New Century Files For Chapter 11 Bankruptcy

Readers of my blog know that I have been quite bearish on New Century Financial (NEW) for some time now. Well, as expected NEW finally filed for bankruptcy protection this morning. You can read the article here. I have written numerous articles on the state of subprime lending and the precarious condition New Century finds itself in as the nations largest independent provider of subprime mortgages. The first was back on March 4th, I called for a NEW bankruptcy back on March 12th, and detailed their last gasps for breath on March 23rd. My general thesis is that subprime lending is far too risky in a bear real estate market. The ability of overleveraged subprime borrowers to support their mortgage payments was and is linked in large part to how much equity they could build in the property before having to refinance. Many of these borrowers are underwater and are facing recasting mortgages that they cannot afford anymore. Because lending has tightened up they aren't even able to refinance into a loan like the one they currently have. As a result the looming recast wave will lead to a slew of foreclosures.

So what does this all mean for a monoline subprime lender like New Century? After all, they don't carry most of these loans on their books, they package them and sell them to banks and hedge funds. Well, those same banks aren't going to have the same appetite for risk that they had before once they realize how unstable these subprime loan portfolios are. Since New Century has very little of its own capital they are entirely reliant on the ability to arrange financing. If they get cut off they can no longer lend money and are quite literally dead in the water.

What kills me the most is the way the subprime brass frame themselves as the defenders of the helpless and the weak. Even as his company files for bankruptcy New Century CEO Brad Morrice had this to say:

"These loans have helped millions of Americans, many who might not otherwise have been able to access credit or to realize the benefits of home ownership," he said. "The non-prime sector will remain an important part of the American economy."

I'm not going to lie Brad, you have done as much harm as you have good. Don't get me wrong, there are some borrowers who took out subprime loans who will hold on to their homes and enjoy all the fruits of homeownership. These borrowers benefited greatly from being able to get a loan that they otherwise would not have been unable to get. But, I would say that most subprime borrowers will actually be hurt financially as a result of getting a subprime loan.

Brad Morrice and his ilk have done nothing more than feed the American Dream to those who can't afford it. He claims to be a relentless defender of those with bad credit, helping them realize the benefits of home ownership, but as many as 25% of NEW's loans in 2005/2006 will lead the borrowers to foreclosure. While owning your own home is part of the American Dream I think in this country we have a quixotic focus on home ownership that deludes many in to making bad real estate decisions. Add pushy mortgage brokers and loose lending standards into the equation and you get a perfect storm. I fully expect a lawsuit to emerge against New Century with claims of predatory lending. Until then we'll have to deal with Brad telling anyone who will listen all the good he has done.