New Century Financial Corporation

New Century Financial Corporation

1. What appeared to be New Century’s strategic objectives?  Describe and evaluate the business model the company had adopted to achieve these objectives.

The main activities of the company included aggressively generating, retaining, selling, and servicing home mortgage loans for subprime borrowers who couldn’t get finance from other sources. Since its target market consisted of borrowers with low FICO scores, it could charge interest rates 2-3% higher than prime rates as well as higher origination fees.

1. What were the primary risks that New Century faced?

The primary risk that New Century faced is the quality of mortgage loan for the subprime borrowers. High levels of default will increase its liabilities and violate the debt covenant. This would create a huge negative impact on its liquidity.

1. What were the company’s critical performance variables?  How well was the company performing with respect to these critical performance variables?

Some of the critical performance variable include the amount of loan sales, loan quality indicators such as early payment defaults and loan sold at a discount. The company has done fairly well regarding sales but poorly in monitoring loan quality.

1. What were the primary reporting items within New Century’s financial statements?  Using the bank examiner’s report, what were the key reporting errors identified?

The primary reporting items within the company’s financial statements are mortgage loan held for sales, mortgage loan held for investment. Some of the key reporting errors identified by the bank examiner include inadequate repurchase reserve, flawed valuation model for residual interest and improper application of LCM valuation.