New Century Financial Corporation, the nation's second largest maker of subprime mortgages, filed for Chapter 11 bankruptcy protection Monday morning (April 2) in U.S. District Court in Delaware.
New Century attributed the filing to the deterioration of the subprime mortgage market and its inability to meet repurchase agreements involving mortgage packages sold to its primary sources of capital. The company announced it was immediately laying off 3,200 people, 54% of its employees, and that it had entered an agreement to sell its servicing assets and servicing platform to Carrington Capital Management, LLC and its affiliate, subject to the approval of the court, for approximately $139 million. The company said it will entertain higher bids if they materialize.
The Irvine, Calif.-based mortgage company, once a high-flying symbol of the U.S. housing boom, in February lost funding from all of its primary lenders and was shut out of the Fannie Mae and Freddie Mac markets. It is also under investigation by the Securities and Exchange Commission and the U.S. Justice Department.
The bankruptcy filing was expected. It was also anticipated that the filing would include the prepackaged sale of New Century's assets. Brad A. Morrice, president and CEO, said, "The decision to pursue the sale of the company's assets and operations through the bankruptcy process was a difficult but appropriate decision for our Board to make. However, given the sudden and significant challenges facing our industry and New Century specifically, bankruptcy is the best means available to allow the company's assets and operations to be sold through an orderly process."
More than two dozen other subprime lenders have shut down operations since defaults began rising last year and the capital markets became skittish about the sector, drying up the supply of money. New Century is the largest company to date to fail.
Some economists now fear that the turmoil in the subprime market is precipitating an overall tightening of credit in the U.S., which could put a brake on consumer spending and perhaps plunge the economy into recession.
