, depending upon the prevailing
practice in the state in which the property securing the loan is located.
Depending on local law, foreclosure is effected by judicial action or non-
judicial sale, and is subject to various notice and filing requirements. In
general, the borrower, or any person having a junior encumbrance on the real
estate, may cure a monetary default by paying the entire amount in arrears plus
other designated costs and expenses incurred in enforcing the obligation during
a statutorily prescribed reinstatement period. Generally, state law controls
the amount of foreclosure expenses and costs, including attorney's fees, which
may be recovered by a lender. After the reinstatement period has expired
without the default having been cured, the borrower or junior lien-holder no
longer has the right to reinstate the loan and may be required to pay the loan
in full to prevent the scheduled foreclosure sale. Where a loan has not yet
been sold or securitized, we will generally allow a borrower to reinstate the
loan up to the date of foreclosure sale.
Although foreclosure sales are typically public sales, third-party
purchasers rarely bid in excess of the lender's lien because of the difficulty
of determining the exact status of title to the property, the possible
deterioration of the property during the foreclosure proceedings and a
requirement that the purchaser pay for the property in cash or by cashier's
check. Thus, the foreclosing lender often purchases the property from the
trustee or referee for an amount equal to the sum of the principal amount
outstanding under the loan, accrued and unpaid interest and the expenses of
foreclosure. Depending on market conditions, the ultimate proceeds of the sale
may not equal the lender's investment in the property.
Delinquency Reporting
In February 1996, we began receiving applications for mortgage loans under
our regular lending program. During 1996, we sold all of our loans on a whole
loan, servicing-released basis. We began selling loans through securitizations
in 1997. In connection with these securitizations, we established reporting
systems to track historical delinquency, bankruptcy, foreclosure and default
experience for the loans included in our securitizations as well as our total
portfolio of loans. Current delinquency and loss information is not necessarily
representative of future delinquencies and losses.
22
The following table provides information for the loans securitized in 1997
through 2001 that are delinquent over 60 days (dollars in thousands) expressed
as a percentage of the current balance of the mortgage loans as of June 30,
2001:
Delinquency Rate
----------------------------------------------------------
Original Current Orig. Combined
Risk Grade Balance Balance LTV 1997 1998 1999 2000 2001 Pools
---------- ----------- ---------- -------- -------- ------- ------- ------- ------ ----------
Prime Alternative........... $ 12,675 $ 12,126 79.8% --% --% --% 2.55% --% 0.55%
A+.......................... 2,827,774 1,358,389 78.2 4.77 8.33 6.33 5.95 -- 5.89
A-.......................... 2,610,214 1,251,155 77.5 10.04 10.40 8.29 8.83 -- 8.31
B........................... 1,528,468 744,985 74.5 12.53 13.24 12.78 12.54 0.53 11.28
C........................... 897,744 385,487 70.4 21.61 21.42 17.42 19.51 1.54 18.04
C-.......................... 402,502 140,509 63.8 22.95 21.78 30.21 28.49 0 25.40
---------- ----------
Total....................... $8,279,477 $3,892,651 75.8% 10.61% 11.65% 10.01% 11.37% 0.20% 9.59%
========== ==========
The above table indicates that, as anticipated, we are experiencing higher
rates of delinquency on lower credit grade loans. In addition, we have
repurchased loans from our first three 1997 and one of our 1998 securitizations.
The agreements governing the securitizations permit these repurchases, but only
to the extent the loans being repurchased are more than 90 days delinquent. We
elected to make these repurchases in order to avoid disruption of cash flow from
the 1997-NCl, NC2 and NC3 and 1998-NC5 trusts and to provide us with maximum
flexibility in resolving problem loans.
In order to provide additional flexibility in trying to maximize recovery
on our delinquent loans and loans in foreclosure, our aggregation financing
arrangements with Salomon and Morgan Stanley permit financing of a limited
number of delinquent loans and loans in foreclosure at a reduced financing rate
based on the value of the underlying property. In addition, Salomon permits
financing of real property owned by us upon foreclosure on delinquent loans.
This facility provides us with additional flexibility in disposing of those
properties for the highest possible price.
Insurance Agency
During 2000, we established an affiliated insurance agency, NC Insurance
Services, in order to be able to offer certain insurance products to our
customers. The revenues received by NC Insurance Services during the first six
months of 2001 were $907,000. The vast majority of these revenues were from
commissions earned by placing hazard and flood collateral protection insurance.
NC Insurance Services is also beginning to offer Accidental Death and
Dismemberment coverage to our customers and is evaluating a variety of other
insurance products that might be of interest to those customers.
Upon the transfer of our servicing rights to Ocwen, we will no longer have
the ability to offer insurance products to the mortgagors on our securitized
loans. However, we plan to continue to offer insurance products from time to
time to the borrowers on our loans held for sale. We may also begin offering
credit insurance products to borrowers at origination, although we do not intend
to offer any single premium insurance products.
Interest Rate Risk Management Strategies
We try to mitigate interest rate risks by utilizing a variety of
strategies. For instance, we do not lock the interest rate that will be charged
to our borrowers until the loan is funded. This allows us to reprice our
pipeline of approved loans if significant increases in interest rates occur. We
may use forward committed sales with a calculated price to protect us from price
changes due to interest rate increases. If we do not have a forward loan sale
commitment in place, we may elect to use various instruments, including swaps,
options, futures contracts and other derivative instruments to mitigate this
interest rate risk. In addition, in order to protect us against the adverse
effects resulting from interest rate increases on our adjustable-rate mortgage
loans, we forecast future interest rates utilizing the LIBOR forward curve in
the valuation of our residual assets. We may purchase an interest rate cap
contract, with a notional balance that reduces in a corresponding amount as the
estimated reduction in the mortgage loans underlying the residual interests, and
with monthly interest rate strike prices that change at the same rate and
direction as the LIBOR forward curve. In months where the actual LIBOR rate is
greater than the strike rate on the interest rate cap contract, the counterparty
to the interest rate cap contract is required to pay to us the difference in
23
interest rates multiplied by the notional balance for the contract as set forth
in agreement. The cash flow received by us corresponds to the reduction in cash
flow realized by the residual interests as a result of the interest rate
increase.
Competition
We continue to face intense competition in the business of originating,
purchasing and selling mortgage loans. Our competitors include other consumer
finance companies, mortgage banking companies, commercial banks, credit unions,
thrift institutions, credit card issuers and insurance finance companies. Most
notably, in the past two or three years, some large, diversified financial
corporations have purchased several of our competitors. Other large financial
institutions have gradually expanded their "non-prime" or "sub-prime" lending
capabilities. Many of these companies have greater access to capital at a cost
lower than our cost of capital under our warehouse, aggregation and residual
financing facilities. In addition, many of these competitors have considerably
greater technical and marketing resources than we have.
At the same time, the two large government-sponsored secondary market
purchasers of loans, Fannie Mae and Freddie Mac, have begun purchasing some non-
prime loans. This has the potential of increasing competition as lenders
without prior non-prime origination expertise begin originating non-prime loans
to Fannie Mae's and Freddie Mac's guidelines using their automated tools.
Competition among industry participants can take many forms, including
convenience in obtaining a loan, customer service, marketing and distribution
channels, amount and term of the loan, loan origination fees and interest rates.
Additional competition may lower the rates we can charge borrowers, thereby
potentially lowering gain on future loan sales and securitizations. Our results
of operations, financial condition and business prospects could be materially
adversely affected to the extent any of our competitors significantly expands
its activities in our markets. Fluctuations in interest rates and general
economic conditions may also affect our competitive position. During periods of
rising rates, competitors that have locked in low borrowing costs may have a
competitive advantage. During periods of declining rates, competitors may
solicit our customers to refinance their loans.
We believe that one of our key competitive strengths is our employees, with
their strong commitment to customer service and their team-oriented approach.
In addition to the strength of our work force, we believe that our competitive
strengths include:
. providing a high level of service to brokers and their customers;
. offering competitive loan programs for borrowers whose needs are not
met by conventional mortgage lenders;
. our high-volume targeted direct mail marketing program; and
. our performance-based compensation structure which allows us to attract,
retain and motivate qualified personnel.
Regulation
The mortgage lending industry is a highly regulated industry. Our business
is subject to extensive and complex rules and regulations of, and examinations
by, various state and federal government authorities. These regulations impose
obligations and restrictions on our loan origination, loan purchase and
servicing activities. In addition, these regulations may limit the interest
rates, finance charges and other fees that we may assess, mandate extensive
disclosure to our customers, prohibit discrimination and impose multiple
qualification and licensing obligations on us. Failure to comply with these
requirements may result in, among other things, loss of approved licensing
status, demands for indemnification or mortgage loan repurchases, certain rights
of rescission for mortgage loans, class action lawsuits, administrative
enforcement actions and civil and criminal liability. Our management believes
that we are in compliance with these rules and regulations in all material
respects.
Our loan origination and loan purchase activities are subject to the laws
and regulations in each of the states in which those activities are conducted.
For example, state usury laws limit the interest rates we can charge on our
24
loans. As of June 30, 2001, we were licensed or exempt from licensing
requirements by the relevant state banking or consumer credit agencies to
originate first mortgages in all 50 states and the District of Columbia and
second mortgages in 48 states and the District of Columbia. Our lending
activities are also subject to various federal laws, including the Truth in
Lending Act, or TILA, the Homeownership and Equity Protection Act of 1994, the
Equal Credit Opportunity Act, the Fair Credit Reporting Act, the Real Estate
Settlement Procedures Act and the Home Mortgage Disclosure Act, and their
implementing regulations.
We are subject to certain disclosure requirements under TILA and Regulation
Z promulgated under TILA. TILA is designed to provide consumers with uniform,
understandable information with respect to the terms and conditions of loan and
credit transactions. TILA gives consumers, among other things, a three-business
day right to rescind certain refinance loan transactions that we originate.
The Homeownership and Equity Protection Act of 1994, or the High Cost
Mortgage Act, amends TILA. The High Cost Mortgage Act generally applies to
consumer credit transactions secured by the consumer's principal residence,
other than residential mortgage transactions, reverse mortgage transactions or
transactions under an open end credit plan, in which the loan has either (i)
total points and fees upon origination in excess of the greater of eight percent
of the loan amount or $465, or (ii) an annual percentage rate of more than ten
percentage points higher than United States Treasury securities of comparable
maturity. These loans are known as Covered Loans. The High Cost Mortgage Act
imposes additional disclosure requirements on lenders originating Covered Loans.
In addition, it prohibits lenders from, among other things, originating Covered
Loans that are underwritten solely on the basis of the borrower's home equity
without regard to the borrower's ability to repay the loan. The High Cost
Mortgage Act also prohibits prepayment fee clauses in Covered Loans to borrowers
with a debt-to-income ratio in excess of 50% or Covered Loans used to refinance
existing loans originated by the same lender. In addition, the High Cost
Mortgage Act restricts, among other things, certain balloon payments and
negative amortization features. We commenced originating and purchasing Covered
Loans during 1997 and stopped originating and purchasing them in the second
quarter of 2000.
We are also required to comply with the Equal Credit Opportunity Act of
1974, as amended, and Regulation B promulgated thereunder, the Fair Credit
Reporting Act, as amended, the Real Estate Settlement Procedures Act of 1974, as
amended, and Regulation X promulgated thereunder, and the Home Mortgage
Disclosure Act of 1975, as amended. The Equal Credit Opportunity Act prohibits
creditors from discriminating against applicants on the basis of race, color,
sex, age, religion, national origin or marital status if all or part of the
applicant's income is derived from a publicly assisted program or if the
applicant has in good faith exercised any right under the Consumer Credit
Protection Act. Regulation B restricts creditors from requesting certain types
of information from loan applicants. The Fair Credit Reporting Act, as amended,
requires lenders, among other things, to supply an applicant with certain
information if the lender denied the applicant credit. The Real Estate
Settlement Procedures Act mandates certain disclosures concerning settlement
fees and charges and mortgage servicing transfer practices. It also prohibits
the payment or receipt of kickbacks or referral fees in connection with the
performance of settlement services. In addition, we are required to file an
annual report with the Department of Housing and Urban Development pursuant to
the Home Mortgage Disclosure Act, which requires the collection and reporting of
statistical data concerning mortgage loan transactions.
In the course of our business, we may acquire properties securing loans
that are in default. There is a risk that hazardous or toxic waste could be
found on such properties. If this occurs, we could be held responsible for the
cost of cleaning up or removing this hazardous waste. This cost could exceed
the value of the underlying properties.
Regulatory Developments
During 2000 and the first half of 2001, federal and state legislative and
regulatory developments regarding consumer privacy and predatory lending could
have a significant impact on our future business activities. The federal Gramm-
Leach-Bliley financial reform legislation imposes additional privacy obligations
on us with respect to our applicants and borrowers. We adopted a new privacy
policy and adopted controls and procedures in order to comply with the law when
it took effect on July 1, 2001. In addition, several states are considering
even more stringent privacy legislation. If passed, a variety of inconsistent
state privacy legislation could substantially increase our compliance costs.
25
Several federal, state and local laws and regulations have been adopted or
are under consideration that are intended to eliminate so-called "predatory"
lending practices. Many of these laws and regulations impose broad restrictions
on certain commonly accepted lending practices, including some of our practices.
There can be no assurance that these proposed laws, rules and regulations, or
other similar laws, rules or regulations, will not be adopted in the future.
Adoption of these laws and regulations could have a material adverse impact on
our business by substantially increasing the costs of compliance with a variety
of inconsistent federal, state and local rules, or by restricting our ability to
charge rates and fees adequate to compensate it for the risk associated with
certain loans.
In an effort to prevent the origination of loans containing unfair terms or
involving predatory practices, we have employed extensive policies and
procedures, including:
. not offering loans with terms providing for balloon payments, negative
amortization or reverse mortgages;
. only approving loan applications that evidence a borrower's ability to
repay the loan;
. not selling single premium insurance products with our loans;
. maintaining caps on the points and fees that can be charged to
borrowers;
. offering loans with and without prepayment penalties;
. directing marketing efforts throughout the broader geographic areas
in which our branches are located;
. maintaining a rigorous appraisal review process;
. surveying our customers in order to confirm satisfaction;
. performing regular random and targeted audits to confirm adherence to
fair lending laws and principles;
. monitoring the conduct of our brokers and requiring them to agree to
adhere to our Broker Code of Conduct;
. resolving customer complaints promptly and fairly; and
. training our employees to adhere to fair lending principles.
We plan to continue to review, revise and improve our practices in order to
enhance our fair lending efforts and support the goal of eliminating predatory
lending practices.
Employees
At June 30, 2001, we employed 1,378 full-time employees and 27 part-time
employees. None of our employees is subject to a collective bargaining
agreement. We believe that our relations with our employees are satisfactory.
Properties
Our executive, administrative offices and some of our lending offices are
located in Irvine, California and consist of approximately 222,000 square feet.
The three leases covering these executive, administrative and lending offices
expire in June 2002, December 2002 and October 2005, respectively, and the
combined monthly rent is $424,000. We lease space for our regional operating
centers in Schaumburg, Illinois, Rancho Bernardo and San Ramon, California,
Tampa, Florida and Englewood, Colorado. As of June 30, 2001, these facilities
had an annual aggregate base rental of approximately $75,200. We also lease
space for our sales offices, which range in size from 140 to 2,928 square feet
with lease terms typically ranging from one to five years. As of June 30, 2001,
annual base
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rents for the sales offices ranged from approximately $5,600 to $79,500. In
general, the terms of these leases vary as to duration and rent escalation
provisions, expire between August 2001 and January 2005 and provide for rent
escalations dependent upon either increases in the lessors' operating expenses
or fluctuations in the consumer price index in the relevant geographical area.
We seek to sublease space that we no longer use as a result of branch
closings, moves or the reduction or elimination of certain operations.
Accordingly, upon the completion of the transfer of all of the servicing
operations to Ocwen and the subsequent closing of our servicing division, it is
our intention to sublease the approximately 66,000 square foot facility that
houses our mortgage servicing operations. If we are successful in subleasing
this space, we will save approximately $1.0 million per year in rent expense.
Legal Proceedings
FTC Inquiry. In August 2000, we were informed by the Federal Trade
Commission that it was conducting an inquiry to determine whether we had
violated the Fair Credit Reporting Act, Federal Trade Commission Act or other
statutes administered by the Commission. The Commission subsequently focused
its inquiry on whether the pre-approved credit solicitations our retail units
generated comply with applicable law. We are cooperating with the inquiry and
the Commission is reviewing data and information we have provided to it. The
Commission recently informed us that the matter is temporarily on hold pending
the completion of some staffing changes relating to the change of
administrations in Washington.
Matthews, et al. In October 2000, Hazel Jean Matthews, Ruth D. Morgan and
Marie I. Summerall filed an amended class action suit against New Century
Mortgage Corporation, Central Mortgage, Equibanc Mortgage Corporation, Century
21 Home Improvements, and Incredible Exteriors, on behalf of themselves and
other consumers located in the State of Ohio whose credit transaction was
brokered by Equibanc and Central Mortgage. We were not named in the original
complaint. The suit was filed in the Ohio state court and later removed by New
Century Mortgage to the U.S. District Court for the Southern District of Ohio.
The complaint alleges breaches of the Federal Fair Housing Act, Equal Credit
Opportunity Act, Truth in Lending Act, gender discrimination, fraud,
unconscionability, civil conspiracy, RICO, as well as other claims against the
other defendants. The plaintiffs are seeking injunctive relief, compensatory
and punitive damages, attorneys' fees and costs. We filed a motion to dismiss
this complaint in December 2000. Plaintiffs filed their Second Amended
Complaint in May 2001. Plaintiffs thereafter expressed an interest in settling
the case on an individual basis with each of the named plaintiffs. The parties
have agreed to postpone the deadline for us to respond to the Second Amended
Complaint while we pursue settlement negotiations.
Fairbanks. In May 2001, Fairbanks Capital initiated arbitration against
New Century Mortgage Corporation for breach of contract, breach of implied
covenant of good faith, fraud and negligent misrepresentation stemming from our
decision to sell our servicing rights to Ocwen Federal Bank FSB instead of
closing a sub-servicing arrangement that we had negotiated with Fairbanks and
was scheduled to close. Fairbanks is seeking damages of approximately $3.9
million. We paid Fairbanks the $750,000 break-up fee that our agreement with
Fairbanks specified, and believe we owe no more. We expect the arbitration to
take place by the end of September 2001.
Grimes. In June 2001, we were served with a class action complaint filed
by Richard L. Grimes and Rosa L. Grimes against New Century Mortgage
Corporation. The action was filed in the U.S. District Court for the Northern
District of California, and seeks rescission, restitution and damages on behalf
of the two plaintiffs, others similarly situated and on behalf of the general
public. The complaint alleges a violation of the Federal Truth in Lending Act
and Business & Professions Code (S) 17200. Specifically, the complaint alleges
that we gave the borrowers the required three-day notice of their right to
rescind before the loan transaction had technically been consummated. Our
response was due on July 30, 2001. We believe the allegations lack merit, and
intend to defend ourselves vigorously.
Perry. In July 2001, Charles Perry Jr. filed a class action complaint
against New Century Mortgage Corporation and Noreast Mortgage Company, Inc. in
the U.S. District Court for the District of Massachusetts. The complaint
alleges that certain payments we make to mortgage brokers, sometimes referred to
as yield spread premiums, violate the federal Real Estate Settlement Procedures
Act. The complaint also alleges that New Century
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Mortgage Corporation induced mortgage brokers to breach their fiduciary duties
to borrowers. We have retained legal representation and are evaluating the
complaint. Our answer is due in August 2001.
We are also a party to various legal proceedings arising out of the
ordinary course of our business. Management believes that any liability with
respect to these legal actions, individually or in the aggregate, will not have
a material adverse effect on our business, results of operation or financial
position.
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FORWARD-LOOKING STATEMENTS
This prospectus contains or incorporates by reference certain forward-
looking statements. When used, statements which are not historical in nature,
including those containing words such as "anticipate," "estimate," "should,"
"expect," "believe," "intend," and similar expressions are intended to identify
forward-looking statements. Statements regarding the following subjects are
forward-looking by their nature:
. our business strategy;
. our understanding of our competition;
. market trends;
. assumptions regarding the early retirement of our residual financing;
. projected sources and uses of funds from operations; and
. potential liability with respect to legal proceedings.
These forward-looking statements are subject to various risks and
uncertainties, including those relating to:
. our access to funding sources and our ability to renew, replace or add
to our existing credit facilities on terms comparable to the current
terms;
. initiation of a margin call under our warehouse, aggregation or residual
financing agreements;
. assumptions underlying our residual values and loan loss allowances;
. an increase in the prepayment speed or default rate of our borrowers;
. the effect of changes in interest rates;
. the condition of the secondary markets for our products;
. the negative impact of economic slowdowns or recessions;
. management's ability to manage our past growth and planned expansion;
. the effect of the competitive pressures from other lenders or suppliers
of credit in our market;
. our ability to reduce the number of loans sold at a discount;
. our ability to expand origination volume while reducing overhead;
. our ability to provide a smooth transfer of servicing to Ocwen Federal
Bank FSB; and
. the impact of new state or federal legislation or court decisions
restricting the activities of lenders or suppliers of credit in our
market.
Other risks, uncertainties and factors, including the factors described in
"RISK FACTORS" above as well as those discussed in our reports incorporated in
this prospectus by reference, could cause our actual results to differ
materially from those projected in any forward-looking statements we make. We
are not obligated to publicly update or revise any forward-looking statements,
whether as a result of new information, future events or otherwise.
USE OF PROCEEDS
We will not receive any proceeds from the offering. The selling
stockholders will receive all the proceeds from the offering. All costs,
expenses and fees in connection with the offering will be borne by us.
Brokerage commissions and similar selling expenses, if any, will be borne by the
selling stockholders.
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SELLING STOCKHOLDERS
The following table sets forth the number of shares of common stock owned
by each of the selling stockholders as of July 25, 2001. To our knowledge,
except as provided below, none of the selling stockholders has had a material
relationship with us within the past three years other than as a result of the
ownership of the shares covered by this prospectus. Because the selling
stockholders may offer all or some of the shares which they hold pursuant to the
offering contemplated by this prospectus, and because there are currently no
agreements, arrangements or understandings with respect to the sale of any of
the shares, no definitive estimate can be given as to the amount of shares that
will be held by the selling stockholders after completion of this offering and
the following table has been prepared on the assumption that all shares of
common stock offered hereby will be sold. The shares offered by this prospectus
may be offered from time to time by the selling stockholders named below.
Shares Beneficially Owned
------------------------------------------------------------------
Number Percent Number Percent
Before Before Number After After
Name of Selling Stockholder Offering Offering Offered (1) Offering Offering
----------------------------------------------------- ----------- ----------- ------------- ---------- -----------
Archon Partners...................................... 42,500 0.28% 42,500 0 0%
Banzai Offshore Fund Ltd............................. 2,167 0.01% 2,167 0 0%
Banzai Partners LP................................... 8,184 0.05% 8,184 0 0%
Boulderwood Company L.P.............................. 96,153 0.63% 96,153 0 0%
Condor Partners, L.P................................. 79,300 0.52% 79,300 0 0%
FBR Ashton L.P....................................... 101,936 0.67% 101,936 0 0%
4-G Investment Group................................. 96,230 0.63% 96,230 0 0%
Friedman, Billings, Ramsey & Co., Inc. (2)........... 112,109 0.74% 112,109 0 0%
Frorer Partners, L.P................................. 38,461 0.25% 38,461 0 0%
Lyxor Asset Management SA............................ 50,662 0.33% 50,662 0 0%
M&M Hedged Equity, LP................................ 50,000 0.33% 50,000 0 0%
Michael Gindi........................................ 10,000 0.07% 10,000 0 0%
Points West International Investments Ltd............ 10,852 0.07% 10,852 0 0%
Rath Foundation, Inc................................. 48,000 0.32% 48,000 0 0%
Retirement Plan Partners............................. 22,430 0.15% 22,430 0 0%
Riggs Partners, LLC.................................. 72,115 0.48% 72,115 0 0%
Sunova Long Term Opportunity Fund, L.P............... 34,100 0.22% 34,100 0 0%
Sunova Offshore, Ltd................................. 134,484 0.89% 134,484 0 0%
Sunova Partners, LP.................................. 71,800 0.47% 71,800 0 0%
Third Point Offshore Fund Ltd........................ 67,898 0.45% 67,898 0 0%
Third Point Partners LP.............................. 52,544 0.35% 52,544 0 0%
Tidal Insurance Limited.............................. 192,307 1.27% 192,307 0 0%
Tower Capital, LLC................................... 48,076 0.32% 48,076 0 0%
--------- --------- -
Total 1,442,308 1,442,308 0
========= ========= =
___________________
(1) This registration statement shall also cover any additional shares of common
stock which become issuable in connection with the shares registered for
sale hereby by reason of any stock dividend, stock split, recapitalization
or other similar transaction effected without the receipt of consideration
which results in an increase in the number of the registrant's outstanding
shares of common stock.
(2) Friedman, Billings, Ramsey & Co., Inc. was retained as placement agent for
the private placement of our common stock in July 2001. See "PLAN OF
DISTRIBUTION" below. In addition, Friedman, Billings, Ramsey & Co., Inc.
has been engaged by us to act as lead manager in a public offering of our
common stock.
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PLAN OF DISTRIBUTION
On July 19, 2001, we entered into a common stock purchase agreement
with the selling stockholders pursuant to which we sold 1,442,308 shares of our
common stock at a purchase price of $10.40 per share. Pursuant to that sale, we
agreed to register the shares under the Securities Act for resale to the public.
Under this agreement, we must use our reasonable commercial efforts to cause
this registration statement to be declared effective by the SEC as soon as
practicable after filing, and in any event no later than October 23, 2001,
subject to certain exceptions. We also agreed to keep this registration
statement current and effective under the Securities Act, subject to certain
exceptions, until the earliest of (1) the second anniversary of the date of
effectiveness of this registration statement, (2) the date on which the selling
stockholders may sell all of the shares offered by this prospectus without
registration or without regard to any volume limitations by reason of Rule
144(k) of the Securities Act or (3) such time as all of the shares offered by
this prospectus have been sold pursuant to this registration statement.
As used in this "PLAN OF DISTRIBUTION", the term "selling
stockholders" includes the selling stockholders named in the table above and any
permitted transferees or other successors-in-interest of shares received from a
named selling stockholder who is a permitted assignee of the registration rights
contained in the common stock purchase agreement after the date of this
prospectus. The selling stockholders may sell the shares from time to time and
may also decide not to sell all the shares they are allowed to sell under this
prospectus. The selling stockholders will act independently of us in making
decisions with respect to the timing, manner and size of each sale. The sales
may be made on one or more exchanges or in the over-the-counter market or
otherwise, at prices and at terms then prevailing or at prices related to the
then current market prices, or in negotiated transactions. The selling
stockholders may effect such transactions by selling the shares to or through
broker-dealers.
To the extent required, this prospectus may be amended or supplemented
from time to time to describe a specific plan of distribution. In effecting
sales, broker-dealers engaged by the selling stockholders may arrange for other
broker-dealers to participate in the resales.
The selling stockholders may enter into hedging transactions with
broker-dealers in connection with distributions of shares or otherwise. In such
transactions, broker-dealers may engage in short sales of shares in the course
of hedging the positions they assume with selling stockholders. The selling
stockholders also may sell shares short and redeliver shares to close out such
short positions. The selling stockholders may enter into option or other
transactions with broker-dealers which require the delivery of shares to the
broker-dealer. The broker-dealer may then resell or otherwise transfer such
shares pursuant to this prospectus. The selling stockholders also may loan or
pledge shares to a broker-dealer. The broker-dealer may sell the shares so
loaned, or upon a default the broker-dealer may sell the shares so pledged,
pursuant to this prospectus.
Broker-dealers or agents may receive compensation in the form of
commissions, discounts or concessions from selling stockholders. Broker-dealers
or agents may also receive compensation from the purchasers of shares for whom
they act as agents or to whom they sell as principals, or both. Broker-dealers
or agents and any other participating broker-dealers or the selling stockholders
may be deemed to be "underwriters" within the meaning of Section 2(11) of the
Securities Act in connection with sales of shares. Accordingly, any such
commission, discount or concession received by them and any profit on the resale
of shares purchased by them may be deemed to be underwriting discounts or
commissions under the Securities Act. Because selling stockholders may be
deemed to be "underwriters" within the meaning of Section 2(11) of the
Securities Act, the selling stockholders will be subject to the prospectus
delivery requirements of the Securities Act. Any shares of a selling
stockholder covered by this prospectus which qualify for sale pursuant to Rule
144 promulgated under the Securities Act may be sold under Rule 144, rather than
pursuant to this prospectus.
The shares may be sold by selling stockholders only through registered
or licensed brokers or dealers if required under applicable state securities
laws. In addition, in certain states the shares may not be sold unless they
have been registered or qualified for sale in the applicable state or an
exemption from the registration or qualification requirement is available and is
complied with.
Under applicable rules and regulations under the Securities Exchange
Act, any person engaged in the distribution of shares may not simultaneously
engage in market making activities with respect to our common stock for a period
of two business days prior to the commencement of such distribution. In
addition, each selling stockholder will be subject to applicable provisions of
the Securities Exchange Act and the associated rules and
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regulations under the Securities Exchange Act, including Regulation M, which
provisions may limit the timing of purchases and sales of shares of our common
stock by the selling stockholders. We will make copies of this prospectus
available to the selling stockholders and have informed them of the need for
delivery of copies of this prospectus to purchasers at or prior to the time of
any sale of the shares.
Pursuant to the terms of the common stock purchase agreement, we agreed to
pay all expenses incurred in connection with registration of the shares,
including, without limitation, all registration expenses, all listing fees and
all fees and expenses of complying with securities or blue sky laws. The selling
stockholders will bear and pay any underwriting, brokerage and other selling
commissions and discounts, and the fees and expenses of counsel(s) to the
selling stockholders. We agreed in the common stock purchase agreement to
indemnify the selling stockholders against certain liabilities, including
liabilities under the Securities Act. The selling stockholders may agree to
indemnify any broker-dealer or agent that participates in transactions involving
sales of the shares against certain liabilities, including liabilities arising
under the Securities Act.
LEGAL MATTERS
The validity of the securities offered hereby will be passed upon for us by
O'Melveny & Myers LLP, Newport Beach, California.
EXPERTS
The consolidated financial statements of New Century Financial Corporation
and subsidiaries as of December 31, 2000 and 1999 and for each of the years in
the three-year period ended December 31, 2000, are incorporated by reference
herein and in the registration statement in reliance upon the report of KPMG
LLP, independent auditors, incorporated by reference herein, and upon the
authority of such firm as experts in accounting and auditing.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We file annual, quarterly and special reports, proxy statements and other
information with the SEC. You may read and copy the materials we file at the
SEC's Public Reference Room at 450 Fifth Street, N.W., Washington D.C. 20549.
Please call the SEC at 1-800-SEC-0330 for further information on the operation
of the Public Reference Room. Our SEC filings are also available to the public
from the SEC's World Wide Web site on the Internet at http://www.sec.gov. This
------------------
site contains reports, proxy and information statements and other information
regarding issuers that file electronically with the SEC. You may also read and
copy this information at the National Association of Securities Dealers, Inc.,
1735 K Street, N.W., Washington, D.C. 20006.
We maintain an Internet site on the World Wide Web at www.ncen.com. The
------------
information contained on our website is not a part of this prospectus and you
should not rely on it in deciding whether to invest in our common stock.
We have filed a registration statement, of which this prospectus is a part,
covering the offered securities. As allowed by the SEC rules, this prospectus
does not include all of the information contained in the registration statement
and the included exhibits, financial statements and schedules. We refer you to
the registration statement, the included exhibits, financial statements and
schedules for further information. This prospectus is qualified in its entirety
by such other information.
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