Subprime Update: New Century's 'Louisville Slugger' Loan Approvals

I wasn't the only one to single out New Century Financial months ago as perhaps the most vulnerable subprime lender. Now, as a sea of laid of New Century employees open up to the press some interesting information is coming to light about New Century's internal operations and business processes. I'll give you a hint, none of it is good. Here's a taste:

1. David Cho of the Washington Post reports shocking accounts of physical intimidation at New Century to get loans approved. I mean this is just scary:

   "The stress in that place was ungodly. It was like selling your soul," said Maggie Hardiman, who worked for New Century in 2004 and 2005. "There was instant notification to everyone as soon as you rejected a loan. And you dreaded doing it because you paid for it. Two guys would come with a bat, and they were all [ticked] off because you cut their deals."

2. New Century has had other problems as well: KPMG quit its job as NEW's auditor, the company failed to sell its mortgage origination business and was forced to lay off 2,000 employees, and more details on New Century's ambitious gain-on-sale accounting came to the surface. If you think this is the last you have heard of New Century you are wrong -- the lawsuits will inevitably stretch out for years.

In light of the information about New Century and the sea of other negative press about the mortgage lending industry the Fed is considering new rules to curb abusive lending. Maybe we should have done this back in 2004?:

"The Federal Reserve will hold a public hearing June 14 to consider adopting new rules to combat abusive lending, especially in the subprime market, the Fed announced Thursday."

From an investment perspective the mortgage lending fallout has created plenty of interesting investment plays. Speculating in the subprime lenders who haven't gone bankrupt has been profitable over the past month as hedge funds and other investors snap up the remnants of the distressed subprime lending sector. In the past month Accredited Home Lenders (LEND) is up 20%, Fremont General (FRE) is up 17%, Novastar Financial (NFI) is up 28% and Countrywide (CFC) is up over 14% (see graph below- click to enlarge):