Edgar Filing: NEW CENTURY FINANCIAL CORP

Form 10-Q for period ended June 30, 2005

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2005

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 001-32314

NEW CENTURY FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)


MARYLAND		56-2451736
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

18400 VON KARMAN, SUITE 1000, IRVINE, CALIFORNIA		92612
(Address of principal executive offices)		(Zip code)

Registrant’s telephone number, including area code: (949) 440-7030

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check ¨ whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES x NO ¨

Indicate by check ¨ whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). YES x NO ¨

As of July 31, 2005, the registrant had 56,352,490 shares of common stock outstanding.

NEW CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES

FORM 10-Q

QUARTER ENDED JUNE 30, 2005

INDEX


		Page
PART I—FINANCIAL INFORMATION
Item 1. Financial Statements		4
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		34
Item 3. Quantitative and Qualitative Disclosures About Market Risk		60
Item 4. Controls and Procedures		61
PART II—OTHER INFORMATION
Item 1. Legal Proceedings		62
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		65
Item 4. Submission of Matters to a Vote of Security Holders		65
Item 6. Exhibits		65
SIGNATURES		66
EXHIBIT INDEX		67

Certain information included in this Form 10-Q may include “forward-looking” statements under federal securities laws, and the company intends that such forward-looking statements be subject to the safe-harbor created thereby. Such statements include, without limitation, (i) the company’s expectation that its portfolio of mortgage assets will provide a relatively stable source of revenues and will contribute a significant portion of the company’s earnings in 2005; (ii) the company’s expectation that it will retain between 20% and 30% of its total loan production for investment on its balance sheet for 2005; (iii) the company’s belief that a substantial majority of its loan sales will occur during the second half of 2005; (iv) the company’s expectation that its reported earnings in the second half of 2005 will exceed its reported earnings in the first half of 2005; (v) the company’s belief that its REIT structure provides the most tax-efficient way to hold mortgage loans on its balance sheet; (vi) the company’s expectation that it will continue to increase the size of its on-balance sheet mortgage loan portfolio, producing more diverse revenues across a variety of interest rate environments; (vii) the company’s intention to evaluate, from time to time, whether it should engage in various capital raising activities, which may include offerings of debt, preferred stock, common stock or equity-linked securities; (viii) the company’s expectation that a significant source of its revenue prospectively will be interest income generated from its portfolio of mortgage loans held by the company’s REIT and its qualified REIT subsidiaries; (ix) the company’s expectation that it will continue to generate revenue through its taxable REIT subsidiaries from the sale of loans, servicing income and loan origination fees; (x) the company’s expectation that the primary components of its expenses will be interest expense on its credit facilities, securitizations and other borrowings, general and administrative expenses and payroll and related expenses arising from the company’s origination and servicing businesses; (xi) the company’s expectation that a majority of its income will come from the interest it earns on the mortgage assets its holds for investment; (xii) the company’s expectation that it will supplement its income with earnings from its taxable REIT subsidiaries, which will continue to originate, service and sell mortgage loans; (xiii) the company’s assumptions with respect to cumulative credit losses, which it generally assumes to be approximately 3% of the original balance of the loans; (xiv) the company’s expectation that the gain on sale of mortgage loans will remain at lower margins, similar to the margins during the first six months of 2005, through the fourth quarter of 2005; (xv) the company’s belief that it may continue to utilize securitizations structured as sales in the second half of 2005 in order to maximize the secondary market value of its loan production; (xvi) the company’s belief that its current rate of business is sustainable and that its origination strategies and initiatives are consistent with that belief; (xvii) the company’s belief that if it is successful in maintaining its current mix of production, the company’s exposure to interest rate cyclicality will be reduced; (xviii) the company’s belief that its stricter underwriting guidelines and the stronger credit characteristics of its interest-only loans mitigate their perceived higher risk; (xix) the company’s expectation that the recognition of income as interest payments on the underlying mortgage loans will result in higher income recognition in future periods than would a securitization structured as a sale; (xx) the company’s belief that Carrington may acquire additional assets (including regular and residual interests, whole loans, participation certificates, grantor trust and trust certificates, warehousing and servicing interests) in either the primary or secondary markets; (xxi) the company’s underlying assumptions used to value its residual interests in securitizations and to determine the discount rates of projected cash flows for its residual interests and for residual interests through NIMS transactions; (xxii) the estimates and assumptions required by the company’s accounting policies; (xxiii) the company’s estimates and assumptions with respect to the interest rate environment; (xxiv) the company’s estimates and assumptions with respect to the economic environment; (xxv) the company’s estimates and assumptions with respect to secondary market conditions; (xxvi) the company’s estimates and assumptions with respect to the performance of the loans underlying its residual assets and mortgage loans held for investment; (xxvii) the company’s loan loss allowance estimates; (xxiii) the company’s estimates with respect to its average cumulative losses as a percentage of the original principal balance of mortgage loans; (xxix) the company’s beliefs with respect to its legal proceedings; (xxx) the company’s expectations with respect to the renewal or extension of its credit facilities; (xxxi) the company’s expectations regarding its target levels of liquidity and capital; (xxxii) the execution of the company’s strategy to effectively manage the percentage of loans sold through whole loan sales compared to securitizations structured as financings; (xxxiii) the company’s successful execution of its liquidation strategy; (xxxiv) the company’s expectation that its liquidity, credit facilities and capital resources will be sufficient to fund its operations for the foreseeable future, while enabling it to maintain its qualification as a REIT under the requirements of the Code; (xxxv) the company’s expectation that it will access the capital markets when appropriate to support its growth plan; (xxxvi) the company’s expectation that the RBC transaction will be slightly dilutive to its earnings-per-share in 2005 and accretive to its earnings-per-share within the first 12 months following the transaction’s close; (xxxvii) the company’s expectation that the RBC transaction will close in the third quarter of 2005; (xxxviii) the belief that the RBC transaction will establish the company as a leader in the retail origination channel; (xxxix) the company’s belief that RBC’s large purchase business will be significant to growing the company’s business; and (xl) the company’s belief that being a full-service mortgage provider will allow it to build upon the success of its national Home123 branding and marketing campaign.

The company cautions that these statements are qualified by important factors that could cause its actual results to differ materially from expected results in the forward-looking statements. Such factors include, but are not limited to, (i) the condition of the U.S. economy and financial system; (ii) the interest rate environment; (iii) the effect of increasing competition in the company’s sector; (iv) the condition of the markets for whole loans and mortgage-backed securities; (v) the stability of residential property values; (vi) the company’s ability to comply with the requirements applicable to REITs; (vii) the company’s ability to increase its portfolio income; (viii) the company’s ability to continue to maintain low loan acquisition costs; (ix) the potential effect of new state or federal laws and regulations; (x) the company’s ability to maintain adequate credit facilities to finance its business; (xi) the outcome of litigation or regulatory actions pending against the company; (xii) the company’s ability to adequately hedge its residual values; (xiii) the accuracy of the assumptions regarding the company’s repurchase allowance and residual valuations, prepayment speeds and loan loss allowance; (xiv) the ability to finalize forward sale commitments; (xv) the ability to deliver loans in accordance with the terms of forward sale commitments; (xvi) the assumptions underlying the company’s risk management practices; (xvii) the ability of the company’s servicing platform to maintain high performance standards; (xviii) the satisfaction of the RBC transaction’s closing conditions; and (xix) the approval of applicable government authorities and regulators of the RBC transaction. Additional information on these and other factors is contained in the company’s Annual Report on Form 10-K for the year ended December 31, 2004, the company’s Quarterly Report on Form 10-Q for the period ended March 31, 2005 and the company’s other periodic filings with the Securities and Exchange Commission.

The company assumes no obligation to update the forward-looking statements contained in this Form 10-Q.

NEW CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

June 30, 2005 and December 31, 2004

(Dollars in thousands, except share amounts)


	June 30, 2005 (unaudited)			December 31, 2004
Assets

Cash and cash equivalents	$	569,153		842,854
Restricted cash		736,259		454,035
Mortgage loans held for sale, net of reserves of $11,792 and $9,575, respectively		5,989,211		3,922,865
Mortgage loans held for investment, net of reserves of $145,565 and $90,227, respectively		18,482,990		13,195,324
Residual interests in securitizations		145,563		148,021
Mortgage servicing assets		40,395		8,249
Accrued interest receivable		108,350		66,208
Income taxes, net		93,122		180,840
Office property and equipment, net		72,774		47,266
Prepaid expenses and other assets		194,163		186,282

Total assets	$	26,431,980		19,051,944

Liabilities and Stockholders’ Equity

Credit facilities on mortgage loans held for sale	$	5,627,207		3,704,268
Financing on mortgage loans held for investment, net		18,343,545		13,105,973
Accounts payable and accrued liabilities		411,351		320,108
Convertible senior notes, net		4,919		5,392
Notes payable		43,904		37,638

Total liabilities		24,430,926		17,173,379

Commitments and contingencies

Stockholders’ equity:
Preferred stock, $0.01 par value, Authorized 10,000,000 shares; issued and outstanding 4,500,000 and zero shares at June 30, 2005 and December 31, 2004, respectively		45		—
Common stock, $0.01 par value, Authorized 300,000,000 shares; issued and outstanding 56,179,685 and 54,702,623 shares at June 30, 2005 and December 31, 2004, respectively		562		547
Additional paid-in capital		1,254,763		1,108,590
Accumulated other comprehensive loss		(20,668	)	(4,700	)
Retained earnings, restricted		784,889		781,627

		2,019,591		1,886,064
Deferred compensation costs		(18,537	)	(7,499	)

Total stockholders’ equity		2,001,054		1,878,565

Total liabilities and stockholders’ equity	$	26,431,980		19,051,944

See accompanying notes to unaudited condensed consolidated financial statements.

NEW CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statements of Earnings

(Dollars in thousands, except per share and share data)

(Unaudited)


	Three Months Ended June 30,						Six Months Ended June 30,
	2005			2004			2005		2004
Interest income	$	420,861			191,135		751,932		344,263
Interest expense		(218,555	)		(67,306	)	(380,636	)	(123,270	)

Net interest income		202,306			123,829		371,296		220,993
Provision for losses on mortgage loans held for investment		(36,875	)		(17,112	)	(67,113	)	(36,981	)

Net interest income after provision for losses		165,431			106,717		304,183		184,012
Other operating income:
Gain on sale of mortgage loans		138,704			215,051		278,456		417,027
Servicing income		6,631			7,753		13,353		13,649
Other income		3,398			829		7,271		829

Total other operating income		148,733			223,633		299,080		431,505

Operating expenses:
Personnel		148,061			109,000		276,583		189,966
General and administrative		42,324			34,551		84,099		64,383
Advertising and promotion		20,711			15,684		40,543		29,249
Professional services		9,677			8,729		17,483		13,066

Total operating expenses		220,773			167,964		418,708		296,664

Earnings before income taxes		93,391			162,386		184,555		318,853

Income tax (benefit) expense		(1,688	)		60,009		4,716		129,231

Net earnings		95,079			102,377		179,839		189,622

Dividends on preferred stock		285			—		285		—

Net earnings available to common stockholders	$	94,794		$	102,377		179,554		189,622

Basic earnings per share	$	1.71			3.07		3.26		5.72
Diluted earnings per share	$	1.65			2.46		3.13		4.56
Basic weighted average shares outstanding		55,376,001			33,299,104		55,079,377		33,129,024
Diluted weighted average shares outstanding		57,396,098			42,161,644		57,331,721		42,088,799

See accompanying notes to unaudited condensed consolidated financial statements.

NEW CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive Income

(Dollars in thousands)

(Unaudited)


	Three Months Ended June 30				Six Months Ended June 30
	2005			2004	2005		2004
Net earnings	$	95,079		102,377	179,839		189,622
Other comprehensive income (loss):
Unrealized gain (loss) on derivative instruments designated as hedges, net of taxes of ($1.5) million, and $849,000 for the three and six months ended June 30, 2005, respectively, and $21.3 million, and $12.4 million for the three and six months ended June 30, 2004, respectively, net		(91,805	)	30,585	(15,968	)	18,333

Comprehensive income	$	3,274		132,962	163,871		207,955

See accompanying notes to unaudited condensed consolidated financial statements.

NEW CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES

Consolidated Statements of Changes in Stockholders’ Equity

Six Months Ended June 30, 2005

(In thousands, except per share amounts)


	Preferred shares outstanding	Preferred stock amount		Common shares outstanding		Common stock amount			Additional paid-in capital		Accumulated Other Comprehensive Loss		Retained earnings, restricted		Deferred compensation		Total
Balance December 31, 2004	—		—	54,703			547		1,108,590		(4,700	)	781,627		(7,499	)	1,878,565
Proceeds from issuance of common stock	—		—	1,381			14		16,919		—		—		—		16,933
Proceeds from issuance of preferred stock	4,500		45	—			—		108,911		—		—		—		108,956
Cancelled shares related to stock options	—		—	(224	)		(2	)	(9,584	)	—		—				(9,586	)
Conversion of convertible senior notes	—		—	15			—		500		—		—		—		500
Issuance of restricted stock, net	—		—	305			3		14,833		—		—		(14,836	)	—
Amortization of deferred compensation	—		—	—			—		—		—		—		3,798		3,798
Net earnings	—		—	—			—		—		—		179,839		—		179,839
Tax benefit related to non-qualified stock options	—		—	—			—		14,594		—		—		—		14,594
Other comprehensive loss, net of tax	—		—	—			—		—		(15,968	)	—		—		(15,968	)
Dividends declared on common stock, $3.15 per share	—		—	—			—		—		—		(176,292	)	—		(176,292	)
Dividends on preferred stock, $0.06 per share	—		—	—			—		—		—		(285	)	—		(285	)

Balance June 30, 2005 (unaudited)	4,500	$	45	56,180		$	562		1,254,763		(20,668	)	784,889		(18,537	)	2,001,054

See accompanying notes to unaudited condensed consolidated financial statements.

NEW CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(Dollars in thousands)

(Unaudited)


	Six Months Ended
	June 30, 2005			June 30, 2004
Cash flows from operating activities:
Net earnings	$	179,839			189,622
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization		57,311			12,105
Cash flows received from residual interests		12,210			27,537
Accretion of Net Interest Receivables, or “NIR”		(7,927	)		(9,358	)
NIR gains		1,670			(21,871	)
Initial deposits to over-collateralization accounts		(7,914	)		(10,871	)
Retained bond		—			(3,536	)
Servicing gains		(35,893	)		—
Fair value adjustment of residual securities		4,419			6,770
Provision for losses on mortgage loans held for investment		67,113			36,981
Provision for repurchase losses		6,072			3,184
Mortgage loans originated or acquired for sale		(15,587,599	)		(17,234,447	)
Mortgage loan sales, net		13,520,803			14,140,969
Principal payments on mortgage loans held for sale		115,017			55,709
Increase in credit facilities on mortgage loans held for sale		1,922,939			2,808,168
Tax benefit related to non-qualified stock options		14,594			—
Net change in other assets and liabilities		14,765			51,217

Net cash provided by operating activities		277,419			52,179

Cash flows from investing activities:

Mortgage loans originated or acquired for investment, net		(8,174,316	)		(3,457,776	)
Principal payments on mortgage loans held for investment		2,759,900			739,313
Purchases of office property and equipment		(35,618	)		(12,594	)

Net cash used in investing activities		(5,450,034	)		(2,731,057	)

Cash flows from financing activities:
Proceeds from issuance of financing on mortgage loans held for investment, net		8,574,456			5,017,915
Repayments of financing on mortgage loans held for investment		(2,588,407	)		(640,625	)
Decrease in credit facilities on mortgage loans held for investment		(756,835	)		(1,680,487	)
Proceeds from issuance of preferred stock		108,956			—
Proceeds from notes payable		15,726			17,756
Repayment of notes payable		(9,460	)		(6,248	)
Change in restricted cash		(282,224	)		(205,486	)
Payment of dividends on common stock		(168,938	)		(12,132	)
Net proceeds from issuance of stock		17,433			4,527
Purchase of treasury stock		(11,793	)		—

Net cash provided by financing activities		4,898,914			2,495,220


Net decrease in cash and cash equivalents		(273,701	)		(183,658	)
Cash and cash equivalents, beginning of period		842,854			278,598

Cash and cash equivalents, end of period	$	569,153			94,940

Supplemental cash flow disclosure:
Interest paid	$	372,065			113,913
Income taxes paid		83,223			157,892
Supplemental non-cash financing activity:
Restricted stock issued	$	17,966		$	5,782
Accrued dividends		90,176			6,781

See accompanying notes to unaudited condensed consolidated financial statements.

NEW CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

June 30, 2005 and 2004

1. Basis of Presentation

New Century TRS Holdings, Inc. (formerly known as New Century Financial Corporation), a Delaware corporation (“New Century TRS”), was incorporated on November 17, 1995. New Century Mortgage Corporation, a wholly-owned subsidiary of New Century TRS (“New Century Mortgage”), commenced operations in February 1996 and is a mortgage finance company engaged in the business of originating, purchasing, selling and servicing mortgage loans secured primarily by first and second mortgages on single-family residences. NC Capital Corporation, a wholly-owned subsidiary of New Century Mortgage (“NC Capital”), was formed in December 1998 to conduct the secondary marketing activities of New Century (as defined below). New Century Credit Corporation (formerly known as Worth Funding Incorporated) (“New Century Credit”), a wholly-owned subsidiary of New Century, was acquired in March 2000 by New Century Mortgage. NC Residual IV Corporation (“NCRIV”), a wholly-owned subsidiary of New Century, was formed in September 2004 to hold a portfolio of mortgage loans held for investment. After consummation of the Merger (defined below), New Century purchased New Century Credit from New Century Mortgage. The terms “New Century,” “Company,” “we,” “our,” and “us” refer to New Century Financial Corporation, except where the context otherwise requires.

On April 5, 2004, New Century TRS’s board of directors approved a plan to change New Century TRS’s capital structure to enable it to qualify as a real estate investment trust, or REIT, for United States federal income tax purposes. The decision to convert to a REIT was based on several factors, including the potential for increased stockholder return, tax efficiency and ability to achieve growth objectives. On April 19, 2004, New Century TRS’s board of directors approved certain legal and financial matters related to the proposed REIT conversion.

On April 12, 2004, New Century TRS formed New Century Financial Corporation (formerly known as New Century REIT, Inc.), a Maryland corporation (“New Century”). On September 15, 2004, New Century TRS’s stockholders approved and adopted the Agreement and Plan of Merger dated as of April 21, 2004 (the “Merger Agreement”), by and among New Century TRS, New Century and NC Merger Sub, Inc., a Delaware corporation formed by New Century for purposes of effecting the Merger (“Merger Sub”), which implemented the restructuring of New Century TRS in order for it to qualify as a REIT (the “Merger”).

Pursuant to the Merger Agreement, (i) Merger Sub merged with and into New Century TRS, with New Century TRS as the surviving corporation, (ii) each outstanding share of New Century TRS’s common stock was converted into the right to receive one share of common stock, par value of $0.01 per share, of New Century, (iii) New Century TRS became a wholly-owned subsidiary of New Century and changed its name from New Century Financial Corporation to New Century TRS Holdings, Inc., and (iv) New Century REIT, Inc. changed its name to New Century Financial Corporation. The Merger was consummated and became effective on October 1, 2004, and was accounted for on an “as if pooling basis.” These condensed consolidated financial statements give retroactive effect to the Merger for the periods presented. Accordingly, under “as if pooling accounting,” the assets and liabilities of New Century TRS transferred to New Century in connection with the Merger have been accounted for at historical amounts as if New Century TRS was transferred to New Century as of the earliest date presented and the condensed consolidated financial statements of New Century prior to the Merger include the results of operations of New Century TRS. Stockholders’ equity amounts presented for years prior to the formation of New Century are those of New Century TRS, adjusted for the Merger exchange rate.

On September 29, 2004, in contemplation of the Merger, New Century TRS requested that The Nasdaq Stock Market, Inc. suspend the listing of the shares of New Century TRS’s common stock on the Nasdaq National Market prior to the commencement of trading on October 1, 2004. Shares of New Century’s common stock, which were issued in exchange for then outstanding shares of New Century TRS’s common stock on a one-for-one basis in connection with the Merger, were approved for listing on the New York Stock Exchange, Inc. and commenced trading on October 1, 2004 under the ticker symbol “NEW.”

The accompanying condensed consolidated financial statements include the consolidated financial statements of the Company’s wholly-owned subsidiaries, New Century TRS, New Century Credit, and NCRIV. All material intercompany balances and transactions are eliminated in consolidation. The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America.

The Company has prepared the accompanying unaudited condensed consolidated financial statements in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally

NEW CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

June 30, 2005 and 2004

accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the six months ended June 30, 2005 are not necessarily indicative of the results that may be expected for the year ending December 31, 2005. For further information, refer to the consolidated financial statements and notes thereto included in New Century’s Annual Report on Form 10-K for the year ended December 31, 2004 filed with the Securities and Exchange Commission.

Reclassification

Certain amounts from prior year’s presentation have been reclassified to conform to the current year’s presentation.

Recent Accounting Developments

In May 2003, the FASB issued FAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” FAS 150 establishes standards for how an issuer classifies and measures in its statement of financial position certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances) because that financial instrument embodies an obligation of the issuer. FAS 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003 except for mandatory redeemable financial instruments of nonpublic entities. The Company applied the provisions of FAS 150 when the Series A Cumulative Redeemable Preferred Stock was issued in the second quarter of 2005.

In December 2004, the FASB issued Statement of Financial Accounting Standards No. 123R, “Share-based Payment,” or SFAS 123R. SFAS 123R is a revision of FASB Statement No. 123, “Accounting for Stock-based Compensation,” and supercedes Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees.” SFAS 123R requires an entity to measure the cost of employee services in exchange for an award of equity instruments based on the grant date fair value of the award (with limited exception). That cost will be recognized over the period during which the employee is required to provide service in exchange for the award, or the requisite service period, which is usually the vesting period. No compensation cost is recognized for equity instruments for which employees do not render the requisite service. Employee share purchase plans will not result in recognition of compensation expense if certain conditions are met.

The notes to financial statements will disclose information to assist users of financial information to understand the nature of share-based payment transactions and the effects of those transactions on the financial statements. In April 2005, the Securities and Exchange Commission deferred the effective date of SFAS 123R. The Company will be required to apply the provisions of SFAS 123R beginning in 2006. There are three methods from which an entity may select to apply the provisions of SFAS 123R during the transition period: modified prospective application, modified retrospective application—all periods, and modified retrospective application—interim periods. The Company provides pro forma disclosure as to the impact of SFAS 123 or 123R in footnote 1 of the Notes to Condensed Consolidated Financial Statements—Stock-Based Compensation.

Cash and Cash Equivalents

For purposes of the statements of cash flows, the Company considers all highly liquid debt instruments with original maturities of three months or less to be cash equivalents. Cash equivalents consist of cash on hand and due from banks.

Restricted Cash

As of June 30, 2005, restricted cash totaled $736.3 million, and included $116.5 million in cash held in a margin account associated with the Company’s interest rate risk management activities, $599.8 million in cash held in custodial accounts associated with its mortgage loans held for investment, and $20.0 million in cash held in a cash reserve account in connection with its asset-backed commercial paper facility. As of December 31, 2004, restricted cash totaled $454.0 million, and included $58.2 million in cash held in a margin account associated with its interest rate risk management activities, $375.8 million in cash held in custodial accounts associated with its mortgage loans held for investment, and $20.0 million in cash held in a cash reserve account in connection with its asset-backed commercial paper facility.

NEW CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

June 30, 2005 and 2004

Mortgage Loans Held for Sale

Mortgage loans held for sale are stated at the lower of amortized cost or fair value as determined by outstanding commitments from investors or current investor-yield requirements, calculated on an aggregate basis.

Mortgage Loans Held for Investment

Mortgage loans held for investment represent loans securitized through transactions structured as financings, or pending securitization through transactions that are expected to be structured as financings. Mortgage loans held for investment are stated at amortized cost, including the outstanding principal balance, less the allowance for loan losses, plus net deferred origination costs. The financing related to these securitizations is included in the Company’s condensed consolidated balance sheet as financing on mortgage loans held for investment.

Allowance for Losses on Mortgage Loans Held for Investment

In connection with its mortgage loans held for investment, the Company establishes an allowance for loan losses based on its estimate of losses inherent and probable as of its balance sheet date. The Company charges off uncollectible loans at the time of liquidation. The Company evaluates the adequacy of this allowance each quarter, giving consideration to factors such as the current performance of the loans, characteristics of the portfolio, the value of the underlying collateral and the general economic environment. In order to estimate an appropriate allowance for losses for loans held for investment, the Company estimates losses using “static pooling,” which stratifies the loans held for investment into separately identified vintage pools. Provision for losses is charged to the Company’s condensed consolidated statement of earnings. Losses incurred are charged to the allowance. Management considers the current allowance to be adequate.

Residual Interests in Securitizations

Residual interests in securitizations, or Residuals, are recorded as a result of the sale of loans through securitizations that the Company structures as sales rather than financings, referred to as “off-balance sheet securitizations.” The Company may also sell Residuals through what are sometimes referred to as net interest margin securities, or NIMS.

In a securitization structured as a sale, the Company sells a pool of loans to a trust for a cash purchase price and a certificate evidencing its 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. The Company receives the cash flows from the Residuals after payment of servicing fees, guarantor fees and other trust expenses if the specified over-collateralization requirements are met. Over-collateralization requirements are generally based on a percentage of the original or current unpaid principal balance of the loans and may be increased during the life of the transaction depending upon actual delinquency or loss experience. A NIMS transaction, through which certificates are sold that represent a portion of the spread between the coupon rate on the loans and the investor pass-through rate, may also occur concurrently with or shortly after a securitization. A NIMS transaction allows the Company to receive a substantial portion of the gain in cash at the closing of the NIMS transaction, rather than over the actual life of the loans.

The Annual Percentage Rate, or APR, on the mortgage loans is relatively high in comparison to the pass-through rate on the certificates. Accordingly, the Residuals described above are a significant asset of the Company. In determining the value of the Residuals, the Company estimates the future rate of prepayments, prepayment penalties that it will receive, delinquencies, defaults and default loss severity as they affect the amount and timing of the estimated cash flows. The Company estimates average cumulative losses as a percentage of the original principal balance of the mortgage loans of 1.65% to 4.62% for adjustable-rate securities and 1.44% to 5.13% for fixed-rate securities. The Company bases these estimates on historical loss data for the loans, the specific characteristics of the loans, and the general economic environment. While the range of estimated cumulative pool losses is fairly broad, the weighted average cumulative pool loss estimate for the entire portfolio of residual assets was 3.75% at June 30, 2005. The Company estimates prepayments by evaluating historical prepayment performance of its loans and the impact of current trends. The Company uses a prepayment curve to estimate the prepayment characteristics of the mortgage loans. The rate of increase, duration, severity, and decrease of the curve depends on the age and nature of the mortgage loans, primarily whether the mortgage loans are fixed or adjustable and the interest rate adjustment characteristics of the mortgage loans (6-month, 1-year, 2-year, 3-year, or 5-year adjustment periods). These prepayment curve and default estimates have resulted in weighted average lives of between 2.28 to 2.57 years for the Company’s adjustable-rate securities and 2.44 to 3.49 years for its fixed-rate securities.

NEW CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

June 30, 2005 and 2004

During the quarter ended June 30, 2005, the Company completed a $989.2 million securitization structured as a sale resulting in a gain on sale of $21.2 million. In addition, the Company’s retained interest was $6.2 million.

During the six months ended June 30, 2005, the Residuals provided $12.2 million in net cash flow to the Company. The Company performs an evaluation of the Residuals quarterly, taking into consideration trends in actual cash flow performance, industry and economic developments, as well as other relevant factors. During the quarter ended June 30, 2005, the Company increased its prepayment rate assumptions based upon actual performance and made minor adjustments to certain other assumptions, resulting in a $3.1 million decrease in the fair value for the quarter and is recorded as a reduction to gain on sale of mortgage loans.

The bond and certificate holders and their securitization trusts have no recourse to the Company for failure of mortgage loan borrowers to pay when due. The Company’s Residuals are subordinate to the bonds and certificates until the bond and certificate holders are fully paid.

The Company is party to various transactions that have an off-balance sheet component. In connection with the Company’s off-balance sheet securitization transactions, as of June 30, 2005, there were $1.8 billion in loans owned by the off-balance sheet trusts. The trusts have issued bonds secured by these loans. The bondholders generally do not have recourse to the Company in the event that the loans in the various trusts do not perform as expected. Because these trusts are “qualifying special purpose entities,” in accordance with generally accepted accounting principles, the Company has included only its residual interest in these loans on its condensed consolidated balance sheet. The performance of the loans in the trusts will impact the Company’s ability to realize the current estimated fair value of these residual assets.

Derivative Instruments Designated as Hedges

The Company accounts for certain Euro Dollar futures and interest rate cap contracts designated and documented as cash flow hedges pursuant to the requirements of Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”). Pursuant to SFAS 133, these contracts have been designated as hedging the exposure to variability of cash flows from the Company’s variable rate financing on mortgage loans held for investment attributable to changes in interest rates. Cash flow hedge accounting requires that the effective portion of the gain or loss in the fair value of a derivative instrument designated as a hedge be reported in other comprehensive income and the ineffective portion be reported in current earnings. Additionally, certain Euro Dollar futures contracts were designated as hedges of the fair values of certain mortgage loans held for investment and certain mortgage loans held for sale, pursuant to SFAS 133. Fair value hedge accounting requires that for a fair value hedge, changes in the fair value of the derivative instrument and changes in the fair value of the hedged asset or liability attributable to the hedged risk be reported in current earnings.

Income Taxes

The Company is a REIT for federal income tax purposes and is not generally required to pay federal and most state income taxes if it meets the REIT requirements of the Internal Revenue Code of 1986, as amended, or the Code. Also, the Company’s subsidiaries that meet the requirements of the Code to be a qualified REIT subsidiary, or a QRS, are not generally required to pay federal and most state income taxes. However, the Company must recognize income taxes in accordance with Statement of Financial Accounting Standards No. 109 “Accounting for Income Taxes,” (“SFAS 109”) for its taxable REIT subsidiaries, or TRS, whose income is fully taxable at regular corporate rates.

SFAS 109 requires that inter-period income tax allocation be based on the asset and liability method. Accordingly, the Company recognizes the tax effects of temporary differences between its tax and financial reporting bases of assets and liabilities that will result in taxable or deductible amounts in future periods.

Stock-Based Compensation

The Company has elected to follow Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”), and related interpretations, in accounting for employee stock options rather than the fair value accounting allowed by

NEW CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

June 30, 2005 and 2004

Financial Accounting Standards Board (“FASB”) Statement No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”). APB 25 provides that compensation expense relative to the Company’s employee stock options is recorded over the vesting period if the current market price of the underlying stock exceeds the exercise price on the date of grant. Under SFAS 123, the fair value of stock options at the date of grant is recognized in earnings over the vesting period of the options. In December 2002, FASB issued Statement of Financial Accounting Standards No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure” (“SFAS 148”), which amends SFAS 123 to provide alternative methods of transition for a voluntary change to the fair value method of accounting for stock-based employee compensation. In addition, SFAS 148 amends the disclosure requirements of SFAS 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method on reported results.

The fair value of each stock option granted is estimated at the date of grant using the Black-Scholes option-pricing model. The weighted average fair value of stock options granted and the weighted average underlying assumptions used to estimate those values for the three and six months ended June 30, 2005 and 2004 are as follows:


	Three Months Ended June 30,						Six Months Ended June 30,
	2005			2004			2005			2004
Fair value	$	8.98		$	22.27		$	9.21		$	19.06
Expected life (years)		4.5			4.5			4.5			4.5
Risk-free interest rate		3.8	%		3.8	%		4.2	%		3.3	%
Volatility		60.0	%		60.6	%		60.5	%		52.2	%
Expected annual dividend yield		13.78	%		1.80	%		13.68	%		1.76	%

As of June 30, 2005 and 2004, there were stock options outstanding for the purchase of 4,394,552 and 5,495,015 shares, respectively, of the Company’s common stock. The following table shows the pro forma net income as if the fair value method of SFAS 123 had been used to account for stock-based compensation expense (dollars in thousands, except per share amounts):

NEW CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

June 30, 2005 and 2004


	Three Months Ended June 30,					Six Months Ended June 30,
	2005			2004		2005		2004
Basic net earnings available to common shareholders:
As reported	$	94,794		102,377		179,554		189,622
Compensation expense, net of related tax effects		(1,664	)	(1,325	)	(3,189	)	(2,505	)

Pro forma	$	93,130		101,052		176,365		187,117

Diluted net earnings available to common shareholders:
As reported	$	94,871		103,631		179,649		192,129
Compensation expense, net of related tax effects		(1,664	)	(1,325	)	(3,189	)	(2,505	)

Pro forma	$	93,207		102,306		176,460		189,624

Basic earnings per share:
As reported	$	1.71		3.07		3.26		5.72
Pro forma		1.68		3.03		3.20		5.65
Diluted earnings per share:
As reported	$	1.65		2.46		3.13		4.56
Pro forma		1.64		2.47		3.11		4.59
Basic weighted average shares outstanding:
As reported		55,376		33,299		55,079		33,129
Pro forma		55,376		33,299		55,079		33,129
Diluted weighted average shares outstanding:
As reported		57,396		42,162		57,332		42,089
Pro forma		56,684		41,397		56,665		41,319

2. Mortgage Loans Held for Sale

A summary of mortgage loans held for sale, at the lower of cost or market at June 30, 2005 and December 31, 2004, is as follows (dollars in thousands):


	June 30, 2005		December 31, 2004
First trust deeds	$	5,370,148	3,686,830
Second trust deeds		586,463	197,362
Net deferred origination costs and other		32,600	38,673

	$	5,989,211	3,922,865

At June 30, 2005, the Company had mortgage loans held for sale of approximately $31.3 million on which the accrual of interest had been discontinued. If these mortgage loans had been current throughout their terms, interest income would have increased by approximately $1.2 million for the six months ended June 30, 2005.

NEW CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

June 30, 2005 and 2004

3. Mortgage Loans Held for Investment

For the three and six months ended June 30, 2005, the Company securitized $5.9 billion and $8.9 billion in loans, respectively, through transactions structured as financings, resulting in an increase in its mortgage loans held for investment. As of June 30, 2005, the balance of mortgage loans held for investment included $25.7 million of mortgage loans held for investment that were not yet securitized. A summary of the components of mortgage loans held for investment at June 30, 2005 and December 31, 2004 is as follows (dollars in thousands):


	June 30, 2005			December 31, 2004
Mortgage loans held for investment:
Unpaid principal balance of mortgage loans	$	18,475,484		13,169,595
Allowance for loan losses		(145,565	)	(90,227	)
Net deferred origination costs		153,071		115,956

	$	18,482,990		13,195,324

At June 30, 2005, the Company had mortgage loans held for investment of approximately $319.5 million on which the accrual of interest had been discontinued. If these mortgage loans had been current throughout their terms, interest income would have increased by approximately $13.6 million for the six months ended June 30, 2005.

The following table presents a summary of the activity for the allowance for losses on mortgage loans held for investment for the three and six months ended June 30, 2005 and 2004 (dollars in thousands):


	Three Months Ended June 30,					Six Months Ended June 30,
	2005			2004		2005		2004
Beginning balance	$	117,495		45,596		90,227		26,251
Additions		36,875		17,112		67,113		36,981
Charge-offs		(8,805	)	(1,401	)	(11,775	)	(1,925	)

	$	145,565		61,307		145,565		61,307

4. Residual Interests in Securitizations

Residual interests in securitizations consisted of the following components at June 30, 2005 and December 31, 2004 (dollars in thousands):


	June 30, 2005			December 31, 2004
Over-collateralization account	$	158,621		158,755
Net interest receivable (NIR)		(13,058	)	(10,734	)

	$	145,563		148,021

The net interest receivable, or NIR, balance above represents the discounted value of cash flows expected to be received from net interest spread, while the over-collateralization account represents the current, un-discounted balance of over-collateralization as of the period end. Residual interests in securitizations are recorded at estimated fair value, which is based on estimated discounted cash flows, resulting in the presentation above.

NEW CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

June 30, 2005 and 2004

The following table summarizes the activity in the over-collateralization, or OC, accounts for the six months ended June 30, 2005 and 2004 (dollars in thousands):


	Six Months Ended June 30,
	2005			2004
Balance, beginning of period	$	158,755		169,905
Initial deposits to OC accounts		7,914		—
Additional deposits to OC accounts		1,305		10,871
Release of cash from OC accounts		(9,353	)	(8,167	)

Balance, end of period	$	158,621		172,609

The following table summarizes activity in the NIR accounts for the six months ended June 30, 2005 and 2004 (dollars in thousands):


	Six Months Ended June 30,
	2005			2004
Balance, beginning of period	$	(10,734	)	9,593
NIR gains		(1,670	)	21,871
Cash received from NIRs		(4,162	)	(19,370	)
Accretion of NIRs		7,927		9,358
Fair value adjustment		(4,419	)	(6,770	)

Balance, end of period	$	(13,058	)	14,682

During the six months ended June 30, 2005, the Company completed a $989.2 million securitization structured as a sale. During the six months ended June 30, 2004, the Company completed a $337.1 million securitization structured as a sale, related to its investment in Carrington Mortgage Credit Fund I, LP, (“Carrington”). Purchasers of securitization bonds and certificates have no recourse against the other assets of the Company, other than the assets of the trust. The value of the Company’s retained interests is subject to credit, prepayment and interest rate risk on the transferred financial assets.

5. Mortgage Servicing Assets

Mortgage servicing assets represent the carrying value of our mortgage loan servicing rights. The following table summarizes activity in the mortgage servicing assets for the six months ended June 30, 2005 and 2004 (dollars in thousands):


	Six Months Ended June 30,
	2005			2004
Balance, beginning of period	$	8,249		1,900
Additions		35,893		—
Amortization		(3,747	)	(252	)

Balance, end of period	$	40,395		1,648

The Company records mortgage servicing assets when it sells loans on a servicing-retained basis and when it sells loans through whole loan sales to an investor in the current period and sells the servicing rights to a third party in a subsequent period.

The addition of $35.9 million for the six months ended June 30, 2005 includes (i) $27.2 million of servicing rights retained by the Company in certain of its whole loan sales to Carrington and (ii) $8.7 million of servicing rights related to the securitization structured as a sale completed in June 2005. The $8.7 million of servicing rights associated with the securitization structured as a sale was subsequently sold to a third party in August 2005 for $8.7 million. As of June 30, 2005, the Company had also retained the right to service $17.1 billion of loans underlying its portfolio of mortgage loans held for investment.

NEW CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

June 30, 2005 and 2004

6. Goodwill

Goodwill is recorded in connection with the acquisition of new subsidiaries and is included in prepaid expenses and other assets. As of June 30, 2005 and December 31, 2004, the Company had goodwill of $15.5 million. No impairment was recognized during the six months ended June 30, 2005.

7. Credit Facilities and Other Short-Term Borrowings

Credit facilities and other short-term borrowings consist of the following at June 30, 2005 and December 31, 2004 (dollars in thousands):


	June 30, 2005		December 31, 2004
A $2.0 billion asset-backed commercial paper facility for Von Karman Funding LLC, a wholly-owned subsidiary of New Century Mortgage, expiring in September 2006, secured by mortgage loans held for sale and cash generated through the sale of loans, bearing interest based on a margin over one-month LIBOR.	$	—	—

A $2.0 billion master repurchase agreement ($1 billion of which is uncommitted) between New Century Funding A, a Delaware business trust which is a wholly-owned subsidiary of New Century Mortgage, and Bank of America, N.A., expiring in August 2005, secured by mortgage loans held for sale, bearing interest based on a margin over one-month LIBOR. The Company expects to either renew or extend this facility prior to its expiration.		769,730	975,119

A $1.0 billion master repurchase agreement among New Century Credit, NC Residual II Corporation, a wholly-owned subsidiary of NC Capital (“NC Residual II”), New Century Mortgage, NC Capital and Barclays Bank PLC expiring in November 2005, secured by mortgage loans held for sale, bearing interest based on a margin over one-month LIBOR. The Company expects to either renew or extend this facility prior to its expiration.		609,719	43,917

An $800 million aggregation facility ($400 million of which is uncommitted) from Bear Stearns Mortgage Capital expiring in October 2005, secured by mortgage loans held for sale, bearing interest based on a margin over one-month LIBOR. The Company expects to either renew or extend this facility prior to its expiration.		764,471	428,397

A $700 million master repurchase agreement among New Century Credit, New Century Mortgage, NC Capital, NC Residual II, and IXIS Real Estate Capital Inc. expiring in September 2005, secured by mortgage loans held for sale, bearing interest based on a margin over one-month LIBOR. The Company expects to either renew or extend this facility prior to its expiration.		428,626	617,141

A $150 million master repurchase agreement between New Century Funding SB-1, a Delaware business trust and wholly-owned subsidiary of New Century Mortgage, and Citigroup Global Markets, successor to Salomon Brothers, expiring in September 2005, secured by mortgage loans held for sale, bearing interest based on a margin over one-month LIBOR. The Company expects to either renew or extend this facility prior to its expiration.		—	—

NEW CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

June 30, 2005 and 2004


	June 30, 2005			December 31, 2004
A $650 million repurchase agreement among New Century Credit, NC Capital and Citigroup Global Markets Reality Corp., successor to Salomon Brothers, expiring in September 2005, secured by mortgage loans held for sale, bearing interest based on a margin over one-month LIBOR. We have the ability to increase the size of this facility to $800 million provided that the value of the loans outstanding at any one time under this facility and the $150 million facility set forth immediately above may not exceed $800 million in the aggregate. The Company expects to either renew or extend this facility prior to its expiration.		668,459		260,025

A $150 million master loan and security agreement among New Century Mortgage, NC Capital, New Century Financial and Citigroup Global Markets Realty Corp., successor to Salomon Brothers Realty Corp., expiring in December 2005, secured by delinquent loans and REO properties, bearing interest based on a margin over one-month LIBOR. The Company expects to either renew or extend this facility prior to its expiration.		1,091		959

A $250 million repurchase agreement between New Century Mortgage and Citigroup Global Markets, which expires in December 2005, secured by small balance commercial mortgage loans held for sale, bearing interest based on a margin over one-month LIBOR.		25,529		54,398

A $500 million master loan and security agreement among New Century Credit, New Century Mortgage, NC Capital and Credit Suisse First Boston Mortgage Capital LLC expiring in November 2005, secured by mortgage loans held for sale, bearing interest based on a margin over one-month LIBOR. The Company expects to either renew or extend this facility prior to its expiration.		352,785		—

A $2.0 billion master loan and security agreement among New Century Credit, New Century Mortgage, NC Capital, NC Residual II, Morgan Stanley Bank, Concord Minutemen Capital Company, LLC and Morgan Stanley Mortgage Capital Inc. expiring in February 2007, secured by mortgage loans held for sale, bearing interest based on a margin over one-month LIBOR.		705,874		959,822

A $2.0 billion asset-backed note purchase and security agreement ($500 million, of which is uncommitted) between New Century Funding I, a special-purpose vehicle established as a Delaware statutory trust, which is a wholly-owned subsidiary of New Century Mortgage, and UBS Real Estate Securities Inc., expiring in June 2006, secured by mortgage loans held for sale, bearing interest based on a margin over one-month LIBOR.		1,320,764		1,141,167

Less: Credit facility amounts reclassified to financing on mortgage loans held for investment		(19,841	)	(776,677	)

	$	5,627,207		3,704,268

NEW CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

June 30, 2005 and 2004

The various credit facilities contain certain restrictive financial and other covenants that require the Company to, among other things, restrict dividends, maintain certain levels of net worth, liquidity, available borrowing capacity, and debt-to-net worth ratios and to comply with regulatory and investor requirements. The Company was in compliance with these covenants at June 30, 2005.

8. Financing on Mortgage Loans Held for Investment

When the Company sells loans through securitizations structured as financings, the related bonds are added to its balance sheet. As of June 30, 2005 and December 31, 2004, the financing on mortgage loans held for investment consisted of the following (dollars in thousands):


	June 30, 2005			December 31, 2004
Securitized bonds	$	18,378,752		12,379,524
Short-term financing on retained bonds		9,945		23,616
2003-NC5 NIM bond		—		7,583
2005-NC3 NIM bond		8,272		—
Debt issuance costs		(73,265	)	(81,427	)
Credit facility amounts reclassified from warehouse credit facilities		19,841		776,677

Total financing on mortgage loans held for investment	$	18,343,545		13,105,973

The Company’s maturity of financing on mortgage loans held for investment is based on certain prepayment assumptions. The Company estimates the average life to be between 1.9 and 4.0 years. The following table reflects the estimated maturity of the financing on mortgage loans held for investment as of June 30, 2005 (dollars in thousands):


Due in less than 1 year	$	4,850,728
Due in 2 years		5,587,436
Due in 3 years		2,410,775
Thereafter		5,494,606

	$	18,343,545

9. Convertible Senior Notes Private Offering

On July 8, 2003, New Century TRS closed a private offering of $175.0 million of convertible senior notes due July 3, 2008 pursuant to Rule 144A under the Securities Act of 1933. On July 14, 2003, the initial purchasers of the convertible senior notes exercised their option, in full, to acquire an additional $35.0 million principal amount of the convertible senior notes. The convertible senior notes bear interest at a rate of 3.50% per year, paid semi-annually, and, as of March 17, 2004, became convertible into New Century TRS common stock at a conversion price of $34.80 per share. The conversion price represents a 28.0% premium over the closing share price on July 8, 2003. Principal balance is not due until maturity. As a result of the Merger, the convertible senior notes became convertible into shares of New Century common stock. On February 14, 2005, New Century, New Century TRS and the trustee under the indenture governing the convertible senior notes entered into a second supplemental indenture pursuant to which New Century agreed to fully and unconditionally guarantee the due and punctual payment of the convertible senior notes.

On November 22, 2004, New Century TRS commenced an offer, upon the terms and subject to the conditions described in the prospectus related to the offer and the accompanying letter of transmittal, to convert all the outstanding convertible senior notes into shares of New Century common stock, cash, or a combination of both. The offer and withdrawal rights expired at midnight, New York City time, on December 23, 2004. On December 24, 2004, New Century TRS accepted for payment $204.5 million, or approximately 97.4%, of the $210.0 million aggregate principal amount of the convertible senior notes then outstanding, which constituted all of the convertible senior notes validly tendered and not withdrawn. In the aggregate, the holders who tendered their convertible senior notes for conversion in the offer received 6,236,431 shares of New Century common stock, which included 359,796 shares for additional consideration and an additional $3.4 million in cash for accrued interest through that date. On June 27, 2005, a holder of New Century TRS’

NEW CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

June 30, 2005 and 2004

convertible senior notes proposed, and it agreed, to convert $500,000 principal amount of convertible senior notes into 15,014 shares of its common stock. In connection with the conversion, the Company made a cash payment to the holder of $51,104, which included a conversion incentive fee and accrued interest through that date.

As of June 30, 2005, the number of shares of the Company’s common stock into which the remaining convertible senior notes were convertible into was 150,143, subject to certain adjustments under the terms of the convertible senior notes. For example, the terms of the convertible senior notes allow for the bondholder’s conversion rate to adjust if the Company’s dividend rate increases generally above a dividend yield of 1.75%, subject to certain other factors. As of June 30, 2005, the maximum number of shares of the Company’s common stock into which the remaining untendered convertible senior notes were convertible into was 176,637, subject to certain adjustments under the terms of the convertible senior notes. On July 29, 2005, concurrent with the payment of a cash dividend of $1.60 per share, the number of shares into which the remaining convertible senior notes were convertible was adjusted to 154,679.

10. Series A Cumulative Redeemable Preferred Stock Offering

In June 2005, the Company sold 4,500,000 shares, which included 300,000 shares sold to the underwriters to cover overallotments, of its Series A Cumulative Redeemable Preferred Stock, raising $109.0 million in net proceeds. The shares have a liquidation value of $25.00 per share and pay an annual coupon of 9.125% and are not convertible into any other securities. The Company may, at its option, redeem the Series A Cumulative Redeemable Preferred Stock, in the aggregate or in part, at any time on or after June 21, 2010. As such, this stock is not considered mandatorily or contingently redeemable under the provisions of SFAS 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity and is therefore classified as a component of equity. Accrued preferred stock dividends were $285,000 as of June 30, 2005.

11. Interest Income

The following table presents the components of interest income for the three and six months ended June 30, 2005 and 2004 (dollars in thousands):


	Three Months Ended June 30,			Six Months Ended June 30,
	2005		2004	2005	2004
Interest on mortgage loans held for investment	$	315,887	97,472	563,547	176,809
Interest on mortgage loans held for sale		98,830	89,071	175,029	158,063
Residual interest income		3,903	4,578	7,927	9,358
Other interest income		2,241	14	5,429	33

	$	420,861	191,135	751,932	344,263

NEW CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

June 30, 2005 and 2004

12. Interest Expense

The following table presents the components of interest expense for the three and six months ended June 30, 2005 and 2004 (dollars in thousands):


	Three Months Ended June 30,			Six Months Ended June 30,
	2005		2004	2005	2004
Interest on financing on mortgage loans held for investment	$	160,646	33,430	278,366	66,415
Interest on credit facilities and other short-term borrowings		54,850	29,743	97,056	49,686
Interest on convertible senior notes		60	2,126	123	4,250
Other interest expense		2,999	2,007	5,091	2,919

	$	218,555	67,306	380,636	123,270

13. Hedging Activities

In connection with the Company’s strategy to mitigate interest rate risk on its residual assets, mortgage loans held for sale and mortgage loans held for investment, the Company uses derivative financial instruments such as Euro Dollar futures and interest rate cap contracts. It is not the Company’s policy to use derivatives to speculate on interest rates. These derivative instruments have an active secondary market, and are intended to provide income and cash flow to offset potential reduced interest income and cash flow under certain interest rate environments, as well as to hedge the fair value of certain fixed-rate mortgage loans held for investment and certain mortgage loans held for sale. In accordance with SFAS 133, the derivative financial instruments and any related margin accounts are reported on the condensed consolidated balance sheets at their fair value.

In 2003, the Company began applying hedge accounting as defined by SFAS 133 for certain derivative financial instruments used to hedge cash flows related to its financing on mortgage loans held for investment. In June 2004, the Company began applying hedge accounting for certain derivative financial instruments to hedge the fair value of certain of its mortgage loans held for investment and certain of its mortgage loans held for sale. The Company designates certain derivative financial instruments, Euro Dollar futures and interest rate cap contracts, as hedge instruments under SFAS 133, and, at trade date, these instruments and their hedging relationship are identified, designated and documented.

The Company documents the relationships between hedging instruments and hedged items, as well as its risk management objectives and strategies for undertaking various hedge transactions. This process includes linking derivatives to specific assets and liabilities on the condensed consolidated balance sheet. The Company also assesses, both at the inception of the hedge and on an ongoing basis, whether the derivatives used in hedging transactions are highly effective in offsetting changes in cash flows or fair value of the hedged items. When it is determined that a derivative is not highly effective as a hedge or that it has ceased to be a highly effective hedge, the Company will discontinue hedge accounting prospectively.

When hedge accounting is discontinued because the Company determines that the derivative no longer qualifies as an effective hedge, the derivative will continue to be recorded on the condensed consolidated balance sheet at its fair value. Any change in the fair value of a derivative no longer qualifying as an effective hedge is recognized in current period earnings. When a hedge is terminated, it is derecognized at the time of termination. For terminated hedges or hedges that no longer qualify as effective, the effective position previously recorded is amortized or accreted into earnings with the hedged item.

Cash Flow Hedge Instruments - For derivative financial instruments designated as cash flow hedge instruments, the Company evaluates the effectiveness of these hedges against the interest payments related to its financing on mortgage loans held for investment being hedged to ensure there remains a highly effective correlation in the hedge relationship. To hedge the adverse effect of interest rate changes on the cash flows as a result of changes in the benchmark LIBOR interest rate, which affect the interest payments related to its financing on mortgage loans held for investment (variable rate debt) being hedged, the Company uses derivatives classified as cash flow hedges under SFAS 133. Once the hedge relationship is established, for those derivative instruments designated as qualifying cash flow hedges, the effective portion of the gain or loss on the derivative is reported as a component of other comprehensive income during the current period, and reclassified into earnings in the period(s) during which the hedged transaction

NEW CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

June 30, 2005 and 2004

affects earnings pursuant to SFAS 133. The ineffective portion and/or remaining gain or loss on the derivative instrument is recognized in earnings in the current period. During the three and six months ended June 30, 2005, the Company recognized a gain of $3.6 million from the ineffective portion of these hedges. For the three and six months ended June 30, 2004, the Company recorded a charge to earnings of approximately $1.2 million and $3.0 million, respectively, for the ineffective portion of these hedges.

As of June 30, 2005, the Company had open Euro Dollar futures contracts that were designated as hedging the variability in expected cash flows from the variable rate debt related to its financing on mortgage loans held for investment. The fair value of these contracts at June 30, 2005 was an $11.0 million asset and is included in prepaid expenses and other assets. The fair value of these contracts at June 30, 2004 was a $26.6 million asset, and is included in prepaid expenses and other assets. For the three and six months ended June 30, 2005, the Company recognized a gain of $13.9 million and $20.6 million, respectively, attributable to cash flow hedges, which has been recorded as a reduction of interest expense related to the Company’s financing on mortgage loans held for investment. Additionally, certain Euro Dollar futures contracts were terminated during the fourth quarter of 2004 in connection with the transfer of certain assets from New Century TRS to New Century. The fair value of the contracts at the termination date of ($30.9) million is being amortized from other comprehensive income over the original hedge period, as the hedged transaction affects future earnings. The amortization of $3.1 million and $6.1 million, respectively, for the three and six months ended June 30, 2005 have been recorded as an increase in interest expense related to the Company’s financing on mortgage loans held for investment. As of June 30, 2005, the related other comprehensive income balance was ($24.8) million.

Fair Value Hedge Instruments - For derivative financial instruments designated as fair value hedge instruments, the Company evaluates the effectiveness of these hedges against the fair value of the asset being hedged to ensure that there remains a highly effective correlation in the hedge relationship. To hedge the adverse effect of interest rate changes on the fair value of the hedged assets as a result of changes in the benchmark LIBOR interest rate, the Company uses derivatives classified as fair value hedges under SFAS 133. Once the hedge relationship is established, for those derivative instruments designated as qualifying fair value hedges, changes in the fair value of the derivative instruments and changes in the fair value of the hedged asset or liability attributable to the hedged risk are recorded in current earnings pursuant to SFAS 133. For the three months ended June 30, 2005, the Company recognized a loss of $3.8 million whereas for the six months ended June 30, 2005, the Company recognized a gain of $4.8 million, which was substantially offset by changes in the fair value of the hedged assets. The gain (loss) has been included as a component of gain on sale of mortgage loans

As of June 30, 2005, the Company had open Euro Dollar futures contracts that were designated as fair value hedges. The fair value of these contracts at June 30, 2005 was a $6.5 million liability and is included in accounts payable and accrued liabilities. The fair value of these contracts was substantially offset by changes in the fair value of the hedged assets.

Interest Rate Cap - Certain of the Company’s securitizations structured as financings are subject to interest rate cap contracts, or caplets, designated and documented as cash flow hedges, used to mitigate interest rate risk. The change in the fair value of these interest rate cap contracts is recorded in other comprehensive income each period. Amounts are reclassified out of other comprehensive income as the hedged transactions impact earnings. For the three and six months ended June 30, 2005, the Company recorded interest expense of $2.7 million and $5.0 million, respectively, related to the amortization of the caplets. The related net change to other comprehensive income due to the amortization and change in fair value of the caplets was $2.3 million. At June 30, 2004, such caplets were not designated as hedges. The fair value of these caplets was $2.2 million at June 30, 2005 and is included in prepaid expenses and other assets.

During the six months ended June 30, 2004, certain of the Company’s securitizations structured as financings were subject to interest rate cap contracts, not designated and documented as hedges, used to mitigate interest rate risk. The change in the fair value of these interest rate cap contracts is recorded through earnings each period, and is included as a component of interest expense. For the three months ended June 30, 2004, the Company recognized interest expense reduction of $1.8 million and for the six months ended June 30, 2004, the Company recognized interest expense of $338,000 related to the change in fair value of these cap contracts. The fair value of these cap contracts at June 30, 2004 was $3.2 million and is included in prepaid expenses and other assets. At June 30, 2005, all cap contracts were designated as hedges.

Non-designated Hedge Instruments - For derivative financial instruments not designated as hedge instruments, realized and unrealized changes in fair value are recognized in the period in which the changes occur.

The change in the fair value of Euro Dollar futures contracts, not designated and documented as hedges, used to mitigate interest rate risk in the Company’s residual assets is recorded through earnings each period, and is included as a component of gain on sale. During the three and six months ended June 30, 2005, the

NEW CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

June 30, 2005 and 2004

Company recognized a gain of zero and $395,000, respectively, related to the change in fair value of these contracts. These contracts were settled at March 31, 2005, and as such had no fair value as of that date. For the three and six months ended June 30, 2004, the Company recognized a gain of $3.2 million and $1.0 million, respectively, related to the change in the fair value of these contracts. The fair value of these contracts at June 30, 2004 was a $236,000 asset, and is included in prepaid expenses and other assets.

14. Income Taxes

Commencing in 2004, New Century has operated so as to qualify as a REIT for federal income tax purposes and will file a separate federal income tax return that does not include the operations of the Company’s non-REIT, or TRS, companies. Provided at least 90% of the taxable income of the REIT is distributed to stockholders in the manner prescribed by the Code, no income taxes are due on the income distributed in the form of dividends by the REIT. Effective tax rates for all periods reported upon in 2005 will therefore differ substantially from rates in 2004 when most of the operations of the Company were taxable. The table below outlines the calculation of tax expense and a comparison of the components comprising the differences in the tax rate for the consolidated group for the three and six months ended 2005 and 2004 (dollars in thousands):


	Three Months Ended June 30,									Six Months Ended June 30,
	2005							2004		2005						2004
	REIT			TRS		Total		Non-REIT		REIT		TRS		Total		Non-REIT
Earnings before income taxes	$	79,234		14,157		93,391		162,386		143,820		40,735		184,555		318,853
Taxable REIT earnings (expense) in excess of GAAP Earnings		41,763		(21,644	)	20,119		N/A		65,408		(36,677	)	28,731		N/A

Taxable REIT and taxable TRS income		120,997		(7,487	)	113,510		162,386		209,228		4,058		213,286		318,853
Expected dividend paid deduction for REIT level companies		(120,997	)	N/A		(120,997	)	N/A		(209,228	)	N/A		(209,228	)	N/A

Taxable income after REIT dividend paid deduction	$	—		(7,487	)	(7,487	)	162,386		—		4,058		4,058		318,853

Income tax (expense) benefit by entity		747		941		1,688		(60,009	)	—		(4,716	)	(4,716	)	(129,231	)
Add back earnings before income taxes		79,234		14,157		93,391		162,386		143,820		40,735		184,555		318,853

Net earnings by entity	$	79,981		15,098		95,079		102,377		143,820		36,019		179,839		189,622

Combined tax rate						-1.81	%	36.95	%					2.56	%	40.53	%

For 2005, the Company has available an additional “Dividend Paid Deduction” which was not required to be utilized in its 2004 tax year. After operating so as to qualify as a REIT in 2004, the Company’s first REIT dividend shareholder record date and payment date were both January 2005 events. By applying, via a tax election, only the portion of its January 2005 dividend representing taxable earnings on the 2004 tax return, the remaining dividend paid in January 2005 of approximately $27.0 million is deductible against the Company’s taxable REIT income in 2005, reducing the amount of distributions that otherwise would be required to avoid a tax liability on undistributed taxable income. Based upon this additional $27.0 million deduction and the Company’s dividend guidance for the current year, no accrual of taxes for taxable REIT income in excess of the dividends paid out to date are required for the six months ended June 30, 2005.

NEW CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

June 30, 2005 and 2004

15. Earnings per Share

The following table illustrates the computation of basic and diluted earnings per share for the periods indicated (dollars in thousands, except per share amounts):


	Three Months Ended June 30,			Six Months Ended June 30,
	2005		2004	2005	2004
Basic:
Net earnings	$	95,079	102,377	179,839	189,622
Less: Preferred stock dividends		285	—	285	—

Net earnings available to common stockholders	$	94,794	102,377	179,554	189,622

Weighted average number of common shares outstanding		55,376	33,299	55,079	33,129

Earnings per share	$	1.71	3.07	3.26	5.72

Diluted:
Net earnings available to common stockholders	$	94,794	102,377	179,554	189,622
Add: Interest and amortization of debt issuance costs on convertible senior notes, net of tax		77	1,254	95	2,486

Diluted net earnings	$	94,871	103,631	179,649	192,108

Weighted average number of common shares outstanding		55,376	33,299	55,079	33,129
Dilutive effect of convertible senior notes, stock options and restricted stock		2,020	8,863	2,253	8,960

		57,396	42,162	57,332	42,089

Earnings per share	$	1.65	2.46	3.13	4.56

For the three and six months ended June 30, 2005, the Company has included the effect of approximately 165,000 shares of common stock issuable related to its convertible senior notes in the computation of diluted earnings per share. For the three and six months ended June 30, 2004, the Company has included the effect of approximately 6.0 million shares of common stock issuable under its convertible senior notes in the computation of diluted earnings per share. Diluted earnings have been adjusted to add the interest expense and amortization of debt issuance costs recorded related to the convertible senior notes, net of the applicable income tax effect.

For the three months ended June 30, 2005 and 2004, options to purchase 313,000 and 855,000 shares, respectively, of the Company’s common stock were excluded from the calculation of diluted earnings per share because their effect was anti-dilutive. For the six months ended June 30, 2005 and 2004, options to purchase 196,000 and 795,000 shares, respectively, of the Company’s common stock were excluded from the calculation of diluted earnings per share because their effect was anti-dilutive.

16. Consolidating Financial Information

On February 14, 2005, New Century and New Century TRS entered into a second supplemental indenture in connection with New Century’s agreement to guarantee the payment of New Century TRS’ obligations with respect to its 3.50% convertible senior notes due 2008 (see Note 9—Convertible Senior Notes Private Offering).

NEW CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES

Unaudited Condensed Consolidating Schedule - Balance Sheet

June 30, 2005

(Dollars in thousands)

The following is consolidating information as to the financial condition, results of operations and cash flows of New Century:


	New Century Financial Corporation			New Century Residual IV Corporation		New Century Credit Corporation		New Century TRS Holdings, Inc.		Eliminations		Consolidated
Assets
Cash and cash equivalents	$	407,069		—		1,000		161,084		—		569,153
Restricted cash		—		553,219		—		183,040		—		736,259
Mortgage loans held for sale, net		—		—		—		5,989,211		—		5,989,211
Mortgage loans held for investment, net		—		15,454,417		25,750		3,071,569		(68,746	)	18,482,990
Residual interests in securitizations		—		—		—		145,563		—		145,563
Mortgage servicing assets		—		—		—		40,395		—		40,395
Accrued interest receivable		—		86,401		232		21,717		—		108,350
Income taxes, net		—		—		—		93,122		—		93,122
Office property and equipment, net		—		—		—		72,774		—		72,774
Prepaid expenses and other assets		512		23,088		(3,054	)	140,722		32,895		194,163
Due to (from) affiliates		251,805		(214,614	)	46,007		(83,198	)	—		—
Investment in subsidiary		1,433,997		—		—		—		(1,433,997	)	—

Total assets	$	2,093,383		15,902,511		69,935		9,835,999		(1,469,848	)	26,431,980

Liabilities and Stockholders’ Equity
Credit facilities on mortgage loans held for sale	$	—		—		—		5,627,207		—		5,627,207
Financing on mortgage loans held for investment, net		—		15,274,603		19,841		3,049,101		—		18,343,545
Accounts payable and accrued liabilities		92,329		18,251		—		300,771		—		411,351
Convertible senior notes, net		—		—		—		4,919		—		4,919
Notes payable		—		—		—		43,904		—		43,904

Total liabilities		92,329		15,292,854		19,841		9,025,902		—		24,430,926

Commitments and contingencies
Stockholders’ equity:
Preferred stock		45		—		—		—		—		45
Common stock		562		—		—		—		—		562
Additional paid-in capital		1,236,226		450,152		3,000		—		(453,152	)	1,236,226
Accumulated other comprehensive income (loss)		(20,668	)	933		—		(21,601	)	20,668		(20,668	)
Retained earnings, restricted		784,889		158,572		47,094		831,698		(1,037,364	)	784,889

Total stockholders’ equity		2,001,054		609,657		50,094		810,097		(1,469,848	)	2,001,054

Total liabilities and stockholders’ equity	$	2,093,383		15,902,511		69,935		9,835,999		(1,469,848	)	26,431,980

NEW CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES

Consolidating Schedule – Balance Sheet

December 31, 2004

(Dollars in thousands)


	New Century Financial Corporation			New Century Residual IV Corporation	New Century Credit Corporation	New Century TRS Holdings, Inc.		Eliminations		Consolidated
Assets
Cash and cash equivalents	$	742,239		—	1,000	99,615		—		842,854
Restricted cash		9,000		274,408	—	170,627		—		454,035
Mortgage loans held for sale, net		—		—	—	3,922,865		—		3,922,865
Mortgage loans held for investment, net		—		8,582,010	806,479	3,834,614		(27,779	)	13,195,324
Residual interests in securitizations		—		—	—	148,021		—		148,021
Mortgage servicing assets		—		—	—	8,249		—		8,249
Accrued interest receivable		—		43,374	1,328	21,506		—		66,208
Income taxes, net		—		—	—	180,840		—		180,840
Office property and equipment, net		—		—	—	47,266		—		47,266
Prepaid expenses and other assets		213		40,062	1,694	126,066		18,247		186,282
Due to (from) affiliates		(30,568	)	44,288	39,006	(52,726	)	—		—
Investment in subsidiary		1,240,315		—	—	—		(1,240,315	)	—

Total assets	$	1,961,199		8,984,142	849,507	8,506,943		(1,249,847	)	19,051,944

Liabilities and Stockholders’ Equity
Credit facilities on mortgage loans held for sale	$	—		—	—	3,704,268		—		3,704,268
Financing on mortgage loans held for investment, net		—		8,467,650	776,676	3,861,647		—		13,105,973
Accounts payable and accrued liabilities		82,634		8,277	59,853	169,344		—		320,108
Convertible senior notes, net		—		—	—	5,392		—		5,392
Notes payable		—		—	—	37,638		—		37,638

Total liabilities		82,634		8,475,927	836,529	7,778,289		—		17,173,379
Commitments and contingencies
Stockholders’ equity:
Common stock		547		—	—	—		—		547
Additional paid-in capital		1,101,091		450,152	3,000	—		(453,152	)	1,101,091
Accumulated other comprehensive income (loss)		(4,700	)	23,608	—	(28,307	)	4,699		(4,700	)
Retained earnings, restricted		781,627		34,455	9,978	756,961		(801,394	)	781,627

Total stockholders’ equity		1,878,565		508,215	12,978	728,654		(1,249,847	)	1,878,565

Total liabilities and stockholders’ equity	$	1,961,199		8,984,142	849,507	8,506,943		(1,249,847	)	19,051,944

NEW CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES

Unaudited Condensed Consolidating Schedule – Statements of Income

For the Three Months Ended

June 30, 2005 and 2004

(Dollars in thousands)


	June 30, 2005													June 30, 2004
	New Century Financial Corporation			New Century Residual IV Corporation		New Century Credit Corporation		New Century TRS Holdings, Inc.		Eliminations		Consolidated		New Century TRS Holdings, Inc.
Interest income	$	2,246		249,883		26,854		161,776		(19,898	)	420,861		191,135
Interest expense		(4,783	)	(103,094	)	(6,204	)	(104,474	)	—		(218,555	)	(67,306	)

Net interest income		(2,537	)	146,789		20,650		57,302		(19,898	)	202,306		123,829
Provision for losses on mortgage loans held for investment		—		(36,550	)	—		(325	)	—		(36,875	)	(17,112	)

Net interest income after provision for losses		(2,537	)	110,239		20,650		56,977		(19,898	)	165,431		106,717
Other operating income:
Gain (loss) on sale of mortgage loans		—		—		—		135,240		3,464		138,704		215,051
Servicing fees received (paid)		—		(15,991	)	(360	)	22,982		—		6,631		7,753
Other income		—		443		2,967		(12	)	—		3,398		829
Equity in net earnings of subsidiary		105,573		—		—		—		(105,573	)	—		—

Total other operating income		105,573		(15,548	)	2,607		158,210		(102,109	)	148,733		223,633

Operating expenses:
Personnel		4,565		—		—		143,496		—		148,061		109,000
General and administrative		3,255		—		—		39,069		—		42,324		34,551
Advertising and promotion		—		—		—		20,711		—		20,711		15,684
Professional services		137		—		—		9,540		—		9,677		8,729

Total operating expenses		7,957		—		—		212,816		—		220,773		167,964

Earnings before income taxes		95,079		94,691		23,257		2,371		(122,007	)	93,391		162,386
Income taxes		—		(747	)	—		(941	)	—		(1,688	)	60,009

Net earnings	$	95,079		95,438		23,257		3,312		(122,007	)	95,079		102,377

NEW CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES

Unaudited Condensed Consolidating Schedule – Statements of Income

For the Six Months Ended

June 30, 2005 and 2004

(Dollars in thousands)


	June 30, 2005													June 30, 2004
	New Century Financial Corporation			New Century Residual IV Corporation		New Century Credit Corporation		New Century TRS Holdings, Inc.		Eliminations		Consolidated		New Century TRS Holdings, Inc.
Interest income	$	4,574		417,877		46,429		306,175		(23,123	)	751,932		344,263
Interest expense		(5,200	)	(168,685	)	(14,108	)	(192,643	)	—		(380,636	)	(123,270	)

Net interest income		(626	)	249,192		32,321		113,532		(23,123	)	371,296		220,993
Provision for losses on mortgage loans held for investment		—		(65,701	)	—		(1,412	)	—		(67,113	)	(36,981	)

Net interest income after provision for losses		(626	)	183,491		32,321		112,120		(23,123	)	304,183		184,012
Other operating income:
Gain (loss) on sale of mortgage loans		—		513		—		281,139		(3,196	)	278,456		417,027
Servicing fees received (paid)		—		(27,967	)	(496	)	41,816		—		13,353		13,649
Other income		—		887		5,292		1,092		—		7,271		829
Equity in net earnings of subsidiary		193,389		—		—		—		(193,389	)	—		—

Total other operating income		193,389		(26,567	)	4,796		324,047		(196,585	)	299,080		431,505

Operating expenses:
Personnel		6,209		—		—		270,374		—		276,583		189,966
General and administrative		6,453		—		—		77,646		—		84,099		64,383
Advertising and promotion		—		—		—		40,543		—		40,543		29,249
Professional services		262		—		—		17,221		—		17,483		13,066

Total operating expenses		12,924		—		—		405,784		—		418,708		296,664

Earnings before income taxes		179,839		156,924		37,117		30,383		(219,708	)	184,555		318,853
Income taxes		—		—		—		4,716		—		4,716		129,231

Net earnings	$	179,839		156,924		37,117		25,667		(219,708	)	179,839		189,622

NEW CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES

Unaudited Consolidating Statements of Cash Flows

Six Months Ended June 30, 2005 and 2004

(Dollars in thousands)


	June 30, 2005													June 30, 2004
	New Century Financial Corporation			New Century Residual IV Corporation		New Century Credit Corporation		New Century TRS Holdings, Inc.		Eliminations		Consolidated		New Century TRS Holdings, Inc.
Cash flows from operating activities:
Net earnings	$	179,839		156,924		37,117		25,667		(219,708	)	179,839		189,622
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization		1,359		35,019		—		20,933		—		57,311		12,105
Cash flows received from residual interests		—		—		—		12,210		—		12,210		27,537
Accretion of NIRs		—		—		—		(7,927	)	—		(7,927	)	(9,358	)
NIR gains		—		—		—		1,670		—		1,670		(21,871	)
Initial deposits to over-collateralization accounts		—		—		—		(7,914	)	—		(7,914	)	(10,871	)
Retained bond		—		—		—		—		—		—		(3,536	)
Servicing gains		—		—		—		(35,893	)	—		(35,893	)	—
Fair value adjustment of residual securities		—		—		—		4,419		—		4,419		6,770
Provision for losses on mortgage loans held for investment		—		65,701		—		1,412		—		67,113		36,981
Provision for repurchase losses		—		—		—		6,072		—		6,072		3,184
Mortgage loans originated or acquired for sale		—		—		—		(15,587,599	)	—		(15,587,599	)	(17,234,447	)
Mortgage loan sales, net		—		—		—		13,520,803		—		13,520,803		14,140,969
Principal payments on mortgage loans held for sale		—		—		—		115,017		—		115,017		55,709
Increase in credit facilities on mortgage loans held for sale		—		—		—		1,922,939		—		1,922,939		2,808,168
Due to (from) affiliates		(282,373	)	258,902		(7,002	)	30,473		—		—		—
Tax benefit related to non-qualified stock options		—		—		—		14,594		—		14,594		—
Net change in other assets and liabilities		4,236		(34,448	)	(54,009	)	113,634		(14,648	)	14,765		51,217
Equity in undistributed earnings of subsidiaries		(193,389	)	—		—		—		193,389		—		—

Net cash provided by (used in) operating activities		(290,328	)	482,098		(23,894	)	150,510		(40,967	)	277,419		52,179

Cash flows from investing activities:
Mortgage loans originated or acquired for investment, net		—		(9,037,680	)	784,406		37,991		40,967		(8,174,316	)	(3,457,776	)
Principal payments on mortgage loans held for investment		—		2,034,024		(3,677	)	729,553		—		2,759,900		739,313
Purchases of office property and equipment		—		—		—		(35,618	)	—		(35,618	)	(12,594	)

Net cash provided by (used in) investing activities		—		(7,003,656	)	780,729		731,926		40,967		(5,450,034	)	(2,731,057	)

Cash flows from financing activities:
Proceeds from issuance of financing on mortgage loans held for investment, net		—		8,575,660		—		(1,204	)	—		8,574,456		5,017,915
Repayments of financing on mortgage loans held for investment		—		(1,775,291	)	—		(813,116	)	—		(2,588,407	)	(640,625	)
Decrease in credit facilities on mortgage loans held for investment		—		—		(756,835	)	—		—		(756,835	)	(1,680,487	)
Proceeds from issuance of preferred stock		108,956		—		—		—		—		108,956		—
Proceeds from notes payable		—		—		—		15,726		—		15,726		17,756
Repayments of notes payable		—		—		—		(9,460	)	—		(9,460	)	(6,248	)
Change in restricted cash		9,000		(278,811	)	—		(12,413	)	—		(282,224	)	(205,486	)
Payment of dividends on common stock		(168,938	)	—		—		—		—		(168,938	)	(12,132	)
Net proceeds from issuance of stock		17,933		—		—		(500	)	—		17,433		4,527
Purchase of treasury stock		(11,793	)	—		—		—		—		(11,793	)	—

Net cash provided by (used in) financing activities		(44,842	)	6,521,558		(756,835	)	(820,967	)	—		4,898,914		2,495,220

Net increase (decrease) in cash and cash equivalents		(335,170	)	—		—		61,469		—		(273,701	)	(183,658	)
Cash and cash equivalents, beginning of period		742,239		—		1,000		99,615		—		842,854		278,598

Cash and cash equivalents, end of period	$	407,069		—		1,000		161,084		—		569,153		94,940

NEW CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

June 30, 2005 and 2004

17. Segment Reporting

The operating segments reported below are the segments of the Company for which separate financial information is available and for which revenues and operating income amounts are evaluated regularly by management in deciding how to allocate resources and in assessing performance.

The portfolio segment reflects the Company’s investment in its mortgage loan portfolio, which produces net interest income. The mortgage loan operations segment reflects purchases and originations of non-conforming residential mortgage loans through relationships with various mortgage companies, mortgage brokers, correspondent lenders, and directly to borrowers. The mortgage loan operations segment records (i) interest income, interest expense, provision for mortgage loans losses on the mortgage loans it holds prior to selling its loans to the portfolio segment or in the whole loan market, (ii) interest income, interest expense, provision for mortgage loan losses on mortgage loans it holds in its portfolio and (iii) gain on sale of mortgage loans. The servicing segment services loans, seeking to ensure that loans are repaid in accordance with their terms and earns a servicing fee based upon the dollar amount of the servicing portfolio.

For its portfolio segment, management evaluates mortgage assets at the segment level. As such, the quarter end balances of these assets are included herein.

For the three and six months ended June 30, 2005 and 2004 (dollars in thousands):


	Three Months Ended June 30, 2005
	Qualified REIT Subsidiary			Taxable REIT Subsidiary
	Portfolio			Portfolio		Mortgage Loan Operations		Servicing and other	Total
Interest income	$	250,766		60,705		109,390		—	420,861
Interest expense		(114,081	)	(46,565	)	(57,909	)	—	(218,555	)

Net interest income		136,685		14,140		51,481		—	202,306
Provision for losses on mortgage loans held for investment		(36,550	)	(325	)	—		—	(36,875	)

Net interest income after provision for losses		100,135		13,815		51,481		—	165,431

Other operating income:
Gain on sale of mortgage loans		—		—		138,704		—	138,704
Servicing & other		(12,942	)	—		(5,270	)	28,241	10,029

Total other operating income		(12,942	)	—		133,434		28,241	148,733

Operating expenses		7,959		—		201,774		11,040	220,773

Earnings before income taxes	$	79,234		13,815		(16,859	)	17,201	93,391

Funding volume	$	—		—		13,444,170		—	13,444,170

Securitizations structured as financings	$	5,890,404		—		—		—	5,890,404

Mortgage assets at June 30, 2005	$	15,411,421		3,071,569		5,989,211		—	24,472,201

NEW CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

June 30, 2005 and 2004


	Three Months Ended June 30, 2004
	Taxable REIT Subsidiary
	Portfolio			Mortgage Loan Operations		Servicing and other	Total
Interest income	$	102,050		89,085		—	191,135
Interest expense		(33,430	)	(33,876	)	—	(67,306	)

Net interest income		68,620		55,209		—	123,829
Provision for losses on mortgage loans held for investment		(17,112	)	—		—	(17,112	)

Net interest income after provision for losses		51,508		55,209		—	106,717

Other operating income:
Gain on sale of mortgage loans		—		215,051		—	215,051
Servicing & other		—		(6,503	)	15,085	8,582

Total other operating income		—		208,548		15,085	223,633

Operating expenses		—		161,786		6,178	167,964

Earnings before income taxes	$	51,508		101,971		8,907	162,386

Funding volume	$	—		12,255,867		—	12,255,867

Securitizations structured as financings	$	3,457,776		—		—	3,457,776

Mortgage assets at June 30, 2004	$	9,146,472		4,784,222		—	13,930,694

NEW CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

June 30, 2005 and 2004


	Six Months Ended June 30, 2005
	Qualified REIT Subsidiary			Taxable REIT Subsidiary
	Portfolio			Portfolio		Mortgage Loan Operations		Servicing and other	Total
Interest income	$	432,210		125,717		194,005		—	751,932
Interest expense		(187,993	)	(90,373	)	(102,270	)	—	(380,636	)

Net interest income		244,217		35,344		91,735		—	371,296
Provision for losses on mortgage loans held for investment		(65,701	)	(1,412	)	—		—	(67,113	)

Net interest income after provision for losses		178,516		33,932		91,735		—	304,183

Other operating income:
Gain on sale of mortgage loans		513		—		277,943		—	278,456
Servicing & other		(22,284	)	—		(10,619	)	53,527	20,624

Total other operating income		(21,771	)	—		267,324		53,527	299,080

Operating expenses		12,925		—		384,035		21,748	418,708

Earnings before income taxes	$	143,820		33,932		(24,976	)	31,779	184,555

Funding volume	$	—		—		23,695,737		—	23,695,737

Securitizations structured as financings	$	8,881,728		—		—		—	8,881,728

Mortgage assets at June 30, 2005	$	15,411,421		3,071,569		5,989,211		—	24,472,201

NEW CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

June 30, 2005 and 2004


	Six Months Ended June 30, 2004
	Taxable REIT Subsidiary
	Portfolio			Mortgage Loan Operations		Servicing and other	Total
Interest income	$	186,167		158,096		—	344,263
Interest expense		(66,415	)	(56,855	)	—	(123,270	)

Net interest income		119,752		101,241		—	220,993
Provision for losses on mortgage loans held for investment		(36,981	)	—		—	(36,981	)

Net interest income after provision for losses		82,771		101,241		—	184,012

Other operating income:
Gain on sale of mortgage loans		—		417,027		—	417,027
Servicing & other		—		(12,717	)	27,195	14,478

Total other operating income		—		404,310		27,195	431,505

Operating expenses		—		284,822		11,842	296,664

Earnings before income taxes	$	82,771		220,729		15,353	318,853

Funding volume	$	—		20,692,223		—	20,692,223

Securitizations structured as financings	$	3,457,776		—		—	3,457,776

Mortgage assets at June 30, 2004	$	9,146,472		4,784,222		—	13,930,694

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

This Quarterly Report on Form 10-Q represents an update to the more detailed and comprehensive disclosures included in our Annual Report on Form 10-K for the year ended December 31, 2004. As such, a reading of the Annual Report on Form 10-K is necessary to an informed understanding of the following discussions.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes contained elsewhere herein. As used herein, except where the context suggests otherwise, for time periods on and after October 1, 2004, the terms “the company,” “our,” “its,” “we,” “the group,” and “us” refer to New Century Financial Corporation and its consolidated subsidiaries and for the time periods before October 1, 2004, the terms “the company,” “our,” “its,” “we,” “the group,” and “us” mean New Century TRS Holdings, Inc. and its consolidated subsidiaries.

General

New Century Financial Corporation is a real estate investment trust, or REIT, that, through its taxable REIT subsidiaries, operates one of the nation’s largest subprime mortgage finance companies. We have been originating and purchasing subprime loans since 1996, and, in the fourth quarter of 2004, we began operating our business as a REIT. We will elect to be taxed as a REIT when we file our tax returns for 2004. In connection with our REIT conversion, we closed an offering of approximately $770.0 million of our common stock, net of underwriting and other expenses. The net proceeds from the offering have been used primarily to build a portfolio of mortgage assets. We expect that our portfolio of mortgage assets will provide a relatively stable source of revenues and will contribute a significant portion of our earnings in 2005.

We originate and purchase primarily first mortgage products nationwide. We focus on lending to individuals whose borrowing needs are generally not fulfilled by traditional financial institutions because they do not satisfy the credit, documentation or other underwriting standards prescribed by conventional mortgage lenders and loan buyers. We originate and purchase loans on the basis of the borrower’s ability to repay the mortgage loan, the borrower’s historical pattern of debt repayment and the amount of equity in the borrower’s property, as measured by the borrower’s loan-to-value ratio, or LTV. We believe we have developed a comprehensive and sophisticated process of credit evaluation and risk-based pricing that allows us to effectively manage the potentially higher credit risks associated with this segment of the mortgage industry.

We have historically sold our loans through both whole loan sales and securitizations. Until 2003, we typically structured those securitizations as sales. Since 2003, we have retained a portion of our loan production for investment on our balance sheet through securitizations structured as financings rather than sales. For 2005, we expect to retain between 20% and 30% of our total loan production for investment on our balance sheet. However, a substantial majority of these investments occurred during the first six months of 2005 and the substantial majority of our whole loan sales will occur during the second half of 2005. Whole loan sales provide greater current period earnings relative to investments in securitizations, which recognize income over time. Given the anticipated timing of our investments in securitizations, we expect that our reported earnings in the second half of 2005 will exceed our reported earnings in the first half of 2005.

We converted to a REIT in 2004 because we believe that the REIT structure provides the most tax-efficient way to hold mortgage loans on our balance sheet. We expect that we will continue to increase the size of our on-balance sheet mortgage loan portfolio, producing more diverse revenues across a variety of interest rate environments. We intend to evaluate, from time to time, whether we should engage in various capital raising activities, which may include offerings of debt, preferred stock, common stock or equity-linked securities.

The Merger and Related Transactions

On April 5, 2004, the board of directors of New Century TRS Holdings, Inc., or New Century TRS, formerly known as New Century Financial Corporation, approved a plan to change its capital structure to enable it to qualify as a REIT for U.S. federal income tax purposes. The board of directors of New Century TRS based its decision to convert New Century TRS to a REIT on several factors, including the potential for increased stockholder return, tax efficiency and ability to achieve growth objectives. On April 19, 2004, the board of directors of New Century TRS approved certain legal and financial matters related to the proposed REIT conversion.

On April 12, 2004, New Century TRS formed New Century Financial Corporation, or New Century, a Maryland corporation formerly known as New Century REIT, Inc. On September 15, 2004, the stockholders of both New Century and New Century TRS approved and adopted the merger agreement that implemented the restructuring of New Century TRS in order for it to qualify as a REIT.

Pursuant to the merger agreement, (i) a wholly-owned subsidiary of New Century merged with and into New Century TRS, with New Century TRS as the surviving corporation, (ii) each outstanding share of common stock of New Century TRS was converted into one share of New Century common stock, (iii) New Century TRS changed its name to “New Century TRS Holdings, Inc.” and became a wholly-owned subsidiary of New Century and (iv) New Century changed its name to “New Century Financial Corporation” and became the publicly-traded NYSE-listed parent company that succeeded to and continued to operate substantially all of the existing businesses of New Century TRS. The merger was consummated and became effective on October 1, 2004.

The board of directors, committees of the board of directors and management of New Century immediately after the consummation of the merger had the same membership as the board of directors, committees of the board of directors and management of New Century TRS immediately prior to the consummation of the merger.

As a result of the merger and the related capital-raising activities, we expect that a significant source of our revenue prospectively will be interest income generated from our portfolio of mortgage loans held by our REIT and our qualified REIT subsidiaries. We also expect to continue to generate revenue through our taxable REIT subsidiaries from the sale of loans, servicing income and loan origination fees. We expect the primary components of our expenses to be (i) interest expense on our credit facilities, securitizations, and other borrowings, (ii) general and administrative expenses, and (iii) payroll and related expenses arising from our origination and servicing businesses.

Executive Summary

In the fourth quarter of 2004, we began operating our business as a REIT and began deploying the $770.0 million of capital we raised to establish a portfolio of mortgage assets. One of our primary objectives for the first six months of 2005 was to continue to grow our REIT portfolio of mortgage loans. During the first six months of 2005, we completed $8.9 billion of securitizations structured as financings at the REIT, increasing the balance of the REIT mortgage loans held for investment portfolio to $15.3 billion at June 30, 2005. The combination of the REIT and TRS mortgage loan portfolios resulted in a total mortgage loans held for investment portfolio of $18.5 billion at June 30, 2005.

We expect that a majority of our income will come from the interest we earn on the mortgage assets we hold for investment. We will supplement that income with earnings from our taxable REIT subsidiaries, which will continue to originate, service and sell mortgage loans.

Overview

Currently, there are two key components to our business: (i) our mortgage loan portfolio held by our REIT, our qualified REIT subsidiaries and our taxable REIT subsidiaries, and (ii) our origination, sales activities, and servicing conducted through our taxable REIT subsidiaries.

REIT and TRS Mortgage Loan Portfolios

The largest component of our revenue is derived from the income we earn on our portfolio of mortgage loans held for investment, which totaled $18.5 billion at June 30, 2005.

During 2003, we shifted our strategy to address the cyclical nature of our earnings with the goal of generating a more stable long-term earnings stream. Our principal strategy to achieve this goal is to hold loans on our balance sheet. Because our credit facilities are short-term in nature and generally do not allow loans to be financed through the facility for longer than 180 days, a securitization structure offers the most attractive means to finance loans on our balance sheet. To support the goal of matching the timing of cash flows with the recognition of earnings on our loans, during 2003 we began to structure our securitizations as financings rather than sales. We make an initial cash investment so that the securitization trusts begin to return cash flow to us beginning in the first month following securitization. Therefore, we require cash and capital to make an initial investment, as well as to support the loans on our balance sheet. During 2003 and 2004, we retained between 20% to 25% of our loan production through securitizations. During the first six months of 2005, we retained approximately 37% of our loan production to support our balance sheet strategy to deploy the capital raised in 2004 by growing our portfolio of mortgage loans held for investment. For the year of 2005, we expect to retain between 20% and 30% of our total loan production.

Our portfolio of mortgage loans held for investment generally consists of a representative cross-section of our overall production volume. This portfolio earns net interest income over its life, which is generally three years, on a weighted-average basis. The net interest income we earn from our portfolio is influenced by a variety of factors, including the performance of the loans and the level and direction of interest rates.

We measure the performance of the loans by monitoring prepayment rates and credit losses. Faster prepayments reduce the weighted average life of the portfolio, reducing net interest income. Cumulative credit losses, which we generally assume to be approximately 3% of the original balance of the loans, also reduce net interest income.

Generally, our loans have a fixed-rate for a period of time, while the underlying bonds that finance those loans are variable rate based on one-month LIBOR, resulting in interest rate risk. Our hedging strategies to mitigate this interest rate risk are designed to lock in our interest margin at the inception of each securitization.

Originations and Sales

The second major component of our business is our ability to originate and purchase mortgage loans at a reasonable cost and to sell a portion of those loans in the secondary mortgage market at prices that result in an attractive operating margin. We measure our operating margin as the sum of the price we receive for our loans, plus the net interest we earn for the period of time we hold the loans, less the cost to originate the loans. For the past several years, our secondary marketing strategy included a combination of both whole loan sales and securitizations of our loans.

Loan origination volumes in our industry have historically fluctuated from year to year and are affected by such external factors as home values, the level of interest rates and consumer debt, and the overall condition of the economy. In addition, the premiums we receive from the secondary market for our loans have also fluctuated and are influenced by each of these factors, but predominantly the interest rate environment. As a consequence, the business of originating and selling loans is cyclical.

The operating margin of our origination franchise has three components: (i) net interest income; (ii) gain on sale of mortgage loans; and (iii) loan origination or acquisition costs. We use the operating margin as our principal metric to measure the value of our origination franchise.

Net interest income on mortgage loans held for sale—We typically hold our mortgage loans held for sale for an average period of 30 to 45 days before they are sold in the secondary market or securitized. During that time, we earn the coupon rate of interest paid by the borrower and we pay interest to the lenders that provide our financing facilities. During 2004, the difference between these interest rates was approximately 4.7%. During the six months ended June 30, 2005, the margin decreased to 3.0% as short-term rates have increased more rapidly than our average coupon rates. We manage the timing of our sales to optimize the net interest income we earn on the loans, while preserving the ability to sell the loans at the maximum price.

Gain on sale of mortgage loans—Gain on sale of mortgage loans is affected by the condition of the secondary market for our loans. During the latter half of 2004 and the first six months of 2005, as interest rates began to rise, the underlying factors that affect secondary market pricing remained somewhat stable. However, as short-term rates rose faster than long-term rates (a flatter yield curve), the prices we received for our loans began to decline relative to historic levels. Further, due to competitive pressures we have not raised the interest rates we charge our borrowers consistently with increases in the overall interest rate environment, reducing gain on sale margins in the first six months of 2005 compared to the first six months of 2004. We expect the gain on sale of mortgage loans to remain at lower margins, similar to the margins during first six months of 2005. During the first six months of 2005, we completed a $989.2 million fixed-rate securitization structured as a sale which resulted from an opportunity to match fixed-rate assets with fixed-rate liabilities. We may continue to utilize securitizations structured as sales in the second half of 2005 in order to maximize the secondary market value of our production.

Loan origination or acquisition cost—We also measure and monitor the cost to originate our loans. We typically refer to this as our loan acquisition costs. Loan acquisition costs include the fees paid to wholesale brokers and correspondents, direct loan origination costs, including commissions and corporate overhead costs, less points and fees received from borrowers, divided by total production volume. Loan acquisition costs do not include profit-based compensation, servicing division overhead, parent company expenses and startup operations. During the year of 2004 and through the first quarter of 2005, our loan acquisition costs remained relatively stable and generally fluctuated inversely with our production volume. As a result of the competitive environment and its impact on the value of our loans, we began implementing cost-cutting measures designed to reduce our loan acquisition costs. The cost-cutting measures we implemented in the first quarter of 2005, which included changes in production costs, controlling growth in non-sales overhead and a greater focus on discretionary spending, as well as increased production during the three months ended June 30, 2005, have resulted in a significant reduction of our loan acquisition costs during the second quarter of 2005.

These two components of our business account for most of our operating revenues and expenses. Our origination platform provides the source of the loan volume to conduct both parts of our business.

Loan Originations and Purchases

As of June 30, 2005, our Wholesale Division operated through 27 regional operating centers. Our Wholesale Division originated or purchased $21.2 billion in loans during the six months ended June 30, 2005. As of June 30, 2005, our Retail Division originated loans through 76 sales offices, including our centralized telemarketing unit. Our Retail Division originated $2.5 billion in loans during the six months ended June 30, 2005.

During the six months ended June 30, 2005, approximately $12.4 billion, or 52.5%, of our mortgage loan production consisted of cash-out refinancings, where the borrowers refinanced their existing mortgages and received cash representing a portion of the equity in their homes. For the same period, approximately $9.2 billion, or 38.9%, of our mortgage loan production consisted of home purchase finance loans. The remainder of our mortgage production, $2.0 billion, or 8.6%, consisted of transactions in which borrowers refinanced their existing mortgages to obtain a better interest rate, a lower payment or different loan maturity, or rate and term refinance transactions. For the six months ended June 30, 2004, total originations consisted of $12.9 billion, or 62.1%, of cash-out refinancings, $6.7 billion, or 32.4%, of home purchase financings, and $1.1 billion, or 5.5%, of rate and term refinance transactions. Market and economic conditions, as well as our focus on increasing our home purchase business, have resulted in the shift in mix between cash-out refinancings and our home purchase business. We believe that our current rate of business is sustainable and that our origination strategies and initiatives are consistent with that belief. If we are successful in maintaining this mix, we believe our exposure to interest rate cyclicality will be somewhat reduced.

We have experienced considerable growth of our interest-only product. During the six months ended June 30, 2005, originations of interest-only loans totaled $7.8 billion, or 33.0%, of total originations. Interest-only originations during the six months ended June 30, 2004 totaled $3.5 billion, or 16.9%, of total originations during the period. We believe our stricter underwriting guidelines and the stronger credit characteristics of these loans mitigate their perceived higher risk.

For the six months ended June 30, 2005, full documentation loans as a percentage of originations totaled $12.3 billion, or 52.1%, limited documentation loans totaled $923.0 million, or 3.9%, and stated documentation loans totaled $10.4 billion, or 44.0%. Full documentation loans generally require applicants to submit two written forms of verification of stable income for at least 12 months. Limited documentation loans generally require applicants to submit 12 consecutive monthly bank statements on their individual bank accounts. Stated income documentation loans are based upon stated monthly income if the applicant meets certain criteria. For the six months ended June 30, 2004, full documentation loans as a percentage of total originations totaled $10.9 billion, or 52.9%, limited documentation loans totaled $978.0 million, or 4.7%, and stated documentation loans totaled $8.8 billion, or 42.4%. Generally, economic and market conditions determine product mix, including product introductions and offerings by competitors. As these factors change, product mix, including required documentation, fluctuates as well. We designed our underwriting standards and quality assurance programs to insure that loan quality is consistent and meets our guidelines, even as the documentation type mix varies.

The following table sets forth selected information relating to loan originations and purchases during the periods shown (dollars in thousands):


	Three Months Ended June 30,					Six Months Ended June 30,
	2005			2004		2005		2004
Wholesale originations	$	12,131,216		11,086,242		21,204,705		18,781,248
Retail originations		1,312,954		1,169,625		2,491,032		1,910,975

Total originations		13,444,170		12,255,867		23,695,737		20,692,223
Fixed-rate mortgages		3,032,998		4,333,968		5,359,577		6,659,613
Adjustable-rate mortgages:
Traditional		5,331,874		5,386,726		10,515,293		10,534,808
Interest Only		5,079,298		2,535,173		7,820,867		3,497,802

Total originations		13,444,170		12,255,867		23,695,737		20,692,223
Purchases		5,602,698		4,218,979		9,226,655		6,703,353
Refinances:
Cash-out refinances		6,695,743		7,368,344		12,441,653		12,850,155
Rate/term refinances		1,145,729		668,544		2,027,429		1,138,715

Total originations		13,444,170		12,255,867		23,695,737		20,692,223
Full documentation		7,150,722		6,461,693		12,349,786		10,947,098
Limited documentation		353,661		546,921		922,591		978,213
Stated documentation		5,939,787		5,247,253		10,423,360		8,766,912

Total originations	$	13,444,170		12,255,867		23,695,737		20,692,223
Average principal balance of loans originated	$	180		175		180		172
Weighted average FICO score of loans originated		632		634		630		628
Percent of loans secured by first mortgages		93.8	%	96.2	%	94.5	%	96.5	%
Weighted average LTV ratio(1)		81.5	%	80.7	%	81.3	%	81.1	%
Weighted average interest rates:
Fixed-rate mortgages - initial rate		7.8	%	6.9	%	7.7	%	7.0	%
Adjustable-rate mortgages - initial rate		7.1	%	6.8	%	7.1	%	6.8	%
Adjustable-rate mortgages - margin over index		5.7	%	5.5	%	5.7	%	5.5	%
Total originations		7.2	%	6.8	%	7.2	%	6.9	%
Percentage of loans originated in top two credit grades		90.3	%	87.3	%	89.0	%	86.0	%
Percentage of loans originated in bottom two credit grades		2.1	%	2.7	%	2.5	%	3.0	%

(1)	Weighted average LTV is the LTV of the first lien mortgages and combined LTV of the second lien mortgages.

Secondary Market Transactions

Historically, one of our major components of revenue has been the recognition of gain on sale of our loans through whole loan sales and, until 2003, securitizations structured as sales. In a whole loan sale, we recognize and receive a cash gain upon sale. In a securitization structured as a sale for financial reporting purposes, we typically recognize a gain on sale at the time the loans are sold, and receive cash flows over the actual life of the loans.

Since the first quarter of 2003, we have structured all but one of our securitizations as financings rather than sales. Such structures do not result in gain on sale at the time of the transaction, but rather yield interest income as the payments on the underlying mortgages are received. The following table sets forth secondary marketing transactions for the periods indicated (dollars in thousands):


	Three Months Ended June 30,								Six Months Ended June 30,
	2005				2004				2005				2004
	Amount		% of Sales		Amount		% of Sales		Amount		% of Sales		Amount		% of Sales
Premium whole loan sales	$	5,933,841	46.0	%	$	6,403,993	62.5	%	$	12,385,139	55.3	%	$	13,713,146	78.0	%
Securitizations structured as sales (1)		989,221	7.7	%		337,148	3.3	%		989,221	4.4	%		337,148	1.9	%

Total premium sales		6,923,062	53.7	%		6,741,141	65.8	%		13,374,360	59.7	%		14,050,294	79.9	%
Discounted whole loan sales		80,878	0.6	%		50,153	0.5	%		146,444	0.7	%		90,675	0.5	%

Total sales		7,003,940	54.3	%		6,791,294	66.3	%		13,520,804	60.4	%		14,140,969	80.4	%
Securitizations structured as financings		5,890,404	45.7	%		3,457,776	33.7	%		8,881,728	39.6	%		3,457,776	19.6	%

Total secondary market transactions	$	12,894,344	100.0	%	$	10,249,070	100.0	%	$	22,402,532	100.0	%	$	17,598,745	100.0	%

(1)	During the six months ended June 30, 2004 we completed a $337.1 million securitization structured as a sale, related to our investment in Carrington Mortgage Credit Fund I, LP.

Whole Loan Sales

During the three months ended June 30, 2005, whole loans sales and securitizations structured as sales accounted for $7.0 billion, or 54.3%, of our total secondary market transactions. The weighted average premiums received on whole loans sales was 2.28% of the original principal balance of the loans sold, including certain hedge gains and premiums received for servicing rights for the three months ended June 30, 2005. For the same period in 2004, whole loans sales and securitizations structured as sales accounted for $6.8 billion, or 66.3%, of our total secondary market transactions and the weighted average premiums received was 4.27%, including premiums received for servicing rights. During the six months ended June 30, 2005, whole loans sales and securitizations structured as sales accounted for $13.5 billion, or 60.4%, of our total secondary market transactions. The weighted average premiums received on whole loans sales was 2.63% of the original principal balance of the loans sold, including certain hedge gains and premiums received for servicing rights for the six months ended June 30, 2005. For the same period in 2004, whole loans sales and securitizations structured as sales accounted for $14.1 billion, or 80.4%, of our total secondary market transactions and the weighted average premiums received was 4.04%, including premiums received for servicing rights. No hedge gains related to whole loans sales were recognized in 2004. The underlying factors that affect secondary market pricing have remained somewhat stable. However, as short-term interest rates have risen faster than long-term interest rates (a flatter yield curve), the prices we received for our loans began to decline relative to historic levels. Further, we have not raised the interest rates we charge our borrowers consistent with increases in the overall interest rate environment, reducing gain on sale margins in the three and six months ended June 30, 2005 compared to the same periods in 2004.

Securitizations Structured as Financings

During the three months ended June 30, 2005, we completed two securitizations totaling $5.9 billion, and during the six months ended June 30, 2005, we completed three securitizations totaling $8.9 billion, which we structured as financings for accounting purposes under Statement of Financial Accounting Standards No. 140, or SFAS 140. The “portfolio-based” accounting treatment for securitizations structured as financings and recorded on-balance sheet is designed to more closely match the recognition of income with the receipt of cash payments. Because we do not record gain on sale revenue in the period in which the securitization structured as a financing occurs, the use of such portfolio-based accounting structures will result in lower income in the period in which the securitization occurs than would a traditional securitization structured as a sale. However, the recognition of income as interest payments are received on the underlying mortgage loans is expected to result in higher income recognition in future periods than would a securitization structured as a sale. During the six months ended June 30, 2004, we completed two securitizations totaling $3.5 billion, which we structured as financings. The increase in securitizations structured as financings in 2005 is the result of our strategy to retain more of our volume on our balance sheet in order to grow our REIT portfolio.

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