e10vk
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
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For the fiscal year ended December 31, 2005 |
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OR |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
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For the transition period
from to |
Commission file number 001-32314
NEW CENTURY FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
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Maryland
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56-2451736 |
(State or other jurisdiction
incorporation or organization) |
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(I. R. S. Employer
Identification Number) |
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18400 Von Karman, Suite 1000, Irvine, California |
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92612 |
(Address of principal executive offices) |
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(Zip Code) |
Registrants telephone number, including area code:
(949) 440-7030
Securities registered pursuant to Section 12(b) of the
Act:
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Title of Each Class |
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Name of Each Exchange on Which Registered |
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Common Stock, par value $0.01 per share
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New York Stock Exchange |
9.125% Series A Cumulative Redeemable Preferred Stock,
par value $0.01 per share |
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New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the
Act:
None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act). Yes þ No o
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o No þ
Indicate by check mark 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
12 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 þ No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
(§229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrants
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this
Form 10-K or any
amendment to this
Form 10-K. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer. See definition of accelerated filer and large
accelerated filer in
Rule 12b-2 of the
Exchange Act. (Check one):
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Large accelerated filer þ
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Accelerated filer o
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Non-accelerated filer o
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Indicate by check mark if the registrant is a shell company (as
defined in
Rule 12b-2 of the
Act). Yes o No þ
The aggregate market value of common stock held by
non-affiliates, based on the closing price of the common stock
of the registrant on the last business day of the most recently
completed second fiscal quarter as reported on the New York
Stock Exchange, was $2.3 billion. All executive officers
and directors of the registrant and all persons filing a
Schedule 13D with the Securities and Exchange Commission in
respect to registrants common stock have been deemed,
solely for the purpose of the foregoing calculations, to be
affiliates of the registrant.
As of March 1, 2006, the Registrant had
55,984,299 shares of common stock outstanding.
Certain information required for Part III of this report
is incorporated herein by reference to the proxy statement for
the 2006 annual meeting of the Companys stockholders.
PART I
General
New Century Financial Corporation is a real estate investment
trust, or REIT, that, through its taxable REIT subsidiaries,
operates one of the nations largest mortgage finance
companies. We began originating and purchasing loans in 1996,
and, in the fourth quarter of 2004, we began operating our
business as a REIT. We originate and purchase primarily first
mortgage loans nationwide. Historically, we have focused 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. In September 2005, we acquired a mortgage origination
platform from RBC Mortgage Company, or RBC Mortgage, that
expands our offerings to include conventional mortgage loans,
including Alt-A mortgage loans, loans insured by the
Federal Housing Administration, or FHA, and loans guaranteed by
the Veterans Administration, or VA. A significant portion of the
conventional loans, which are generally referred to as
conforming loans, we produce qualify for inclusion
in guaranteed mortgage securities backed by the Federal National
Mortgage Association, or Fannie Mae, or the Federal Home Loan
Mortgage Corp., or Freddie Mac. At the same time, some of the
conventional loans we produce either have an original loan
amount in excess of the Fannie Mae and Freddie Mac loan limit
for single-family loans or otherwise do not meet Fannie Mae or
Freddie Mac guidelines.
We have historically sold our loans through both whole loan
sales and securitizations structured as sales. Since 2003, we
have also retained a portion of our loan production for
investment on our balance sheet through securitizations
structured as financings rather than sales. Our decisions
regarding secondary marketing transactions in 2006 will be based
on market conditions and our ability to access external sources
of capital. We do not currently intend to structure any
securitizations as sales in 2006.
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. 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.
Pursuant to the merger that implemented the restructuring of New
Century TRS in order for it to qualify as a REIT, New Century
became the publicly-traded parent listed on the New York Stock
Exchange, or NYSE, that succeeded to and continued to operate
substantially all of the existing businesses of New Century TRS
and its subsidiaries.
In this annual report on
Form 10-K, unless
the context suggests otherwise, for time periods before
October 1, 2004, the terms the company,
our company, we, our and
us refer to New Century TRS and its subsidiaries,
and for time periods on and after October 1, 2004, the
terms the company, our company,
we, our and us refer to New
Century and its subsidiaries, including New Century TRS.
Business Strategy
Our business objective is to deliver an attractive return to our
stockholders, including a stable dividend. Our strategies to
achieve this objective are:
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Delivering consistently strong operating performance,
including taxable REIT subsidiary (TRS) and mortgage loan
portfolio earnings. We intend to maintain, if not increase,
our mortgage loan portfolio by executing securitizations of
loans originated through our TRS, and structuring those
securitizations as financings. As we increase our mortgage loan
portfolio, our interest income will increase and, in turn, we
will have a larger pool of earnings that can be distributed to
our stockholders. Alternatively, if we structure such
securitizations in our TRS, the resulting earnings can be
retained to strengthen our TRS origination franchise. We expect
that our capacity to originate loans at our TRS will enable us
to grow |
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our mortgage loan portfolio by providing us with a significant
volume of loans at a lower cost and with greater reliability
than if we purchased our mortgage loan portfolio from a third
party. |
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Broadening the mortgage products and services available
through each of our delivery channels. We plan to grow our
production franchise by expanding our product and service
offerings through each of our delivery channels, as discussed
below. As a result of our acquisition of the loan origination
platform of RBC Mortgage, we now offer non-prime mortgage loan
products through all of our delivery channels and intend to
offer prime and Alt-A products through all of our
delivery channels by mid-2006. By expanding the product lines
available through each of our delivery channels, we believe we
can profitably gain market share despite the projected
contraction of overall mortgage industry volume in 2006. |
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Increasing productivity while reducing costs to enhance our
competitive position in the industry. In the fourth quarter
of 2005, the costs to originate our loans, which we refer to as
loan acquisition costs, reached a record low as a result of our
concerted efforts to improve our profitability. In addition, our
2005 loan production volume was $56.1 billion, our tenth
consecutive record year of loan production. Our strong and
scalable origination platform and low loan acquisition costs
enable us to react to market conditions and allow us the
opportunity to earn substantial income and build retained
earnings and liquidity, enhancing our competitive position in
the industry. |
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Actively managing our mortgage loan portfolio. We seek to
actively manage the composition, as well as interest rate and
credit risks relating to our mortgage loan portfolio, in an
effort to generate an attractive risk-adjusted return to
stockholders. We continue to use hedge instruments to attempt to
reduce the interest rate exposure that results from financing
fixed-rate assets with floating-rate liabilities. We also
actively monitor our mortgage loan portfolio through early
detection and management of probable delinquencies. |
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Maintaining a strong capital and liquidity base. We
continue to prudently manage our capital and liquidity levels
and may increase our capital and liquidity by accessing the
capital markets, when appropriate. We also seek to maintain
available capacity under our credit facilities and may enhance
our capital and liquidity positions by retaining some or all of
our earnings in our TRS. |
Competitive Advantages
We believe the following competitive strengths distinguish our
business model from those of other mortgage REITs and
residential mortgage lenders and enable us to implement our
business strategy:
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One of the largest mortgage REIT portfolios. We have one
of the largest portfolios of residential mortgage loans of any
REIT. In 2005, our mortgage portfolio provided a significant
portion of our earnings. |
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Leading mortgage loan origination franchise. New Century
Mortgage Corporation and Home123 Corporation, our operating
taxable REIT subsidiaries, together represent one of the
nations largest mortgage finance companies when measured
by loan production volume for the year ended December 31,
2005. We are authorized to lend in all 50 states and have a
leading market presence through a wholesale network of more than
47,000 approved independent mortgage brokers and our retail
network of 222 branch offices, housing our consumer-direct
channel and our builder/realtor channel. Our taxable REIT
subsidiaries have the potential to generate significant earnings
through our mortgage loan origination franchise. |
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Low-cost producer. Our ability to originate mortgage
loans at a low cost allows us to achieve greater profitability
than many of our competitors. In addition, we are able to build
our portfolio by retaining self-originated loans, rather than
engaging in large bulk secondary market purchases, providing us
with a competitive advantage over REITs without origination
capabilities. |
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Operational flexibility. Our structure and business
strategy provide us with the flexibility to both securitize a
portion of our loan originations for our portfolio and sell the
balance for cash. We believe |
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that this flexibility allows us to provide a broader product
offering, better manage our cash flows and respond to changing
conditions in the secondary market environment, thus enhancing
returns to our stockholders. |
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Long-standing institutional relationships. We have
developed long-standing relationships with a variety of
institutional loan buyers, including Credit Suisse First Boston
(DLJ Mortgage Capital, Inc.), Goldman Sachs, JPMorgan Chase,
Lehman Brothers, Morgan Stanley, Residential Funding Corporation
and UBS Real Estate Securities Inc. These loan buyers regularly
bid on and purchase large loan pools from us, and we frequently
enter into committed forward loan sale agreements with them. In
addition, we have developed relationships with a variety of
institutional lenders who provide reliable and stable sources of
warehouse financing, including Bank of America NA, Barclays Bank
PLC, Bear Stearns Mortgage Capital Inc., Citigroup Global
Markets Realty Corp., Credit Suisse First Boston Mortgage
Capital LLC, Deutsche Bank Securities Inc., IXIS Real Estate
Capital Inc. (formerly known as CDC Mortgage Capital Inc.),
Morgan Stanley Mortgage Capital Inc. and UBS Real Estate
Securities. |
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Automated credit grading capability. We have created a
proprietary automated credit grading and pricing methodology
that we believe gives us the ability to more effectively
evaluate credit risk and more efficiently price our products, as
validated by our historical loan performance. |
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Reputation for high quality customer service. We believe
our origination process is easier for our borrowers and brokers
to use than the origination processes of most of our competitors
because of our ability to provide quick responses and consistent
and clear procedures, with an emphasis on ease of use through
technology, including our
FastQual®
system, a Web-based underwriting engine. |
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Management experience and depth. The members of our
senior management team have many years of experience in the
mortgage finance sector, with substantial experience addressing
the challenges posed by a variety of interest rate environments,
including growing an origination franchise, managing credit risk
and developing strong capital market relationships. |
Investment and Operational Policies
One of our strategies is to maintain a portfolio of mortgage
loans through securitizations structured as financings. Our
securitizations are typically structured as collateralized
mortgage obligations, or CMOs, rather than real estate mortgage
investment conduits, or REMICs. Securitizations structured as
financings remain on our consolidated balance sheet as an asset
and the underlying bonds are reported as a liability.
Consequently, we record interest income generated by the
mortgage loans and recognize interest expense on the related
financings over the life of the mortgage loan pool, rather than
generate a gain or loss at the time of the securitization. Our
expected securitization activity for 2006 will be based
primarily on secondary market conditions and our ability to
access external sources of capital.
A substantial portion of the net interest income generated by
our securitized loans is based upon the difference between the
weighted average interest earned on the mortgage loans and the
interest paid to holders of the bonds collateralized by our
loans. The net interest income we receive from the
securitizations structured as financings is affected by the
current level of the London Inter-Bank Offered Rate, or LIBOR,
because the holders of the applicable securities are generally
paid based on an adjustable LIBOR-based yield. Therefore, an
increase in LIBOR reduces the net interest income we receive
from, and the value of, these mortgage loans. In addition, the
net interest income we receive from securitizations will be
reduced if there are a significant number of defaults on
repayments or prepayments of loans with interest rates that are
high relative to the rest of the asset pool. We attempt to
mitigate at least a portion of this net interest margin
variability through various hedging activities described below.
We use leverage to increase our mortgage loan portfolio by
financing the portfolio through securitizations structured as
financings. We generally target our outstanding borrowings,
including these financings, at roughly 12 to 14 times the amount
of our consolidated equity capital, although our actual leverage
ratio may
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vary from time to time depending on market conditions and other
factors deemed relevant by our management and board of directors.
We intend to use a variety of risk management strategies to
monitor and address interest rate risk. We believe that these
strategies will allow us to monitor and evaluate our exposure to
interest rates and to manage the risk profile of our mortgage
loans held for investment, mortgage loans held for sale and our
residual interests in securitizations in response to changes in
market conditions. As part of our interest rate risk management
process, we may continue to use derivative financial instruments
such as Euro Dollar futures contracts, interest rate cap
agreements and interest rate swap agreements and may start using
Treasury futures and options on interest rates. We may also use
other hedging instruments including mortgage derivative
securities, as necessary. These derivative instruments currently
have an active secondary market, and are intended to offset
potential reduced income and cash flow under certain interest
rate environments. Hedging strategies involve transaction and
other costs. We engage in hedging for the sole purpose of
protecting against interest rate risk and not for the purpose of
speculating on changes in interest rates.
If our board of directors determines that additional financing
is required, we may raise the funds through additional equity
offerings, debt financings, retention of cash flow (subject to
provisions in the Internal Revenue Code of 1986, as amended, or
the Code, concerning distribution requirements and taxability of
undistributed REIT taxable income) or a combination of these
methods. In the event that our board of directors determines to
raise additional equity capital, it has the authority, without
stockholder approval, subject to applicable law and NYSE
regulations, to issue additional common stock or preferred stock
in any manner and on terms and for consideration it deems
appropriate up to the amount of authorized stock set forth in
our charter.
Borrowings may be in the form of bank borrowings, secured or
unsecured, and publicly or privately placed debt instruments,
purchase money obligations to the sellers of assets, long-term,
tax-exempt bonds or other publicly or privately placed debt
instruments, financing from banks, institutional investors or
other lenders, and securitizations, including collateralized
debt obligations, any of which indebtedness may be unsecured or
may be secured by mortgages or other interests in the assets.
Such indebtedness may entail recourse to all or any part of our
assets or may be limited to the particular assets to which the
indebtedness relates. We will enter into collateralized
borrowings only with institutions we believe are financially
sound and that are rated investment grade by at least one
nationally recognized rating agency. We have authority to offer
New Century common stock or other equity or debt securities in
exchange for property and to repurchase or otherwise reacquire
our securities or any other securities and may engage in any of
these activities in the future, subject to applicable law.
Our Mortgage Loan Origination Franchise
We originate and purchase mortgage loans through two
divisions our Wholesale Division and our Retail
Division. Our Wholesale Division originates and purchases loans
through a network of independent mortgage brokers and
correspondent lenders solicited by our account executives. Our
account executives provide
on-site customer
service to brokers to facilitate the funding of loans. The
Wholesale Division operates under the name New Century Mortgage
Corporation and originates mortgage loans through its FastQual
Web site at www.newcentury.com, where a broker can upload
a loan request and receive a response generally within 12
seconds. Our Retail Division operates under the name Home123
Corporation and originates loans through a consumer-direct
channel and a builder/realtor channel. The Retail Division is
supported by 222 branch offices and a central telemarketing
unit. Leads for the consumer-direct channel are generated
through radio, direct mail, telemarketing, television
advertising and the Internet. Our builder/realtor channel is
based on relationships that are either referred or solicited.
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Most of our loan production consists of subprime mortgage loans
originated through our Wholesale Division. Subprime mortgage
loans are made 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. Our acquisition of the mortgage
origination platform of RBC Mortgage has expanded our product
offerings to include conventional mortgage loans, including
Alt-A mortgage loans, loans insured by the FHA and
loans guaranteed by the VA.
For 2005, our Wholesale Division originated $49.2 billion
in mortgage loans, or 87.7% of the total mortgage loans we
originated, and our Retail Division originated $6.9 billion
in mortgage loans, or 12.3% of the total mortgage loans we
originated.
As of December 31, 2005, our Wholesale Division operated
through 35 regional operating centers located in 18 states
and employed 989 account executives. As of December 31,
2005, we had approved more than 47,000 mortgage brokers to
submit loan applications to us. During this period, our 10
largest producing brokers originated 5.6% of our wholesale
production.
We have designed and implemented a procedure for qualifying,
approving and monitoring our network of approved mortgage
brokers. We require the brokers to complete an application that
requests general business information and to provide copies of
all required licenses. Upon receipt of the application and
supporting documentation, our Broker Services Department
examines the materials for completeness and accuracy. Our Broker
Services Department then independently verifies the information
contained in the application through (i) a public records
Web site to verify the validity and status of licenses, and
(ii) the Mortgage Asset Research Institute, or MARI, which
provides background information from both the public and private
sectors.
To be approved, a broker must enter into a standard broker
agreement with us pursuant to which the broker agrees to abide
by the provisions of our Policy on Fair Lending and our Broker
Code of Conduct. Each broker also agrees to comply with
applicable state and federal lending laws and agrees to submit
true and accurate disclosures with regard to loan applications
and loans. In addition, we employ a risk management team that
regularly reviews and monitors the loans submitted by our
brokers.
In wholesale loan originations, the brokers role is to
identify the applicant, assist in completing the loan
application form, gather necessary information and documents and
serve as our liaison with the borrower through our lending
process. We review and underwrite the application submitted by
the broker, approve or deny the application, set the interest
rate and other terms of the loan and, upon acceptance by the
borrower and satisfaction of all conditions imposed by us, fund
the loan. Because brokers conduct their own marketing and employ
their own personnel to complete loan applications and maintain
contact with borrowers, originating loans through our Wholesale
Division allows us to increase loan volume without incurring the
higher marketing, labor and other overhead costs associated with
increased retail originations.
Mortgage brokers can submit loan applications through an account
executive or through FastQual, our Web-based loan underwriting
engine, at www.newcentury.com.
In either case, the mortgage broker will forward the original
loan package to the closest regional operating center where the
loan is logged in for regulatory compliance purposes and
approved or denied within 24 hours of receipt in most
cases. If approved, we issue a conditional approval
to the broker with a list of specific conditions that have to be
met (for example, credit verifications and independent
third-party appraisals) and additional documents to be supplied
prior to the funding of the loan. An account manager and account
executive work directly with the submitting mortgage broker who
originated the loan to collect the requested information and to
meet the underwriting conditions and other requirements. In most
cases, we fund loans within 30 days from the date of our
approval of an application.
FastQual generally provides the broker with a response in less
than 12 seconds. Loan information from the brokers own
loan operating systems can be automatically uploaded to
FastQual. The system provides all loan products for which the
borrower qualifies, enabling brokers to offer their customers
many options. Our
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FastQual Web site enables mortgage brokers to evaluate loan
scenarios for borrowers, submit loan applications, order credit
reports, automatically credit grade the loan, obtain pricing and
track the progress of the loan through funding.
Our Wholesale Division also purchases funded loans on an
individual or flow basis from independent mortgage
bankers and financial institutions known as correspondent
lenders. We review an application for approval from each lender
that seeks to sell us a funded loan. We also review their
financial condition and licenses. We require each mortgage
banker to enter into a purchase and sale agreement with us
containing customary representations and warranties regarding
the loans the mortgage banker will sell to us. These
representations and warranties are comparable to those given by
us to the purchasers of our loans. Once the correspondent lender
is approved, we re-underwrite each loan we purchase from them.
The following table sets forth selected information relating to
loan originations and purchases through our Wholesale Division
during the periods shown:
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For the Quarters Ended | |
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March 31, | |
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June 30, | |
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September 30, | |
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December 31, | |
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2005 | |
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2005 | |
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2005 | |
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2005 | |
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Principal balance of originations and purchases (in thousands)
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$ |
9,073,489 |
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12,131,216 |
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14,859,085 |
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13,160,531 |
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Average principal balance of loans originated and purchased (in
thousands)
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$ |
185 |
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184 |
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185 |
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187 |
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Combined weighted average initial loan-to-value ratio(1)
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81.3 |
% |
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81.8 |
% |
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81.4 |
% |
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80.8 |
% |
Percent of loans secured by first mortgages
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94.9 |
% |
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93.3 |
% |
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93.0 |
% |
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92.9 |
% |
Property securing mortgage loans:
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Owner occupied
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92.7 |
% |
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93.9 |
% |
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94.4 |
% |
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93.7 |
% |
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Non-owner occupied
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7.3 |
% |
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6.1 |
% |
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5.6 |
% |
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6.3 |
% |
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(1) |
Weighted average LTV is the LTV of the first lien mortgages and
combined LTV of the second lien mortgages. |
In May 2004, we acquired the rights to Home123, a new brand
identity and customer value proposition for our Retail Division.
In the acquisition, we purchased the rights to the name Home123
and other brand assets including a loan origination center in
Morris Plains, New Jersey, the Home123.com Web site address and
the 1-800-HOME123 phone
number. In order to facilitate a simple loan origination
process, Home123 provides customers with the following tools to
inform them about what they can expect throughout the loan
process: (i) A Home123 Loan Tool
KitSM,
which contains information that assists a customer though the
loan process, including mortgage calculators, available through
Home123.com or on CD-ROM; (ii) a Loan Blueprint
CalendarSM,
which is an automated online calendar that tracks the loan
application allowing the customer and the loan advisor to
understand the status of the loan application throughout the
process; and (iii) a loan advisor that acts as the single
point of contact for the borrower to help make the loan process
as seamless as possible.
In connection with our acquisition of the mortgage loan
origination platform from RBC Mortgage, we launched a
builder/realtor channel as part of our Retail Division and
expanded our product offerings to include conventional mortgage
loans, loans insured by the FHA and loans guaranteed by the VA.
Through the loan origination platform, prime credit quality
first-lien mortgage loans, both conforming and
nonconforming, are secured by
one-to-four family
residences. Conforming conventional loans qualify
for inclusion in guaranteed mortgage securities backed by Fannie
Mae or Freddie Mac. Nonconforming conventional loans
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either have an original loan amount in excess of the Fannie Mae
and Freddie Mac loan limit for single-family loans or otherwise
do not meet Fannie Mae or Freddie Mac underwriting guidelines.
As a subset of nonconforming conventional loans, we offer an
Alt-A adjustable-rate mortgage loan product with a
reduced documentation feature to borrowers who satisfy
prescribed FICO, LTV and loan purpose criteria. In addition to
first-lien mortgage loans, we offer prime credit quality loans
secured by second liens on
one-to-four family
residences, including home equity lines of credit.
We expect to grow our Retail Division through the value
proposition of the Home123 brand, supported by our other retail
marketing efforts. By creating a direct relationship with the
borrower, retail lending provides greater potential for repeat
business and greater control over the lending process. Loan
origination fees we collect contribute to profitability and cash
flow and partially offset the higher costs of retail lending.
As of December 31, 2005, our Retail Division, including our
central retail telemarketing unit, employed approximately 1,747
retail loan officers located in two regional processing centers
and 222 sales offices.
The following table sets forth selected information relating to
loan originations through our Retail Division during the periods
shown:
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For the Quarters Ended | |
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March 31, | |
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June 30, | |
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September 30, | |
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December 31, | |
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2005 | |
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2005 | |
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2005 | |
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2005 | |
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Principal balance of originations and purchases (in thousands)
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$ |
1,178,078 |
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1,312,954 |
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1,852,513 |
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2,540,375 |
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Average principal balance of loans originated and purchased (in
thousands)
|
|
$ |
147 |
|
|
|
151 |
|
|
|
154 |
|
|
|
159 |
|
Combined weighted average initial loan-to-value ratio(1)
|
|
|
78.5 |
% |
|
|
78.9 |
% |
|
|
78.8 |
% |
|
|
78.7 |
% |
Percent of loans secured by first mortgages
|
|
|
98.8 |
% |
|
|
98.2 |
% |
|
|
96.7 |
% |
|
|
94.7 |
% |
Property securing mortgage loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owner occupied
|
|
|
96.6 |
% |
|
|
96.9 |
% |
|
|
95.9 |
% |
|
|
94.8 |
% |
|
Non-owner occupied
|
|
|
3.4 |
% |
|
|
3.1 |
% |
|
|
4.1 |
% |
|
|
5.2 |
% |
|
|
(1) |
Weighted average LTV is the LTV of the first lien mortgages and
combined LTV of the second lien mortgages. |
Our Wholesale Divisions marketing strategy focuses on the
sales efforts of its account executives and on providing prompt,
consistent service to mortgage brokers and other customers. Our
Wholesale Division supplements its strategy with direct mail,
e-mail and fax programs to brokers, advertisements in trade
publications, in-house production of collateral sales material,
seminar sponsorships, tradeshow attendance, periodic sales
contests and its Web site, www.newcentury.com.
Our retail consumer-direct channel solicits prospective
borrowers through a variety of direct response advertising
methods, such as purchased leads from aggregators, radio
advertising, direct mail, search engine placement, banner ads,
e-mail campaigns and
links to related Web sites. The channel relies primarily on
Internet lead acquisition, targeted direct mail, outbound
telemarketing, television, radio and Internet advertisements to
attract borrowers. Our television and radio advertisements are
handled by an outside advertising agency that creates our
advertisements and buys our television and radio time. Our
direct mail and lead acquisition programs are managed by a
centralized staff who create a targeted lead list for each branch
7
market and oversee the completion of mailings by a third-party
mailing vendor. All calls or written inquiries from potential
borrowers are tracked centrally and then forwarded to a branch
location and handled by branch loan officers.
The direct mail program uses the Retail Divisions Web
site, www.Home123.com, to provide information to prospective
borrowers and to allow them to complete a brief or mini
application online. Under the Central Telemarketing Program, the
telemarketing staff solicits prospective borrowers, makes a
preliminary evaluation of the value and type of property, and
then refers qualified leads to loan officers in the retail
branch closest to the customer. Our builder/realtor channel is
based on relationships that are either referred or solicited.
Our loan origination standards and procedures are designed to
produce high quality loans. These standards and procedures
encompass underwriter qualifications and authority levels,
appraisal review requirements, fraud prevention, funds
disbursement controls, training of our employees and ongoing
review of our employees work. We help to ensure that our
origination standards are met by employing accomplished and
seasoned managers, underwriters and processors and through the
extensive use of technology. We also have a comprehensive
training program for the continuing development of both our
existing staff and new hires. In addition, we employ proprietary
underwriting systems in our loan origination process that
improve the consistency of underwriting standards, assess
collateral adequacy and help to prevent fraud, while at the same
time increasing productivity.
A qualified independent appraiser inspects and appraises each
mortgage property and gives an opinion of value and condition.
Following each appraisal, the appraiser prepares a report that
includes a market value analysis based on recent sales of
comparable homes in the area and, when appropriate, replacement
cost analysis based on the current cost of constructing a
similar home. All appraisals must conform to the Uniform
Standards of Professional Appraisal Practice adopted by the
Appraisal Foundations Appraisal Standards Board and are
generally on forms acceptable to Fannie Mae and Freddie Mac. Our
underwriting guidelines require a review of the appraisal by one
of our qualified employees or by a qualified review appraiser
that we have retained. Our underwriting guidelines then require
our underwriters to be satisfied that the value of the property
being financed, as indicated by the appraisal, would support the
requested loan amount.
Most of our conventional loans conform to Fannie Mae, Freddie
Mac, FHA, or VA standards, and our other non-conforming
prime grade loans meet overall industry standards
for loan documentation and borrower characteristics. The
underwriting guidelines for conventional conforming loans comply
with the guidelines established by Fannie Mae or Freddie Mac.
Our underwriting guidelines for
FHA-insured or
VA-guaranteed mortgage
loans comply with guidelines established by the
U.S. Department of Housing and Urban Development, or HUD,
and the VA, as applicable. Non-conforming prime
grade mortgage loans originated through our mortgage loan
origination platform acquired from RBC Mortgage must also
meet overall industry standards for loan documentation and
borrower characteristics so that these loans are saleable in the
secondary market.
We periodically evaluate and modify our underwriting guidelines.
We also adopt new underwriting guidelines appropriate to new
loan products we may offer.
Our underwriting guidelines include three levels of income
documentation requirements, referred to as the full
documentation, limited documentation and
stated income documentation programs.
|
|
|
|
|
Under the full documentation program, we generally require
applicants to submit two written forms of verification, or 12 or
more consecutive monthly bank statements on their individual or
business bank accounts, showing stable income for at least
12 months. |
|
|
|
Under the limited documentation program, we generally require
applicants to submit six consecutive monthly bank statements on
their individual bank accounts. |
8
|
|
|
|
|
Under the stated income documentation program, an applicant may
be qualified based upon monthly income as stated on the mortgage
loan application if the applicant meets certain criteria. |
All of these documentation programs require that, with respect
to any salaried employee, the applicants employment be
verified by telephone. In the case of a purchase money loan, we
require verification of the source of funds, if any, to be
deposited by the applicant into escrow. Under each of these
programs, we review the applicants source of income,
calculate the amount of income from sources indicated on the
loan application or similar documentation, review the
applicants credit history, and calculate the debt
service-to-income ratio
to determine the applicants ability to repay the loan. We
also review the type, use and condition of the property being
financed. We use a qualifying interest rate that is equal to the
initial interest rate on the loan to determine the
applicants ability to repay an adjustable-rate loan. For
our interest-only adjustable rate mortgage, or ARM, loans we
generally use the initial interest-only payment for determining
the borrowers repayment ability.
For the year ended December 31, 2005, full documentation
loans as a percentage of total originations totaled
$30.4 billion, or 54.2%, limited documentation loans
totaled $1.5 billion, or 2.7%, and stated documentation
loans totaled $24.2 billion, or 43.1%.
Our underwriting guidelines require us to obtain a credit report
on each applicant from a credit reporting company. In evaluating
an applicants credit history, we utilize credit bureau
risk scores, generally known as FICO scores, which are
statistical rankings of likely future credit performance
reported by the three national credit data
repositories Equifax, TransUnion and Experian. We
also review all prior mortgage payment histories and public
records in addition to the credit report.
The following table reflects the credit grades and FICO scores
of our borrowers for the years ended December 31 (dollars
in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
|
|
|
Wtd. Avg. | |
|
|
|
|
|
Wtd. Avg. | |
|
|
|
|
|
|
LTV(1) | |
|
|
|
|
|
LTV(1) | |
|
|
Risk Grades |
|
Amount | |
|
% | |
|
Ratio | |
|
FICO | |
|
Amount | |
|
% | |
|
Ratio | |
|
FICO | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
AA
|
|
$ |
42,194,519 |
|
|
|
75.2 |
|
|
|
82.5 |
|
|
|
641 |
|
|
$ |
31,990,160 |
|
|
|
75.8 |
|
|
|
82.7 |
|
|
|
642 |
|
A +
|
|
|
4,919,909 |
|
|
|
8.8 |
|
|
|
79.2 |
|
|
|
597 |
|
|
|
4,225,339 |
|
|
|
10.0 |
|
|
|
79.6 |
|
|
|
598 |
|
A -
|
|
|
2,626,138 |
|
|
|
4.7 |
|
|
|
76.3 |
|
|
|
574 |
|
|
|
2,734,814 |
|
|
|
6.5 |
|
|
|
76.4 |
|
|
|
577 |
|
B
|
|
|
1,529,765 |
|
|
|
2.7 |
|
|
|
73.7 |
|
|
|
561 |
|
|
|
1,760,102 |
|
|
|
4.2 |
|
|
|
73.9 |
|
|
|
565 |
|
C/ C -
|
|
|
1,291,206 |
|
|
|
2.3 |
|
|
|
67.2 |
|
|
|
556 |
|
|
|
1,336,108 |
|
|
|
3.2 |
|
|
|
68.1 |
|
|
|
555 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
52,561,537 |
|
|
|
93.7 |
|
|
|
81.3 |
|
|
|
629 |
|
|
|
42,046,523 |
|
|
|
99.7 |
|
|
|
81.1 |
|
|
|
627 |
|
Commercial Lending
|
|
|
162,912 |
|
|
|
0.3 |
|
|
|
|
|
|
|
|
|
|
|
135,538 |
|
|
|
0.3 |
|
|
|
|
|
|
|
|
|
Prime and Alt-A
|
|
|
3,383,792 |
|
|
|
6.0 |
|
|
|
76.7 |
|
|
|
713 |
|
|
|
17,579 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
56,108,241 |
|
|
|
100.0 |
|
|
|
81.0 |
|
|
|
634 |
|
|
$ |
42,199,640 |
|
|
|
100.0 |
|
|
|
81.1 |
|
|
|
627 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Weighted average LTV is the LTV of the first lien mortgages and
the combined LTV of the second lien mortgages. |
9
The following table sets forth by state the aggregate dollar
amounts (in thousands) and the percentage of loans we originated
or purchased for the periods shown:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
California
|
|
$ |
20,956,373 |
|
|
|
37.35 |
% |
|
|
17,356,938 |
|
|
|
41.13 |
|
|
|
11,228,322 |
|
|
|
41.01 |
|
Florida
|
|
|
4,863,876 |
|
|
|
8.67 |
|
|
|
2,673,481 |
|
|
|
6.33 |
|
|
|
1,653,316 |
|
|
|
6.04 |
|
New York
|
|
|
3,179,280 |
|
|
|
5.67 |
|
|
|
2,630,074 |
|
|
|
6.23 |
|
|
|
1,632,744 |
|
|
|
5.96 |
|
Arizona
|
|
|
2,228,800 |
|
|
|
3.97 |
|
|
|
810,231 |
|
|
|
1.92 |
|
|
|
326,349 |
|
|
|
1.19 |
|
New Jersey
|
|
|
2,203,526 |
|
|
|
3.93 |
|
|
|
1,484,548 |
|
|
|
3.52 |
|
|
|
885,513 |
|
|
|
3.23 |
|
Texas
|
|
|
2,145,907 |
|
|
|
3.82 |
|
|
|
1,552,140 |
|
|
|
3.68 |
|
|
|
1,135,005 |
|
|
|
4.15 |
|
Illinois
|
|
|
1,841,152 |
|
|
|
3.28 |
|
|
|
1,314,726 |
|
|
|
3.11 |
|
|
|
1,230,530 |
|
|
|
4.49 |
|
Massachusetts
|
|
|
1,738,268 |
|
|
|
3.10 |
|
|
|
1,303,383 |
|
|
|
3.09 |
|
|
|
943,160 |
|
|
|
3.45 |
|
Nevada
|
|
|
1,444,757 |
|
|
|
2.58 |
|
|
|
1,053,166 |
|
|
|
2.50 |
|
|
|
315,799 |
|
|
|
1.15 |
|
Maryland
|
|
|
1,315,028 |
|
|
|
2.34 |
|
|
|
843,577 |
|
|
|
2.00 |
|
|
|
488,052 |
|
|
|
1.78 |
|
Other
|
|
|
14,191,274 |
|
|
|
25.29 |
|
|
|
11,177,376 |
|
|
|
26.49 |
|
|
|
7,544,048 |
|
|
|
27.55 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
56,108,241 |
|
|
|
100.00 |
% |
|
|
42,199,640 |
|
|
|
100.00 |
|
|
|
27,382,838 |
|
|
|
100.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing Loan Originations |
We require access to credit facilities in order to originate and
purchase mortgage loans and to hold them pending their sale or
securitization.
As of December 31, 2005, we used our credit facilities
totaling $14.1 billion provided by Bank of America,
Barclays Bank, Bear Stearns, Citigroup Global Markets Realty,
Credit Suisse First Boston, Deutsche Bank, IXIS Real Estate
Capital, Morgan Stanley and UBS Real Estate Securities to
finance the funding of our loan originations and purchases. We
also fund loans through our $2.0 billion asset-backed
commercial paper note facility. We then sell the loans through
whole loan sales or securitizations, generally within one to
three months, and pay down the financing facilities with the
proceeds.
Loan Sales and Securitizations
A majority of the mortgage loans that we originate and sell into
the secondary mortgage market are sold through whole loan sales,
with a lesser amount sold in the form of securities. For the
loans that we retain on our balance sheet, our qualified REIT
subsidiaries purchase those loans from New Century Mortgage or
Home123, initially using short-term credit facilities. Our
qualified REIT subsidiaries then complete CMO securitizations to
finance the loans over the long term.
We sell whole loans on a non-recourse basis pursuant to a
purchase agreement in which we give customary representations
and warranties regarding the loan characteristics and the
origination process. We may be required to repurchase or
substitute loans in the event of a breach of these
representations and warranties. In addition, we generally commit
to repurchase or substitute a loan if a payment default occurs
within the first month or two following the date the loan is
funded, unless we make other arrangements with the purchaser.
The majority of our whole loan sales are sold on a
servicing-released
basis.
Securitizations Structured as Financings
During the year ended December 31, 2005, we completed four
securitizations totaling $11.0 billion, which were
structured as financings for accounting purposes under Statement
of Financial Accounting Standards No. 140, Accounting
for Transfers and Servicing of Financial
10
Assets and Extinguishments of Liabilities a
replacement of FASB Statement No. 125, or
SFAS 140. During 2004, we completed five securitizations
totaling $10.1 billion, all of which were structured as
on-balance sheet securitizations for financial reporting
purposes under generally accepted accounting principles. 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 results in lower income in
the period in which the securitization occurs than would a
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.
Securitizations Structured as Sales In a
securitization structured as a sale, or off-balance sheet, we
sell a pool of loans to a trust for a cash purchase price and a
certificate evidencing our residual interest ownership in the
trust and the transaction is accounted for as a sale under
SFAS 140. 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. We
receive the cash flows from the residual interests 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 net interest margin security, or 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 us
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.
During 2005, we completed four securitizations structured as
sales totaling $6.4 billion. The gain on sale recorded for
the four securitizations was $141.5 million and our
retained interests totaled $97.5 million. We did not
complete any off-balance sheet securitization transactions
structured as sales during 2004 or 2003.
In the first quarter of 2004, we invested $2 million in
Carrington Capital Management, LLC, or the LLC, and
$25 million in Carrington Mortgage Credit Fund I, LP,
or Carrington, which is sponsored by the LLC. Carrington
acquires individual and pooled single-family residential
subprime loans and securitizes them in transactions structured
as sales. We were originally the majority investor in
Carrington, requiring us to consolidate Carringtons
results in our financial statements for financial reporting
purposes through September 30, 2004. In the fourth quarter
of 2004, Carrington raised additional capital, reducing our
ownership position to approximately 38%. Since that time, we
have included Carrington in our financial statements under the
equity method of accounting. As a result of Carringtons
capital raising activities, our ownership position is
approximately 7% as of December 31, 2005 and the carrying
value of our equity investment in Carrington and the LLC is
$39.7 million.
Our Mortgage Loan Portfolio
Our mortgage loan portfolio is comprised of loans originated by
us and sold through securitizations structured as financings.
Our securitization structure results in ownership interests we
retain in what are commonly known as asset-backed securities.
The investment characteristics of our portfolio of asset-backed
securities differ from those of traditional fixed-income
securities. The major differences include the payment of
interest and principal on the asset-backed securities on a more
frequent schedule and the possibility that principal may be
prepaid at any time due to prepayments on the underlying
mortgage loans. These differences can result in significantly
greater price and yield volatility than is the case with
traditional fixed-income securities.
Various factors affect the rate at which mortgage prepayments
occur, including changes in interest rates, general economic
conditions, the age of the mortgage loan, the location of the
property and other social and
11
demographic conditions. Generally, prepayments on asset-backed
securities increase during periods of falling mortgage interest
rates and decrease during periods of rising mortgage interest
rates. As a result, we may replenish the portfolio at a yield
that is higher or lower than the yield on the existing
portfolio, thus affecting the weighted average yield of our
investments.
During 2003, most of our securitizations structured as
financings were structured as REMICs as opposed to CMOs. In
2004, most of our securitizations structured as financings were
structured as CMOs and in 2005, all of our securitizations
structured as financings were structured as CMOs. The CMO
structure provides tax efficiencies not available under the
REMIC structure.
The following table provides certain information on the mortgage
loan portfolio as of December 31, 2005 (dollars in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2003 Vintage | |
|
2004 Vintage | |
|
2005 Vintage | |
|
|
| |
|
| |
|
| |
|
|
REMIC | |
|
CMO | |
|
REMIC | |
|
CMO | |
|
REMIC | |
|
CMO | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Initial collateral pool
|
|
$ |
3,808,887 |
|
|
|
1,137,894 |
|
|
|
1,679,397 |
|
|
|
8,431,735 |
|
|
|
|
|
|
|
10,961,957 |
|
Current collateral pool
|
|
$ |
1,177,971 |
|
|
|
332,200 |
|
|
|
1,105,902 |
|
|
|
4,621,687 |
|
|
|
|
|
|
|
8,946,473 |
|
|
Delinquency (60+ days)
|
|
|
5.61 |
% |
|
|
9.49 |
% |
|
|
2.41 |
% |
|
|
4.67 |
% |
|
|
|
% |
|
|
2.42 |
% |
|
Cumulative losses-to-date
|
|
|
0.29 |
% |
|
|
0.35 |
% |
|
|
0.02 |
% |
|
|
0.10 |
% |
|
|
|
% |
|
|
0.01 |
% |
|
Projected cumulative losses over life
|
|
|
1.24 |
% |
|
|
1.93 |
% |
|
|
1.52 |
% |
|
|
2.40 |
% |
|
|
|
% |
|
|
3.05 |
% |
|
Weighted avg. life in years
|
|
|
2.58 |
|
|
|
2.01 |
|
|
|
3.25 |
|
|
|
1.98 |
|
|
|
|
|
|
|
2.14 |
|
Loan Servicing and Delinquencies
Loan servicing activities are designed and implemented to ensure
that each loan in a mortgage servicing portfolio is repaid in
accordance with its terms. Such activities are generally
performed pursuant to servicing contracts we enter into with
investors or their agents in connection with whole loan sales or
securitizations. The servicing functions performed typically
include: collecting and remitting loan payments; making required
advances; accounting for principal and interest; customer
service; holding escrow or impound funds for payment of taxes
and insurance; and, if applicable, contacting delinquent
borrowers and supervising foreclosures and property dispositions
in the event of un-remedied defaults. For performing these
functions for third parties we generally receive a servicing fee
of 0.50% annually of the outstanding principal balance of each
loan in the mortgage servicing portfolio. The servicing fees are
collected from the monthly payments made by the mortgagors. In
addition, we generally receive other remuneration consisting of
float benefits derived from collecting and remitting mortgage
payments, as well as mortgagor-contracted fees such as late fees
and, in some cases, prepayment penalties. We use MortgageServ as
our main servicing system to perform our servicing activities.
As of December 31, 2005, the balance of our loan servicing
portfolio was $39.6 billion, consisting of
$15.2 billion in mortgage loans held for investment,
$6.7 billion in mortgage loans held for sale,
$10.0 billion in mortgage loans sold on a
servicing-retained basis, and $7.7 billion in loans
serviced on a temporary basis for the purchasers thereof. These
loans are serviced through one of our taxable REIT subsidiaries.
Approximately $1.0 billion of our mortgage loans held for
investment and approximately $1.2 billion of our mortgage
loans held for sale are serviced by a third party. Mortgage
loans originated through our mortgage loan origination platform
acquired from RBC Mortgage through January 2006 were serviced by
a third party. We began servicing the majority of these mortgage
loans in February 2006.
After we originate or purchase a mortgage loan we begin the
process of servicing the loan. We originated $56.1 billion
in mortgage loans during the year ended December 31, 2005.
With the exception of the mortgage loans originated by our
mortgage loan origination platform acquired from
RBC Mortgage, these loans were
12
serviced by us on an interim servicing basis prior to sale or
were included in one of our securitizations. During the year
ended December 31, 2005, we boarded an average of
approximately 24,000 new loans per month to our servicing
platform and transferred an average of 14,000 loans per month to
other unaffiliated servicers pursuant to mortgage loan sales
transactions. We expect to continue to retain the servicing
rights on a portion of the mortgage loan sold to third parties
in whole mortgage loan sales transactions and on all of the
mortgage loans that we hold in our portfolio in the future.
During the past two years, we have completed several key
servicing platform initiatives. These completed technology
initiatives include the deployment of a customer accessible
interactive Web site, enhancements to that Web site including
payment acceptance, bill presentment and access to key
information on payment history, enhancements to the Web
sites main servicing system, the implementation of a
lockbox payment processing system and deployment of software
that improves our loss mitigation activities. In addition, we
moved our servicing platform to a new larger facility to allow
for increased servicing capacity and growth of our servicing
activity.
In the event a borrower becomes delinquent, our loan counselors
and mortgage assistant advisors assist the borrower in
addressing the reasons for the delinquency, achieving a
resolution and bringing the loan current. We will issue a breach
of contract notice upon a mortgage loan becoming more than
32 days delinquent unless the applicable state law requires
a greater number of actual days of delinquency before permitting
the issuance of a breach of contract notice. A breach of
contract notice permits the mortgage loan borrower the
opportunity to cure the delinquency within the following
30 days before we will initiate a foreclosure action.
Accounts that are referred to our foreclosure department are
simultaneously referred to our loss mitigation department. We
review and consider a variety of loss mitigation opportunities
with the borrower, including the possibility of forbearance
agreements, listing the property for sale, using a deed in lieu
of foreclosure and full reinstatement of the loan. Loss
mitigation strategies are designed to decrease the loss to both
the borrower and investor and the resolution of loss mitigation
activities are structured to insure, if at all possible, that
the loan borrower performs his or her payment obligation in a
manner that decreases the prospect of a foreclosure sale, while
at the same time minimizing related fees and costs.
In the event that foreclosure is the only resolution available,
we engage a local attorney to assure satisfaction of all
appropriate legal processes and steps mandated by applicable
state and local statutes. Foreclosure timelines are state and
locality specific and have been programmed in our primary
timeline management software and our loan servicing system.
Servicing management responsibility for a mortgage loan property
for which the foreclosure sale has been completed and the
applicable state redemption period has been exceeded is
transferred to our real estate owned department. Our
in-house asset managers manage the ultimate disposition of these
real estate owned properties with the assistance of
local real estate agents. Once a real estate owned
property has been vacated and is available for sale, it is
listed and marketed for sale. We closely monitor the resulting
sales price and overall recovery in order to decrease the loss
incurred.
In addition to our written policies and procedures designed to
assist our employees in the conduct of servicing activities, we
have also adopted servicing best practices that are
designed to prevent any unfair or abusive servicing practices.
We regularly evaluate our policies and practices to ensure they
remain effective and are properly observed.
We intend to continue to retain servicing rights on certain of
the loans we sell in future periods. In the second quarter of
2004, we received a rating of RPS3+, or average with noted
strengths, from Fitch Ratings for our subprime servicing
platform. In 2005, we received a rating of SQ3+, or average,
from Moodys Credit Rating Service and, in January 2006,
Standard and Poors upgraded its rating for our subprime
servicing platform to above average from average.
13
The following table sets forth loan performance data of the
loans on our mortgage loan servicing platform at
December 31, 2005 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Delinquency | |
|
|
|
|
|
|
|
|
| |
|
|
|
|
Weighted | |
|
|
|
|
|
Real Estate | |
|
|
|
|
|
|
Average | |
|
|
|
|
|
Owned | |
|
|
Pool Type |
|
Balance | |
|
Coupon | |
|
FICO | |
|
<90 days | |
|
90+ | |
|
(REO) | |
|
Total | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Mortgage loans held for investment(1)
|
|
$ |
15,150,133 |
|
|
|
7.04 |
% |
|
|
629 |
|
|
|
2.58 |
% |
|
|
3.29 |
% |
|
|
0.29 |
% |
|
|
6.16 |
% |
Mortgage loans held for sale(1)
|
|
|
6,670,715 |
|
|
|
7.97 |
|
|
|
626 |
|
|
|
0.74 |
|
|
|
0.87 |
|
|
|
0.13 |
|
|
|
1.74 |
|
Interim servicing
|
|
|
7,750,137 |
|
|
|
7.66 |
|
|
|
626 |
|
|
|
0.53 |
|
|
|
0.25 |
|
|
|
0.01 |
|
|
|
0.79 |
|
Servicing rights owned
|
|
|
10,039,803 |
|
|
|
7.22 |
|
|
|
629 |
|
|
|
1.44 |
|
|
|
1.07 |
|
|
|
0.05 |
|
|
|
2.56 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
39,610,788 |
|
|
|
7.36 |
% |
|
|
628 |
|
|
|
1.58 |
% |
|
|
1.72 |
% |
|
|
0.15 |
% |
|
|
3.45 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
At December 31, 2005, approximately $1.0 billion of
our loans held for investment and $1.2 billion of our
mortgage loans held for sale were serviced by a third party. |
The following table sets forth loan performance data of the
loans on our mortgage loan servicing platform at
December 31, 2004 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Delinquency | |
|
|
|
|
|
|
|
|
| |
|
|
|
|
Weighted | |
|
|
|
|
|
Real Estate | |
|
|
|
|
|
|
Average | |
|
|
|
|
|
Owned | |
|
|
Pool Type |
|
Balance | |
|
Coupon | |
|
FICO | |
|
<90 days | |
|
90+ | |
|
(REO) | |
|
Total | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Mortgage loans held for investment(1)
|
|
$ |
11,573,630 |
|
|
|
6.92 |
% |
|
|
631 |
|
|
|
1.22 |
% |
|
|
1.04 |
% |
|
|
0.12 |
% |
|
|
2.39 |
% |
Mortgage loans held for sale
|
|
|
3,884,192 |
|
|
|
7.01 |
|
|
|
630 |
|
|
|
0.20 |
|
|
|
0.52 |
|
|
|
0.03 |
|
|
|
0.75 |
|
Interim servicing
|
|
|
7,705,367 |
|
|
|
7.35 |
|
|
|
628 |
|
|
|
0.40 |
|
|
|
0.01 |
|
|
|
|
|
|
|
0.41 |
|
Servicing rights owned
|
|
|
1,216,325 |
|
|
|
7.30 |
|
|
|
621 |
|
|
|
1.42 |
|
|
|
1.44 |
|
|
|
0.22 |
|
|
|
3.07 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
24,379,514 |
|
|
|
7.09 |
% |
|
|
629 |
|
|
|
0.81 |
% |
|
|
0.65 |
% |
|
|
0.07 |
% |
|
|
1.54 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
At December 31, 2004, approximately $1.6 billion of
our mortgage loans held for investment were serviced by a third
party. |
Competition
We continue to face intense competition in the business of
originating, purchasing and selling mortgage loans. Our
competitors include other mortgage banking companies, consumer
finance companies, commercial banks, credit unions, thrift
institutions, credit card issuers, insurance finance companies,
Internet-based lending companies and other large financial
institutions. Large financial institutions may have greater
access to capital at a cost lower than our cost of capital under
our credit facilities. Federally chartered banks and thrifts
have a competitive advantage over us because the federal laws
applicable to their operations can preempt some of the state and
local lending laws applicable to our operations. Fannie Mae and
Freddie Mac presently do not have the legal authority to
originate mortgage loans, including subprime loans, but they do
have the authority to buy loans. These government-sponsored
entities have a size and
cost-of-funds advantage
that allows them to purchase loans with lower rates or fees than
we are willing to offer. Many of these competitors have
considerably greater technical and marketing resources than we
have. The intense competition in the mortgage industry has led
to rapid technological developments, evolving industry standards
and frequent releases of new products and enhancements.
Competition among industry participants can take many forms,
including convenience in obtaining a loan, customer service,
marketing and distribution channels, amount and term of the
loan, loan origination fees and interest rates. Additional
competition may lower the rates we can charge borrowers, thereby
potentially
14
reducing gain on future loan sales and securitizations. Since
the majority of our core origination business is conducted
through our Wholesale Division, in 2004 and 2005, the most
significant form of competition was pricing pressure among
wholesale mortgage originators. Some of our competitors lowered
rates and fees to preserve or expand their market share.
Competition typically becomes increasingly intense in a rising
interest rate environment, when mortgage lenders do not
necessarily increase their coupon rates as quickly as short-term
interest rates are increasing. During these periods, profit
margins generally decline.
Our results of operations, financial condition and business
prospects could be harmed if competition intensifies or if any
of our competitors significantly expands its activities in our
markets.
Regulation
Our mortgage banking business is subject to the rules,
regulations or guidelines of, and/or examination by, the
following entities with respect to the processing, originating,
selling and servicing of mortgage loans:
|
|
|
|
|
State regulatory authorities; |
|
|
|
The Department of Housing and Urban Development, or HUD; |
|
|
|
The Federal Housing Administration, or the FHA; |
|
|
|
The Department of Veteran Affairs, or the VA; |
|
|
|
Fannie Mae, Freddie Mac and Ginnie Mae; and |
|
|
|
The Federal Home Loan Bank, or the FHLB. |
The rules, regulations and requirements of these entities, among
other things, impose licensing obligations on us and our
subsidiaries, establish standards for processing, underwriting
and servicing mortgage loans, prohibit discrimination, restrict
certain loan features in some cases, and fix maximum interest
rates and fees.
Our business activities are also subject to examination by the
Federal Housing Commissioner to assure compliance with FHA
regulations, policies and procedures. As an FHA lender, we are
required to submit to the FHA Commissioner on an annual basis
audited financial statements. In addition, Ginnie Mae, HUD,
Fannie Mae and Freddie Mac require the maintenance of specified
net worth levels (which vary among the entities).
We are subject to judicial and administrative decisions that
impose requirements and restrictions on our business. Mortgage
origination activities are regulated by federal, state and local
government authorities and are subject to extensive federal,
state and local laws, rules and regulations. At the
federal-level, these laws and regulations include the:
|
|
|
|
|
Equal Credit Opportunity Act; |
|
|
|
Federal Truth in Lending Act and Regulation Z; |
|
|
|
Home Ownership and Equity Protection Act; |
|
|
|
Real Estate Settlement Procedures Act and Regulation X; |
|
|
|
Fair Credit Reporting Act; |
|
|
|
Fair Debt Collection Practices Act; |
|
|
|
Home Mortgage Disclosure Act; |
|
|
|
Fair Housing Act; |
|
|
|
Telephone Consumer Protection Act; |
|
|
|
Gramm-Leach-Bliley Act; |
|
|
|
Fair and Accurate Credit Transactions Act; |
15
|
|
|
|
|
CAN-SPAM Act; |
|
|
|
Sarbanes-Oxley Act; and |
|
|
|
USA PATRIOT Act. |
These laws, rules and regulations, among other things:
|
|
|
|
|
impose licensing obligations and financial requirements on us; |
|
|
|
limit the interest rates, finance charges and other fees that we
may charge; |
|
|
|
prohibit discrimination; |
|
|
|
impose underwriting requirements; |
|
|
|
mandate disclosures and notices to consumers; |
|
|
|
mandate the collection and reporting of statistical data
regarding our customers; |
|
|
|
regulate our marketing techniques and practices; |
|
|
|
require us to safeguard non-public personal information about
our customers; |
|
|
|
regulate our collection practices; |
|
|
|
require us to prevent money-laundering or the conduct of
business with suspected terrorists; and |
|
|
|
impose corporate governance, internal control and financial
reporting obligations and standards. |
Our failure to comply with these laws can lead to:
|
|
|
|
|
civil and criminal liability; |
|
|
|
loss of approved status; |
|
|
|
demands for indemnification or loan repurchases from buyers of
our loans; |
|
|
|
class action lawsuits; and |
|
|
|
administrative enforcement actions. |
Compliance, Quality Control and Quality Assurance
We regularly monitor the laws, rules and regulations that apply
to our business and analyze any changes to them. We integrate
many legal and regulatory requirements into our automated loan
origination system to reduce the prospect of inadvertent
non-compliance due to human error. We also maintain policies and
procedures, summaries and checklists to help our origination
personnel comply with these laws.
Our training programs are designed to teach our personnel about
the significant laws, rules and regulations that affect their
job responsibilities. We also maintain a variety of pre-funding
quality control procedures designed to detect compliance errors
prior to funding.
In addition, we also subject a statistically valid sampling of
our loans to post-funding quality assurance reviews and
analysis. We track the results of the quality assurance reviews
and report them back to the responsible origination units. To
the extent refunds or other corrective actions are appropriate,
we deduct those amounts from the internal profit and loss
calculation for that origination unit.
Our loans and practices are also reviewed regularly in
connection with the due diligence that our loan buyers and
lenders perform. Our state regulators also review our practices
and loan files regularly and report the results back to us.
Since our inception, we have undergone over 140 state
examinations, which have never resulted in findings of material
violations or penalties.
16
Licensing
As of December 31, 2005, two of our taxable REIT
subsidiaries were licensed or exempt from licensing requirements
by the relevant state banking or consumer credit agencies to
originate first and second mortgages in all 50 states and
the District of Columbia. As of December 31, 2005, one of
our qualified REIT subsidiaries was authorized to originate
mortgage loans in 45 states and we are seeking to license
that qualified REIT subsidiary in the states in which it is not
currently authorized to originate mortgages.
Regulatory Developments
During 2005, federal and state legislators and regulators
adopted a variety of new or expanded regulations, particularly
in the areas of privacy and consumer protection. These
regulations are summarized below.
|
|
|
Privacy and Data Security |
The federal Gramm-Leach-Bliley financial reform legislation
imposes additional obligations on us to safeguard the
information we maintain on our borrowers. Regulations have been
promulgated and continue to be proposed by several agencies that
may affect our obligations to safeguard information. In
addition, several federal agencies are considering regulations
that could affect the content of our notices. Also, several
states are considering even more stringent privacy legislation.
California has passed two pieces of legislation known as the
California Financial Information Privacy Act and the California
On-Line Privacy Protection Act. Both pieces of legislation
became effective July 1, 2004, and impose additional
notification obligations on us that are not pre-empted by
existing federal law. In addition, Californias Shine
the Light Law, effective January 1, 2005, imposes
additional requirements on businesses to disclose to customers
how their personal information is shared, and the California
Information Safeguard Law AB1950 imposes the obligation on
businesses to establish procedural and electronic safeguards to
protect customer personal information. If other states choose to
follow California and adopt a variety of inconsistent state
privacy legislation, our compliance costs could substantially
increase.
In 2005, in response to the many well publicized incidents
involving the breach of consumer personal confidential data, a
number of states enacted laws that govern our duty to notify
customers and consumers in the event there is a breach of their
personal confidential information as defined in those laws.
Failure to provide proper and timely notification following a
breach could result in fines and penalties being imposed, which,
in some cases, can be criminal in nature as well as potentially
subject us to legal actions for damages both compensatory and
punitive. Also, there are currently pending in Congress, 23
proposed bills dealing with data security and data breach
notification. Some of these new laws would pre-empt state law if
enacted and create a uniform national standard, but others would
create a federal standard that could be superseded by stricter
state laws. These laws have and will continue to impose
regulatory and compliance costs on us.
|
|
|
Fair Credit Reporting Act |
The Fair Credit Reporting Act provides federal preemption for
lenders to share information with affiliates and certain third
parties and to provide pre-approved offers of credit to
consumers. Changes to the Fair Credit Reporting Act were made in
December 2003, and some provisions will not become effective
until the federal regulatory agencies issue final regulations.
These new provisions impose additional regulatory and compliance
costs on us and reduce the effectiveness of our marketing
programs.
|
|
|
Home Mortgage Disclosure Act |
In 2002, the Federal Reserve Board adopted changes to
Regulation C promulgated under the Home Mortgage Disclosure
Act. Among other things, the new regulations require lenders to
report pricing data on loans with annual percentage rates that
exceed the yield on treasury bills with comparable maturities by
3%. The expanded reporting took effect in 2004 for reports filed
in 2005. As anticipated, a significant portion of our loans were
subject to the expanded reporting requirements.
17
The expanded reporting does not provide for additional loan
information such as credit risk,
debt-to-income ratio,
LTV, documentation-level or other salient loan features. As a
result, lenders are concerned that the reported information may
lead to increased litigation as the information could be
misinterpreted by third parties.
|
|
|
Controlling the Assault of Non-Solicited Pornography and
Marketing Act of 2003 |
The CAN-SPAM Act of 2003 took effect on January 1, 2004 and
applies to businesses, such as ours, that use electronic mail
for advertising and solicitation. This law, generally
administered by the Federal Trade Commission, preempts state
laws to the contrary, and establishes, among other things, a
national uniform standard that gives recipients of
e-mail messages
principally promoting a good or service the right to stop
unwanted emails. New requirements include: truthful and accurate
header captions in emails as well as return email addresses;
specifying a valid physical postal address of the sender;
notifying consumers of the right to opt out from
receiving further emails from the sender and providing an
opt out mechanism and timely honoring an opt
out request. Effective March 28, 2005, new rules
apply to dual-purpose
e-mails where a
commercial message is included with transactional or
relationship e-mail.
These new and existing provisions impose additional regulatory
and compliance costs on us and potentially reduce the
effectiveness of our marketing programs.
|
|
|
Telephone Consumer Protection Act and Telemarketing
Consumer Fraud and Abuse Prevention Act |
The Telephone Consumer Protection Act and the Telemarketing
Consumer Fraud and Abuse Prevention Act, enacted in 1991 and
1994, respectively, are designed to restrict unsolicited
advertising using the telephone and facsimile machine. Since
they were enacted, however, telemarketing practices have changed
significantly due to new technologies that make it easier to
target potential customers while at the same time making it more
cost effective to do so. The Federal Communications Commission,
or the FCC, and the Federal Trade Commission, or the FTC, have
responsibility for regulating various aspects of these laws,
such as regulating unwanted telephone solicitations and the use
of automated telephone dialing systems, prerecorded or
artificial voice messages and telephone facsimile machines. In
2003, both agencies adopted a national do-not-call
registry requirement, which, in part, mandated that companies
such as us (i) cross reference our prospective
telemarketing lists against the national do-not-call
registry to avoid contacting enrolled customers unless
established exceptions apply, (ii) regularly check the
do-not-call registry for updates at least every
31 days, and (iii) maintain and regularly update an
internal company list comprised of consumers who have chosen not
to be called or receive facsimile advertising specifically from
us. Over 25 states have also adopted similar laws, with
which we also comply. As with other regulatory requirements,
these provisions impose additional regulatory and compliance
costs on us and reduce the effectiveness of our marketing
programs.
|
|
|
Predatory Lending Legislation |
The Home Ownership and Equity Protection Act of 1994, or HOEPA,
identifies a category of mortgage loans and subjects them to
more stringent restrictions and disclosure requirements. In
addition, liability for violations of applicable law for loans
covered by HOEPA extends not only to the originator but also to
the purchaser of the loans. HOEPA generally covers loans with
either (i) total points and fees upon origination in excess
of the greater of eight percent of the loan amount or $528 (an
annually adjusted dollar amount), or (ii) an APR of more
than eight percentage points higher than United States Treasury
securities, or Treasuries, of comparable maturity on first
mortgage loans and 10 percentage points above Treasuries of
comparable maturity for junior mortgage loans.
We do not originate loans covered by HOEPA because of the higher
legal risks as well as the potential negative perception of
originating loans that are considered to be high
cost under federal law. Several federal, state and local
laws and regulations have been adopted or are under
consideration that are intended to eliminate so-called
predatory lending practices. Many of these laws and
regulations go beyond targeting abusive practices by imposing
broad restrictions on certain commonly accepted lending
practices, including some of our practices. In addition, some of
these laws impose liability on assignees of mortgage loans such
as
18
loan buyers, lenders and securitization trusts. Such provisions
deter loan buyers from purchasing loans covered by the
applicable law.
In 2005, we continued to be subject to adverse state
legislation. For example, Illinois enacted House Bill 4050
(HB 4050) in 2005, which will subject certain zip
codes in Cook County, Illinois to a pilot program that
potentially may have larger statewide implications for our
subprime business. Under the terms of HB 4050, the law
requires brokers, lenders, title companies, closing agents and
credit counselors to report detailed borrower loan information
for loans being made to borrowers within the designated zip
codes in Cook County. Pursuant to regulations promulgated by the
Department of Financial and Professional Regulation, or the
DFPR, the DFPR determines which borrowers must receive loan
counseling in an effort to avoid abusive or predatory loan
terms. The brokers or lenders are required to pay for the loan
counseling and the loan may not be closed until the borrower
completes loan counseling. The law was to become effective
January 1, 2006, but its effective date has been postponed
until a secure database for the borrower information being
gathered can be created and the logistics of how loan counseling
will be handled can be worked out. It is anticipated that the
law will become effective in the spring of 2006, unless a legal
challenge is mounted. Further clarifying regulations are to be
issued and we will be studying them to see what impact the law
and the regulations will have on our ability to do business in
these zip codes.
Additionally, we await judicial decisions in two court cases,
either one of which may have significant impact on our lending
operations. In Ohio, the issue awaiting decision by the Ohio
Supreme Court in the case of American Financial Services
Association vs. The City of Cleveland is whether or not
cities and counties in Ohio have the right to enact predatory
lending ordinances even though state legislation specifically
preempts their ability to do so. An adverse decision will
subject us to a myriad of local lending laws. In Montgomery
County, Maryland, in the case of American Financial Services
Association, et al vs. Montgomery County, Maryland, a
trial court has enjoined a local predatory
lending/discrimination ordinance from taking effect, pending a
full hearing as to whether or not it is preempted by Maryland
state law.
These decisions and new laws impose additional regulatory and
compliance costs on us and reduce the effectiveness of our
marketing programs. There can be no assurance that other similar
laws, rules or regulations will not be adopted in the future.
Adoption of these laws and regulations could have a material
adverse impact on our business by substantially increasing the
costs of compliance with a variety of inconsistent federal,
state and local rules, or by restricting our ability to charge
rates and fees adequate to compensate us for the risk associated
with certain loans. Adoption of these laws could also have a
material adverse effect on our loan origination volume,
especially if our lenders and secondary market buyers elect not
to finance or purchase loans covered by the new laws. We remain
in favor of strong uniform national standards and are supporting
legislative initiatives consistent with this principle.
Efforts to Avoid Abusive Lending Practices
In an effort to prevent the origination of loans containing
unfair terms or involving predatory practices, we have adopted
many policies and procedures, including the following.
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We do not fund or purchase high cost loans as
defined by HOEPA. |
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We do not make or purchase loans containing single premium
credit life, disability or accident insurance. |
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We do not make or purchase loans containing mandatory
arbitration clauses or interest rate increases triggered by
borrower default. None of the subprime loans we make or purchase
allow for negative amortization of the loan. |
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We offer loans with and without prepayment penalties. When a
borrower opts for a loan with a prepayment charge, the borrower
benefits from a lower interest rate and/or pays lower upfront
fees. |
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Our prepayment penalties do not extend beyond three years from
the origination date. On fixed rate loans, the maximum
prepayment penalty term is three years. Prepayment penalties on
adjustable rate subprime loans do not extend beyond the first
adjustment date. |
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We do not originate loans that pay off zero interest rate
mortgages provided by charitable organizations or the government
without borrower third-party counseling. |
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We only approve subprime loan applications that evidence a
borrowers ability to repay the loan. |
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We consider whether a subprime borrowers loan terms are in
the borrowers best interests and document our belief that
the loan represents a tangible benefit to the borrower. We are
currently working to set up a similar system for loans
originated through our mortgage origination platform acquired
from RBC Mortgage. |
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We do not resolicit our borrowers within 12 months of loan
origination. |
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We price loans commensurate with risk. |
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We use an electronic credit grading system for our subprime
loans to help ensure consistency of grading. |
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We do not ask appraisers to report a predetermined value or
withhold disclosure of adverse features. |
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We employ electronic and manual systems to protect against
adverse practices like property flipping. Loan
origination systems are designed to detect red flags such as
inflated appraisal values, unusual multiple borrower activity or
rapid loan turnover. |
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Customer Interaction and Education |
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We market our loans with a view to encouraging a wide range of
applicants strongly representative of racial, ethnic and
economic diversity in the markets we serve throughout the nation. |
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We provide a helpful,
easy-to-follow brochure
to all our loan applicants to educate them on the loan
origination process, explain basic loan terms, help them obtain
a loan that suits their needs and advise them on how to find a
U.S Department of Housing and Urban Development, or HUD-approved
loan counselor. |
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We distribute our Fair Lending Policy to all newly hired
employees and hold them accountable for treating borrowers
fairly and equally. |
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We provide fair lending training to employees having direct
contact with borrowers or loan decision-making authority. |
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We require brokers to sign an agreement indicating that they are
knowledgeable about and will abide by fair lending laws and our
Broker Code of Conduct. |
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We monitor broker performance and strive to hold brokers
accountable for fair and equal treatment of borrowers. |
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Our Retail Division conducts regular customer satisfaction
surveys of all newly funded loans. |
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We also conduct periodic randomly selected satisfaction surveys
of customers who receive loans through a mortgage broker. |
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Each division is supported by well-trained consumer relations
staff dedicated to resolving consumer complaints in a timely and
fair manner. |
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Our Loan Servicing Department contacts each borrower prior to
the first payment to confirm that the borrower understands the
loan payment terms. |
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When appropriate, we also offer loss mitigation counseling to
borrowers in default and provide opportunities to enter into
mutually acceptable reasonable repayment plans. |
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We report borrower monthly payment performance to major credit
repositories. |
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Evaluation and Compliance |
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We subject a significant statistical sampling of our loans to a
quality assurance review of borrower qualification, validity of
information and verified property value determination. |
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Our Fair Lending Officer provides an independent means of
reporting or discussing fair lending concerns through consumer
and employee hotlines. |
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Our Fair Lending Officer monitors production of fair lending
performance, including loan file analysis and reporting, and
coordinates community outreach programs. |
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We periodically engage independent firms to review internal
controls and operations to help ensure compliance with accepted
federal and state lending regulations and practices. |
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We adhere to high origination standards in order to sell our
loan products in the secondary mortgage market. |
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We treat all customer information as confidential and consider
it to be nonpublic information. We maintain systems and
procedures designed to ensure that access to nonpublic consumer
information is granted only to legitimate and valid users. |
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We use sophisticated fraud prevention and detection applications
and techniques that allow us to better protect our customers
from fraud and identity theft. |
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We believe that our commitment to responsible lending is good
business. |
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We strive to promote highly ethical standards throughout our
industry. |
We plan to continue to review, revise and improve our practices
to enhance our fair lending efforts and support the goal of
eliminating predatory lending practices in the industry. Our
policies and procedures are subject to change from time to time
and without notice.
Environmental
In the course of our business, we may acquire properties
securing loans that are in default. There is a risk that
hazardous or toxic waste could be found on such properties. If
this occurs, we could be held responsible under applicable law
for the cost of cleaning up or removing the hazardous waste.
This cost could exceed the value of the underlying properties.
Employees
As of December 31, 2005, we employed approximately 7,200
employees. None of our employees are subject to a collective
bargaining agreement. We believe that our relations with our
employees are satisfactory.
Available Information
We make available, free of charge, on the Investor Relations
Section of our Web site (http://investorrelations.ncen.com/),
our annual reports on
Form 10-K,
quarterly reports on
Form 10-Q, current
reports on
Form 8-K,
Section 16 reports and any amendments to those reports as
soon as reasonably practicable after such reports or amendments
are electronically filed with or furnished to the SEC.
21
MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS
Introduction
The following general discussion summarizes the material
U.S. federal income tax considerations regarding our
qualification and taxation as a REIT. This discussion is based
on interpretations of the Code, regulations issued thereunder,
and rulings and decisions currently in effect (or in some cases
proposed), all of which are subject to change. Any such change
may be applied retroactively and may adversely affect the
federal income tax consequences described herein. This summary
does not discuss all of the tax consequences that may be
relevant to particular stockholders or stockholders subject to
special treatment under the federal income tax laws.
Accordingly, you should consult your own tax advisor regarding
the federal, state, local, foreign, and other tax consequences
of your ownership and our REIT election, and regarding potential
changes in applicable tax laws.
In general, the Code does not differentiate between preferred
and common stockholders when applying the tax laws to
stockholders. Unless specifically indicated otherwise, all
references to stockholders shall include both our
common and preferred classes of stock.
Taxation as a REIT
Generally. We have elected to be taxed as a REIT under
Sections 856 through 859 of the Code commencing with our
taxable year ended December 31, 2004. To qualify as a REIT,
we must meet a number of organizational and operational
requirements, including a requirement that we distribute
currently to our stockholders at least 90% of our REIT taxable
income. As a REIT, we generally are not subject to federal
corporate income tax on that portion of our REIT taxable income
that we distribute currently to our stockholders. Even if we
qualify as a REIT, however, we may be subject to tax in certain
situations. In addition, any taxable REIT subsidiary or
TRS in which we own an interest, including New
Century TRS Holdings, Inc. and its subsidiaries, is subject to
federal corporate income tax on its taxable income at the
highest applicable state and federal corporate tax rates.
There are no differences in the taxation of our common and
preferred shares. All stockholders will generally be taxed on
the dividends they receive at ordinary income rates unless such
dividends are designated by us as a capital gain dividend or as
qualified dividend income. Since our conversion to a REIT, all
dividends paid are taxed at ordinary income rates. We urge all
investors to consult their own independent tax advisors
regarding the effect of all tax matters, including federal,
state, local and in the case of non U.S. investors,
international tax laws, for their investment in New Century
common or preferred stock.
Many of the requirements for qualification as a REIT are highly
technical and complex and require an analysis of factual matters
and an application of the legal requirements to such factual
matters in situations where there is only limited judicial and
administrative guidance. Therefore, no assurance can be given
that we have qualified or will qualify as a REIT for any
particular year. If we fail to qualify as a REIT in any taxable
year, we will be subject to federal income tax at regular
corporate rates and may not be able to qualify as a REIT for
four subsequent tax years. Failure to qualify as a REIT would
adversely affect our net income, our dividend distributions and
could adversely affect the value of our stock.
Taxable Income. We use the calendar year for both tax and
financial reporting purposes. However, there may be differences
between taxable income, taxable REIT income, and income computed
in accordance with accounting principles generally accepted in
the United States of America (GAAP). These differences primarily
arise from permanent differences created by taxable intercompany
transactions between TRS and REIT level companies or to the
timing and character differences in the recognition of revenue
and expense and gains and losses for tax and GAAP purposes.
Additionally, taxable REIT income does not include the taxable
income of our taxable REIT subsidiaries, although the TRS
operating results are included in our GAAP results.
Taxable mortgage pools and REMICs. We will make
investments or enter into financing and securitization
transactions that give rise to our being considered to be, or to
own an interest in, one or more
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taxable mortgage pools or REMICs, although we do not intend to
engage in REMIC securitization transactions other than through
one of our Taxable REIT Subsidiaries.
Under the REIT rules, any portion of our income from a REMIC
residual interest or taxable mortgage pool, including non-cash
accrued income, or phantom taxable income that is
owned by the REIT, will be treated as excess inclusion income
and the character of that income will be passed along to our
stockholders via the dividend each quarter.
The amount of excess inclusion income in any given year from
these activities, transactions and investments by the REIT could
be significant. Generally, individuals and taxable corporations
investing in New Century and receiving our dividends will not be
required to report or consider excess inclusion income when they
file their annual tax return unless they fall into one of the
three special tax circumstances listed below.
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1. That portion of our dividend represented by excess
inclusion income may not be offset by any net operating losses
otherwise available to the stockholder. |
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2. Stockholders otherwise generally exempt from federal
income tax as a non-profit organization will, for that portion
of our dividend represented by excess inclusion income, be
subject to tax for unrelated business taxable income or
UBTI. |
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3. For most types of foreign stockholders that portion of
our dividend represented by excess inclusion income will result
in the application of U.S. federal income tax withholding
at the maximum rate (i.e., 30%), without reduction for any
otherwise applicable income tax treaty. |
The Treasury Department has yet to issue regulations governing
the exact computation of excess inclusion income, its reporting
and finally the tax treatment of the stockholders of a REIT that
owns an interest in a taxable mortgage pool. Accordingly, the
manner in which excess inclusion income is to be allocated among
shares of different classes of our stock or how such income is
to be reported to our stockholders is not clear under current
law. Tax-exempt investors, foreign investors, and taxpayers with
net operating losses should carefully consider the tax
consequences described above and are urged to consult their tax
advisors in connection with their decision to invest in our
stock.
23
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth information about our executive
officers as of March 1, 2006:
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Executive Officers:
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Robert K. Cole
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59 |
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Chairman of the Board of Directors and Chief Executive Officer
of New Century |
Brad A. Morrice
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49 |
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Vice Chairman of the Board of Directors, President and Chief
Operating Officer of New Century; Chief Executive Officer and
Director of New Century Mortgage(1); Chairman of the Board of
Directors and Chief Executive Officer of NC Capital(2); Chairman
of the Board of Directors and Chief Executive Officer of
Home123(3) |
Edward F. Gotschall
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51 |
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Vice Chairman-Finance of the Board of Directors of New Century;
Chief Financial Officer and Director of NC Capital |
Patrick J. Flanagan
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40 |
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Executive Vice President of New Century |
Kevin M. Cloyd
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35 |
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Executive Vice President of New Century and Home123; Executive
Vice President and Director of New Century Mortgage; President
and Director of NC Capital |
Patti M. Dodge
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45 |
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Executive Vice President and Chief Financial Officer of New
Century and New Century Mortgage; Chief Financial Officer and
Director of Home123 |
Stergios Theologides
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39 |
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Executive Vice President-Corporate Affairs and General Counsel
of New Century; Executive Vice President-Corporate Affairs,
Senior Legal Counsel and Secretary of New Century Mortgage;
Executive Vice President and Director of NC Capital; Corporate
Secretary of Home123 |
Joseph F. Eckroth, Jr.
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47 |
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Executive Vice President of New Century and Executive Vice
President, Chief Information Officer and Chief Operating Officer
of New Century Mortgage |
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(1) |
New Century Mortgage is a wholly owned direct subsidiary of New
Century TRS. |
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NC Capital is a wholly owned direct subsidiary of New Century
Mortgage. |
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Home123 is a wholly owned indirect subsidiary of New Century TRS. |
Robert K. Cole, one of our co-founders, has been the
Chairman of our board of directors and Chief Executive Officer
since December 1995 and one of our directors since November
1995. Mr. Cole also served as a director of New Century
Mortgage from November 1995 to April 2005. From February 1994 to
March 1995, he was the President and Chief Operating
Officer-Finance of Plaza Home Mortgage Corporation, a
publicly-traded savings and loan holding company specializing in
the origination and servicing of residential mortgage loans. In
addition, Mr. Cole served as a director of Option One
Mortgage Corporation, a subsidiary of Plaza Home Mortgage
specializing in the origination, sale and servicing of non-prime
mortgage loans. Previously, Mr. Cole was the President of
operating subsidiaries of NBD Bancorp and Public Storage, Inc.
Mr. Cole received a Masters of Business Administration
degree from Wayne State University.
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Brad A. Morrice, one of our co-founders, has been a Vice
Chairman of our board of directors since December 1996, our
President and one of our directors since 1995, and our Chief
Operating Officer since January 2001. Mr. Morrice also
served as our General Counsel from December 1995 to December
1997 and our Secretary from December 1995 to May 1999. In
addition, Mr. Morrice serves as Chief Executive Officer and
a director of New Century Mortgage and Chairman of the board of
directors and Chief Executive Officer of NC Capital and Home123.
From February 1994 to March 1995, he was the President and Chief
Operating Officer-Administration of Plaza Home Mortgage, after
serving as its Executive Vice President, Chief Administrative
Officer since February 1993. In addition, Mr. Morrice
served as General Counsel and a director of Option One. From
August 1990 to January 1993, Mr. Morrice was a partner in
the law firm of King, Purtich & Morrice, where he
specialized in the legal representation of mortgage banking
companies. Mr. Morrice previously practiced law at the
firms of Fried, King, Holmes & August and Manatt, Phelps
& Phillips. He received his law degree from the University
of California, Berkeley (Boalt Hall) and a Masters of Business
Administration degree from Stanford University.
Edward F. Gotschall, one of our co-founders, has been the
Vice Chairman-Finance of our board of directors since July 2004,
a Vice Chairman of our board of directors since December 1996
and one of our directors since November 1995. Prior to being
appointed Vice Chairman-Finance, Mr. Gotschall served as
our Chief Financial Officer from August 1998 to July 2004 and
our Chief Operating Officer Finance/ Administration from
December 1995 to August 1998. Mr. Gotschall also served as
a director of New Century Mortgage from August 1995 to
April 2005 and was its Executive Vice President from
December 1995 to March 2004 and its Chief Financial Officer from
August 1995 to February 2002. Mr. Gotschall is also Chief
Financial Officer and a director of NC Capital. From April 1994
to July 1995, he was the Executive Vice President/ Chief
Financial Officer of Plaza Home Mortgage and a director of
Option One. Mr. Gotschall was one of the co-founders of
Option One and from December 1992 to April 1994,
Mr. Gotschall served as its Executive Vice President/ Chief
Financial Officer. From January 1991 to July 1992, he was the
Executive Vice President/ Chief Financial Officer of The
Mortgage Network, Inc., a retail mortgage banking company.
Mr. Gotschall received his Bachelors of Science in Business
Administration degree from Arizona State University.
Patrick J. Flanagan has been our Executive Vice President
since August 1998. Mr. Flanagan entered into an employment
agreement with us on December 27, 2005 whereby he commenced
a leave of absence January 1, 2006 and his term as our
Executive Vice President will expire as of the earlier to occur
of June 30, 2006 or Mr. Flanagans termination of
employment with us. Upon expiration of Mr. Flanagans
term as Executive Vice President on July 1, 2006, the
consulting agreement he entered with us on December 27,
2005 will become effective, subject to certain conditions.
Mr. Flanagan was the President of New Century Mortgage from
February 2002 to February 2006 and a director of New Century
Mortgage from May 1997 to February 2006. Mr. Flanagan was
also the Chief Executive Officer and a director of NC Capital
until February 2006. From January 1997 to February 2002,
Mr. Flanagan served as Executive Vice President and Chief
Operating Officer of New Century Mortgage. Mr. Flanagan
initially joined New Century Mortgage in May 1996 as Regional
Vice President of Midwest Wholesale and Retail Operations. From
August 1994 to April 1996, Mr. Flanagan was a Regional
Manager with Long Beach Mortgage. From July 1992 to July 1994,
he was an Assistant Vice President for First Chicago Bank, from
February 1989 to February 1991, he was Assistant Vice President
for Banc One in Chicago, and from February 1991 to July 1992, he
was a Business Development Manager for Transamerica Financial
Services. Mr. Flanagan received his Bachelor of Arts degree
from Monmouth College.
Kevin M. Cloyd has been our Executive Vice President
since March 2004. He has been the President of NC Capital since
February 2002 and one of its directors since December 2002.
Mr. Cloyd has also served as Executive Vice President of
New Century Mortgage since March 2004 and one of its directors
since February 2006 and as Executive Vice President of Home123
since August 2005. Mr. Cloyd previously served as Senior
Vice President of Secondary Marketing for New Century Mortgage
from February 2002 to March 2004, and as Vice President of
Secondary Marketing for New Century Mortgage and Executive Vice
President of NC Capital from January 2001 to February 2002. From
March 2000 to January 2001, Mr. Cloyd left New Century
Mortgage to become the Vice President in charge of Secondary
Marketing and Finance for The Mortgage
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Conduit, a start-up company. Mr. Cloyd initially joined New
Century Mortgage in September 1999 as Vice President of Applied
Analytics. From December 1998 to September 1999, Mr. Cloyd
was Assistant Vice President with Fremont Investment and Loan.
Prior to Fremont Investment and Loan, from April 1996 to
December 1998, Mr. Cloyd served as Director of Finance with
Amresco Residential Credit Corporation and was responsible for
Pricing and Analytics. In addition, from 1994 to April 1996,
Mr. Cloyd worked at Bank of America Mortgage and served as
Financial Consultant to their Secondary Marketing and Portfolio
Management Departments. Mr. Cloyd received his Bachelor of
Arts degree in Business Administration with an emphasis in
Finance from California State University at Fullerton.
Mr. Cloyd received his Masters of Arts in Management from
the University of Redlands.
Patti M. Dodge has been our Chief Financial Officer since
July 2004 and our Executive Vice President since March 2004.
Ms. Dodge previously served as our Controller from
September 1996 to July 2005 and our Senior Vice President from
September 1996 to March 2004. Ms. Dodge has also served as
the Executive Vice President and Chief Financial Officer of New
Century Mortgage since March 2004 and served as the Senior Vice
President and Chief Financial Officer of New Century Mortgage
between February 2002 and March 2004. In addition,
Ms. Dodge has served as the Chief Financial Officer of
Home123 since March 2004 and one its directors since February
2006. Prior to joining us, Ms. Dodge was self-employed.
From December 1990 to June 1995, Ms. Dodge was Senior Vice
President at Plaza Home Mortgage Corporation. From February 1989
to December 1990, Ms. Dodge served as Vice President and
Chief Financial Officer of University Savings Bank and from
October 1984 to February 1989, Ms. Dodge served as
Controller of Butterfield Savings. Ms. Dodge received her
Bachelors in Business Administration degree with an
emphasis in accounting from the University of Southern
California.
Stergios Theologides has been our Executive Vice
President-Corporate Affairs since March 2003, and has served as
General Counsel since April 1998. Mr. Theologides also
served as our Corporate Secretary from May 1999 to May 2005.
Mr. Theologides is responsible for all of our legal,
regulatory affairs and compliance matters. Mr. Theologides
joined us in April 1998 as Vice President and General Counsel.
Mr. Theologides also serves as Executive Vice
President Corporate Affairs, Senior Legal Counsel
and Secretary of New Century Mortgage and Executive Vice
President and Director of NC Capital. In addition,
Mr. Theologides has served as Corporate Secretary of
Home123 since March 2004. Previously, Mr. Theologides had
been employed with Wynns International, Inc. from February
1996 to March 1998 where he served as Corporate Counsel.
Mr. Theologides was an associate in the corporate
department of OMelveny & Myers, LLP, from 1992 to
1996. Mr. Theologides received his Juris Doctorate from
Columbia University School of Law where he was a Harlan Fiske
Stone Scholar and Charles Evans Hughes Fellow. He received his
Bachelor of Arts degree from Princeton University with his major
in public and international affairs.
Joseph F. Eckroth, Jr. joined us as Senior Vice President
and Chief Information Officer in July 2005. In January 2006,
Mr. Eckroth was promoted to Executive Vice President and
Chief Operating Officer of New Century Mortgage Corporation and
in March 2006 Mr. Eckroth was promoted to Executive Vice
President of New Century Financial Corporation. Prior to joining
us, Mr. Eckroth was the Chief Information Officer for
Mattel, Inc., the worlds largest toy manufacturer, a
position he held from 2000 to 2005. From 1996 to 2000,
Mr. Eckroth served as an information technology executive
for the General Electric Company, where he held the position of
Chief Information Officer for the GE Medical Systems and GE
Industrial Systems business units. From 1985 to 1996,
Mr. Eckroth served in a variety of executive operations,
quality assurance and technology positions for the Northrop
Grumman Corporation. Mr. Eckroth received his Masters of
Business Administration degree from Pepperdine University School
of Business and Management. He also serves on the Board of
Directors for VWR International, a scientific and medical
supplies distribution company, a position he has held since
November 2004.
Item 1A. Risk
Factors
Stockholders and prospective purchasers of our common stock
should carefully consider the risks described below before
making a decision to buy our common stock. If any of the
following risks actually occurs, our business could be harmed.
In that case, the trading price of our common stock could
decline, and you may lose all or part of your investment. When
determining whether to buy our common stock,
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stockholders and prospective purchasers should also refer to
the other information in this annual report on Form 10-K,
including our financial statements and the related notes.
Risks Related to Our Business
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We are dependent on external sources of financing, and if
we are unable to maintain adequate financing sources, our
earnings and our financial position will suffer and jeopardize
our ability to continue operations. |
We require substantial cash to support our operating activities
and growth plans in our taxable REIT subsidiaries. Our primary
sources of cash for our mortgage loan origination activities are
our warehouse and aggregation credit facilities, our
asset-backed commercial paper facility and the proceeds from the
sales and securitizations of our mortgage loans. As of
December 31, 2005, we had twelve short-term warehouse and
aggregation credit facilities and our asset-backed commercial
paper facility that provided us with approximately
$13.1 billion of committed and $3.0 billion of
uncommitted borrowing capacity to fund mortgage loan
originations and purchases pending the pooling and sale of such
mortgage loans. From time to time, we finance our residual
interests in securitization transactions through the sale of net
interest margin securities, or NIMS. During volatile times in
the capital and secondary markets, access to warehouse,
aggregation and NIMS financing as well as to the securitization
and secondary markets for the sale of our mortgage loans has
been severely constricted. If we cannot maintain or replace
these facilities on comparable terms and conditions, we may
incur substantially higher interest expense that would reduce
our profitability.
We also require substantial cash in order for our REIT to
purchase and hold mortgage loans through securitizations
structured as financings and to engage in hedging transactions.
Our sources of cash for purchasing mortgage loans to be held for
investment are the capital markets, borrowings from our taxable
REIT subsidiaries or releases of over-collateralization accounts
from prior securitizations structured as financings. If we have
inadequate cash at the REIT, we may not be able to grow or
maintain our REIT portfolio size, which may harm our ability to
maintain or grow our REIT dividend. Likewise, a large margin
call on our hedging instruments could negatively affect our
liquidity position.
In addition, we require substantial cash to pay our required
REIT dividends. To qualify as a REIT under the Code, we
generally are required each year to distribute to our
stockholders at least 90% of our REIT taxable income (determined
without regard to the dividends paid deduction and by excluding
net capital gains). After-tax earnings generated by our taxable
REIT subsidiaries and not distributed to us are not subject to
these distribution requirements and may be retained by such
subsidiaries to provide for future growth, subject to the
limitations imposed by REIT tax rules. We conduct a substantial
amount of our business through our taxable REIT subsidiaries. We
cannot be certain that we will have access to funds to meet the
REIT distribution and other qualification requirements. We may
be required to borrow funds from one of our corporate
subsidiaries or a third party on a short-term basis or liquidate
investments to meet the distribution requirements that are
necessary to qualify as a REIT, even if management believes that
it is not in our best interests to do so. If we do not have
access to the necessary funds, we may have to raise capital at
inopportune times or borrow funds on unfavorable terms. However,
if we are unable to maintain adequate financing or other sources
of capital are not available, we would be forced to suspend or
curtail our operations, which would harm our results of
operations, financial condition and business prospects.
Similarly, we may be required to pursue one or more alternative
strategies, such as selling assets, refinancing or restructuring
our indebtedness or selling additional debt or equity securities.
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We face intense competition that could harm our market
share and our revenues. |
We face intense competition from finance and mortgage banking
companies, Internet-based lending companies and large financial
institutions.
Over the past year, we have experienced severe pricing
competition from lenders who are offering interest rates lower
than those we charge. Currently, we do not intend to compete
solely on the basis of loan pricing. If the other features of
our mortgage loans do not provide enough advantages to induce
our potential wholesale
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and retail customers to choose our mortgage loan products, our
mortgage loan production volume could decrease, which could harm
our results of operations, financial condition and business
prospects.
In addition, Fannie Mae and Freddie Mac are also expanding their
participation in the subprime mortgage industry. These
government-sponsored entities have a size and cost-of-funds
advantage that allows them to purchase mortgage loans with lower
rates or fees than we may be willing to offer. While the
government-sponsored entities presently do not have the legal
authority to originate mortgage loans, including subprime
mortgage loans, they do have the authority to buy mortgage
loans. A material expansion of their involvement in the market
to purchase subprime mortgage loans could change the dynamics of
the subprime industry by virtue of their sheer size, pricing
power and the inherent advantages of a government charter. In
addition, if as a result of their purchasing practices, these
government-sponsored entities experience significantly
higher-than-expected losses, such experience could harm the
overall investor perception of the subprime mortgage industry.
Certain large finance companies and conforming mortgage
originators also originate subprime mortgage loans to customers
similar to the borrowers we serve. Competitors with lower costs
of capital have a competitive advantage over us. In addition,
establishing a wholesale lending operation such as ours requires
a relatively small commitment of capital and human resources.
This low barrier to entry permits new competitors to enter our
markets quickly and compete with our wholesale lending business.
If these competitors are able to attract some of our key
employees and disrupt our broker relationships, it could harm
our results of operations, financial condition and business
prospects.
Some thrifts, national banks and their operating subsidiaries
are also expanding their mortgage lending activities. By virtue
of their charters, these institutions are exempt from complying
with many of the state and local laws that affect our
operations. For example, they are permitted to offer mortgage
loans with prepayment charges in many jurisdictions where we
cannot. If more of these federally chartered institutions are
able to use their preemptive ability to provide more competitive
pricing and terms than we can offer, it could harm our results
of operations, financial condition and business prospects.
In addition, to the extent we purchase mortgage loans or
mortgage-related assets from third parties, we will compete with
other REITs, investment banking firms, savings and loan
associations, banks, insurance companies, other lenders and
other entities that purchase mortgage loans or mortgage-backed
securities, many of which have greater financial resources than
we do. As a result, we may not be able to acquire sufficient
mortgage-related assets with favorable yields over our borrowing
costs, which could harm our results of operations, financial
condition and business prospects.
The intense competition in the mortgage industry has also led to
rapid technological developments, evolving industry standards
and frequent releases of new products and enhancements. As
mortgage products are offered more widely through alternative
distribution channels, such as the Internet, we may be required
to make significant changes to our current wholesale and retail
structures and information systems to compete effectively. Our
inability to continue enhancing our current Internet
capabilities, or to adapt to other technological changes in the
industry, could harm our results of operations, financial
condition and business prospects.
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A prolonged economic slowdown or a lengthy or severe
recession could harm our operations, particularly if it results
in a decline in the real estate market. |
The risks associated with our business are more acute during
periods of economic slowdown or recession because these periods
may be accompanied by decreased demand for consumer credit and
declining real estate values. Declining real estate values
reduce the ability of borrowers to use home equity to support
borrowings because they reduce the LTV of the home equity
collateral. In addition, because we make a substantial number of
mortgage loans to credit-impaired borrowers, the actual rates of
delinquencies, foreclosures and losses on these mortgage loans
could be higher during economic slowdowns. Any sustained period
of increased delinquencies, foreclosures or losses could harm
our ability to sell mortgage loans, the prices we receive for
our mortgage loans, or the values of our mortgage loans held for
investment or our residual interests in securitizations, which
could harm our results of operations, financial condition and
business prospects.
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Our earnings may decrease because of increases or
decreases in interest rates. |
Our profitability may be directly affected by changes in
interest rates. The following are some of the risks we face as a
result of interest rate increases:
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When we securitize mortgage loans, the income we receive and the
value of the residual interests we retain from the
securitizations structured as financings are based primarily on
the London Inter-Bank Offered Rate, or LIBOR. This is because
the interest on the underlying mortgage loans is based on fixed
rates payable on the underlying mortgage loans for the first two
or three years from origination while the holders of the
applicable securities are generally paid based on an adjustable
LIBOR-based yield. Therefore, an increase in LIBOR reduces the
net income we receive from, and the value of, these mortgage
loans and residual interests. |
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Our adjustable-rate mortgage loans have periodic and lifetime
interest rate caps above which the interest rate on the mortgage
loans may not rise. In the event of general interest rate
increases, the rate of interest on these mortgage loans could be
limited, while the rate payable on the senior certificates
representing interests in a securitization trust into which
these mortgage loans are sold may be uncapped. This would reduce
the amount of cash we receive over the life of the mortgage
loans in securitizations structured as financings and our
residual interests, and could require us to reduce the carrying
value of our residual interests. |
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Changes in interest rates may affect our net interest income,
which is the difference between the interest income that we earn
on our mortgage loans or mortgage-related assets and the
interest expense that we incur in financing our assets through
debt, including securitizations. We rely primarily on short-term
borrowings to acquire assets with long-term maturities.
Accordingly, increases in short-term interest rates as compared
to long-term interest rates may negatively affect the value of
our assets and our ability to realize gains from the sale of
mortgage loans we originate for resale, which will ultimately
affect our earnings. In a period of rising interest rates, our
interest expense could increase in different amounts and at
different rates and times than the interest that we earn on our
assets. If the net differential between our interest income on
our mortgage loan assets and our interest expense to carry such
mortgage loans was reduced, our net interest income would be
reduced. Interest rate fluctuations resulting in our interest
expense exceeding our interest income could result in operating
losses for us and may limit or eliminate our ability to make
distributions to our shareholders. |
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A substantial and sustained increase in interest rates could
harm our mortgage loan origination volume because refinancings
of existing mortgage loans, including cash-out refinancings and
interest rate-driven refinancings, would be less attractive and
qualifying for a purchase mortgage loan may be more difficult.
Lower origination volume may harm our earnings by reducing
origination income, net interest income and gain on sale of
mortgage loans. |
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During periods of rising interest rates, the value and
profitability of our mortgage loans may be harmed between the
date of origination or purchase until the date we sell or
securitize the mortgage loans. |
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An increase in interest rates could increase the delinquency and
default rates on the adjustable-rate mortgage loans that we
originate and hold because the borrowers monthly payments
under such mortgage loans may increase beyond the
borrowers ability to pay. Our portfolio of
mortgage-related assets includes a significant number of
mortgage loans that were originated in 2004 and 2005 that are
adjustable-rate mortgage loans. Due to significant increases in
interest rates since those mortgage loans were originated, the
borrowers may be facing a larger-than-expected payment increase
once the initial two or three-year fixed period ends. This may
result in higher delinquencies and/or faster prepayment speeds,
both of which could harm our profitability. High delinquencies
or losses may decrease our cash flows or impair our ability to
sell or securitize mortgage loans in the future, which could
harm our results of operations, financial condition and business
prospects. |
We are also subject to risks from decreasing interest rates. For
example, a significant decrease in interest rates could increase
the rate at which mortgage loans are prepaid, which also could
require us to reduce the carrying value of our residual
interests. Moreover, if prepayments are greater than expected,
the cash we
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receive over the life of our residual interests would be
reduced. Higher-than-expected prepayments could also harm the
value of our servicing portfolio. Therefore, any such changes in
interest rates could harm our results of operations, financial
condition and business prospects.
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Our reliance on cash-out refinancings as a significant
source of our origination volume increases the risk that our
earnings will be harmed if the demand for this type of
refinancing declines. |
During the year ended December 31, 2005, approximately
48.4% of our mortgage loan production volume consisted of
cash-out refinancings. This concentration increases the risk
that our earnings will be reduced if interest rates rise and the
prices of homes decline, which would reduce the demand and
production volume for this type of refinancing. A substantial
and sustained increase in interest rates could significantly
reduce the number of borrowers who would qualify or elect to
pursue a cash-out refinancing and result in a decline in that
origination source. Similarly, a decrease in home prices would
reduce the amount of equity available to be borrowed against in
cash-out refinancings and result in a decrease in our mortgage
loan production volume from that origination source. Therefore,
our reliance on cash-out refinancings as a significant source of
our origination volume could harm our results of operations,
financial condition and business prospects.
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Our accounting policies and methods are fundamental to how
we report our financial condition and results of operations, and
they may require management to make estimates about matters that
are inherently uncertain. |
We have identified several accounting policies as being
critical to the presentation of our financial
condition and results of operations because they require
management to make particularly subjective or complex judgments
about matters that are inherently uncertain and because of the
likelihood that materially different amounts would be recorded
under different conditions or using different assumptions. These
critical accounting policies relate to, without limitation,
securitizations structured as financings, allowance for losses
on mortgage loans held for investment, residual interests in
securitizations, allowance for repurchase losses, gain on sale
of mortgage loans, income taxes and derivative instruments
designated and documented as hedges. Because of the inherent
uncertainty of the estimates associated with these critical
accounting policies, we cannot provide any assurance that we
will not make significant subsequent adjustments to the related
amounts recorded. For more information, please refer to the
Managements Discussion and Analysis of Financial
Condition and Results of Operations Critical
Accounting Policies section in this Report.
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Our hedging strategies may not be successful in mitigating
our risks associated with interest rates. |
We use various derivative financial instruments to provide a
level of protection against interest rate changes, but no
hedging strategy can protect us completely. When rates change,
we expect to record a gain or loss on derivatives, which would
be offset by an inverse change in the value of mortgage loans or
residual interests. Additionally, from time to time, we may
enter into hedging transactions in connection with our holdings
of mortgage-backed securities and government securities with
respect to one or more of our assets or liabilities. Our hedging
activities may include derivative financial instruments such as
Euro Dollar futures contracts, interest rate cap agreements,
interest rate swap agreements, Treasury futures and options on
interest rates as well has hedging instruments such as mortgage
derivative securities. Currently, we intend to primarily use
Euro Dollar futures contracts, interest rate cap agreements and
interest rate swap agreements to manage the interest rate risk
of our portfolio of adjustable-rate mortgages; however, we may
change our hedging strategy in the future depending on market
factors. Under our current strategy, any significant decrease in
interest rates could result in a significant margin call, which
would require us to provide the counterparty with additional
cash collateral. Any such margin call could harm our liquidity,
results of operations, financial condition and business
prospects.
The derivative financial instruments we select may not have the
effect of reducing our interest rate risk. There have been
periods, and it is likely that there will be periods in the
future, during which we will incur losses after accounting for
our derivative financial instruments. In addition, the nature
and timing of hedging transactions may influence the
effectiveness of these strategies. Poorly designed strategies or
improperly executed transactions could actually increase our
risk and losses. Our hedging strategies also involve
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transaction and other costs. We cannot assure you that our
hedging strategy and the derivatives that we use will adequately
offset the risk of interest rate volatility or that our hedging
transactions will not result in losses, which losses could harm
our results of operations, financial condition and business
prospects.
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An increase in mortgage loan prepayments may negatively
affect the yields on our assets. |
The value of the mortgage loans and any underlying
securitization retained interests that we may hold will be
affected by prepayment rates on those mortgage loans. Prepayment
rates on mortgage loans are influenced by changes in interest
rates and a variety of economic, geographic and other factors
beyond our control. As a result, we are unable to predict
prepayment rates with any certainty.
In periods of declining mortgage loan interest rates,
prepayments on mortgage loans generally increase. We likely
would reinvest the proceeds that we receive from those
prepayments in mortgage loans and other assets with lower yields
than the yields on the mortgage loans that were prepaid. As
interest rates decline, the market value of fixed-income assets
generally increases. However, because of the risk of prepayment,
the market value of any mortgage loan or mortgage-related asset
does not increase to the same extent as fixed-income securities
in an environment of declining interest rates. Conversely, in
periods of rising interest rates, prepayments on mortgage loans
generally decrease, in which case we would not have the
prepayment proceeds available to invest in assets with higher
yields. Under certain interest rate and prepayment scenarios, we
may fail to recoup fully our costs.
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The mortgage loans that we hold are subject to the risks
of delinquency and foreclosure loss, which could result in
losses to us. |
Our mortgage loans are secured by residential properties and are
subject to risks of loss from delinquencies and foreclosures.
The ability of a borrower to repay a mortgage loan secured by
residential property typically is dependent primarily upon the
income or assets of the borrower. In addition, the ability of
borrowers to repay their mortgage loans may be affected by,
among other things:
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property location and condition; |
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competition and demand for comparable properties; |
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changes in zoning laws for the property or its surrounding area; |
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environmental contamination at the property; |
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the occurrence of any uninsured casualty at the property; |
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changes in national, regional or local economic conditions; |
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declines in regional or local real estate values; |
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increases in interest rates or real estate taxes; |
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availability and costs of municipal services; |
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changes in governmental rules, regulations and fiscal policies,
including environmental legislation and changes in tax laws; and |
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acts of God, war or other conflict, terrorism, social unrest and
civil disturbances and natural disasters, such as hurricanes. |
In the event of a default under a mortgage loan held directly by
us, we will bear a risk of loss of principal to the extent of
any deficiency between the value of the collateral that we can
realize upon foreclosure and sale, and the principal and accrued
interest of the mortgage loan and the cost of foreclosing on the
related property. Losses resulting from mortgage loan defaults
and foreclosures could have a material adverse effect on our
income and cash flow from operations and could limit the funds
that we have available for distribution to our stockholders. We
are exposed to greater risks of loss where we make both a first
and second lien mortgage loans on the same property and do not
have the benefits of private mortgage insurance. Our
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underlying subordinated tranches in securitizations would also
be affected adversely by losses on our mortgage loans that have
been included in the related securitizations.
In the event of the bankruptcy of a mortgage loan borrower, the
related mortgage loan will be deemed to be secured only to the
extent of the value of the underlying collateral at the time of
bankruptcy, as determined by the bankruptcy court. The lien
securing the mortgage loan will be subject to the avoidance
powers of the bankruptcy trustee or debtor-in-possession to the
extent the lien is unenforceable under state law. Foreclosure of
a mortgage loan can be an expensive and lengthy process that can
have a substantial negative effect on our originally anticipated
return on the foreclosed mortgage loan. Residential
mortgage-backed securities evidence interests in, or are secured
by, pools of residential mortgage loans. Accordingly, the
subordinated tranches in the mortgage-backed securities that we
hold are subject to all of the risks of the related mortgage
loans. In addition, to the extent that the mortgage loans we
originate experience relatively high rates of delinquency and/or
foreclosure, then we may be unable to securitize our mortgage
loans on terms that are attractive to us, if at all.
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The geographic concentration of our mortgage loan
originations increases our exposure to economic and natural
hazard risks specific to those areas. |
Over-concentration of our mortgage loan originations in any one
geographic area increases our exposure to the economic and
natural hazard risks associated with that area. For example, in
the year ended December 31, 2005, approximately 37.4% of
the aggregate principal amount of our mortgage loans was secured
by properties located in California. Certain parts of California
have experienced an economic downturn in the past and have
suffered the effects of certain natural hazards. Declines in the
residential real estate markets in which we are concentrated may
reduce the values of the properties collateralizing our
mortgages, increase the risk of delinquency, foreclosure,
bankruptcy or losses and could harm our results of operations,
financial condition and business prospects.
Furthermore, if borrowers are not insured for natural disasters,
which are typically not covered by standard hazard insurance
policies, then they may not be able to repair the property or
may stop paying their mortgages if the property is damaged. A
natural disaster, such as Hurricane Katrina, that results in a
significant number of delinquencies would cause increased
foreclosures and decrease our ability to recover losses on
properties affected by such disasters and would harm our results
of operations, financial condition and business prospects.
Likewise, the secondary market pricing for pools of mortgage
loans that are not geographically diverse is typically less
favorable than for a diverse pool. Our inability to originate or
purchase geographically diverse pools of mortgage loans could
harm our results of operations, financial condition and business
prospects.
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An interruption or reduction in the securitization and
whole loan markets would harm our financial position. |
We are dependent on the securitization market for the sale of
our mortgage loans because we securitize mortgage loans directly
and many of our whole loan buyers purchase our mortgage loans
with the intention to securitize them. The securitization market
is dependent upon a number of factors, including general
economic conditions, conditions in the securities market
generally and conditions in the asset-backed securities market
specifically. In addition, poor performance of our previously
securitized mortgage loans could harm our access to the
securitization market. Accordingly, a decline in the
securitization market or a change in the markets demand
for our mortgage loans could harm our results of operations,
financial condition and business prospects.
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We may not realize all of the expected benefits of, and we
may incur additional costs related to, the acquisition of a
mortgage origination platform from RBC Mortgage. |
On September 2, 2005, we acquired a mortgage origination
platform from RBC Mortgage. It is too early to conclude whether
we will realize the anticipated benefits of this acquisition,
including expanded depth and breadth of our mortgage product
offerings, expanded retail presence on a nationwide basis and
expanded
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channels of distribution, including into the realtor and builder
channels. Moreover, our management has limited experience
operating the recently acquired RBC Mortgage platform and
integrating recently acquired businesses. At the same time, the
ultimate costs associated with this acquisition may be higher
than expected. In addition, the process of integrating an
acquired business may result in operating difficulties,
compliance errors and unanticipated expenditures and may require
significant management attention that would otherwise be
available for ongoing development of other aspects of our
business.
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If we make any additional acquisitions, we will incur a
variety of costs and may never realize the anticipated
benefits. |
If appropriate opportunities become available, we may attempt to
acquire businesses that we believe are a strategic fit with our
business. We currently have no agreements to consummate any
material acquisitions. If we pursue any such transaction, the
process of negotiating the acquisition and integrating an
acquired business may result in operating difficulties and
expenditures and may require significant management attention
that would otherwise be available for ongoing development of our
business, whether or not any such transaction is ever
consummated. Moreover, we may never realize the anticipated
benefits of any acquisition. Future acquisitions could result in
potentially dilutive issuances of equity securities, the
incurrence of debt, contingent liabilities and/or amortization
expenses related to goodwill and other intangible assets, which
could harm our results of operations, financial condition and
business prospects.
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Our earnings from holding mortgage-backed securities or
government securities may be harmed by changes in the level of
interest rates, changes to the difference between short- and
longer- term interest rates, changes to the difference between
interest rates for these securities compared to other debt
instruments, and an absence of or reduction in the availability,
at favorable terms, of repurchase financing and other liquidity
sources typically utilized by mortgage REITs. |
From time to time, we may purchase mortgage-backed securities or
government securities from third parties in order to comply with
the income and asset tests necessary to maintain our REIT
status. The value of, and return on, the mortgage-backed
securities and government securities we hold will be affected by
changes in the marketplace for such securities, as well as
prepayment speeds in the case of mortgage-backed securities, and
may be volatile and significantly different than anticipated.
The securities that we hold may produce large losses instead of
the income that we expect. The impact of changes in the
marketplace for these securities on our results may be magnified
because these holdings could be highly leveraged. Additionally,
much of the financing we will use to hold these securities may
be cancelable by our lenders on short notice. If our lenders
cease providing financing to us on favorable terms, we would be
forced to liquidate some or all of these securities, possibly at
a substantial loss, which could harm our financial condition,
results of operations and business prospects.
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A material difference between the assumptions used in the
determination of the value of our residual interests and our
actual experience could harm our financial position. |
As of December 31, 2005, the value on our balance sheet of
our residual interests from securitization transactions was
$234.9 million. The value of these residual interests is a
function of the delinquency, loss, prepayment speed and discount
rate assumptions we use. It is extremely difficult to validate
the assumptions we use in valuing our residual interests. In the
future, if our actual experience differs materially from these
assumptions, our cash flow, financial condition, results of
operations and business prospects may be harmed.
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We may be required to conform to the standards of the
recent Ameriquest settlement, which could harm our
business. |
In January 2006, ACC Capital Holding Corporation and its
subsidiaries Ameriquest Mortgage Company, Town & Country
Credit Corporation and AMC Mortgage Services Inc., formerly
known as Bedford Home Loans, which we refer to collectively as
Ameriquest, reached a settlement with various state
Attorneys General resolving some of the regulatory complaints
and consumer claims made against Ameriquest related to predatory
home mortgage lending. By the terms of the settlement, the
second largest federal consumer
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protection settlement in history, Ameriquest agreed to implement
certain new standards and to pay $325 million to the
states, with most of the money to be used to pay restitution to
consumers who obtained mortgage loans from Ameriquest between
January 1999 and December 2005.
In the settlement, Ameriquest denied all allegations but agreed
to implement certain new standards and practices meant to
prevent a recurrence of its alleged abuses and unfair and
deceptive practices. Many of the settlements requirements
far exceed any express requirements of existing lending laws.
Although we believe our historical controls and practices have
operated effectively to mitigate the risk of the abuses alleged
in the Ameriquest settlement, in many cases our controls and
policies are not identical to those prescribed by the Ameriquest
settlement. However, some Attorneys General have made public
statements that the conduct required by the Ameriquest
settlement should be seen as new standards applicable to the
entire industry and that they may pursue actions against lenders
who do not adhere the new standards. If the Attorneys General
seek to apply these standards to the entire industry or our
company in particular, some of our own practices could be called
into question and our revenues, business, results of operations
and profitability could be harmed. In addition, if it becomes
accepted practice that settlements entered with Attorneys
General establish new standards for the industry as a whole and
supercede existing express legislative requirements, the
standards by which we are governed will become less predictable
and the risks associated with our business will increase.
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New legislation could restrict our ability to make
mortgage loans, which could harm our earnings. |
Several states and cities are considering or have passed laws,
regulations or ordinances aimed at curbing predatory lending
practices. The federal government is also considering
legislative and regulatory proposals in this regard. In general,
these proposals involve lowering the existing federal
Homeownership and Equity Protection Act thresholds for defining
a high-cost mortgage loan and establishing enhanced
protections and remedies for borrowers who receive such mortgage
loans. However, many of these laws and rules extend beyond
curbing predatory lending practices to restrict commonly
accepted lending activities, including some of our activities.
For example, some of these laws and rules prohibit any form of
prepayment charge or severely restrict a borrowers ability
to finance the points and fees charged in connection with the
borrowers mortgage loan. In addition, some of these laws
and regulations provide for extensive assignee liability for
warehouse lenders, whole loan buyers and securitization trusts.
Because of enhanced risk and for reputational reasons, many
whole loan buyers elect not to purchase any mortgage loan
labeled as a high cost mortgage loan under any
local, state or federal law or regulation. Accordingly, these
laws and rules could severely constrict the secondary market for
a significant portion of our mortgage loan production. This
would effectively preclude us from continuing to originate
mortgage loans that fit within the newly defined thresholds.
Some of our competitors who are, or are owned by, national banks
or federally chartered thrifts may not be subject to these laws
and may, therefore, be able to capture market share from us and
other lenders. Passage of such state and local laws could
increase compliance costs and reduce fee income and origination
volume, all of which would harm our results of operations,
financial condition and business prospects.
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Lawsuits challenging our business practices, our
competitors and other companies are pending and more may be
filed in the future. |
We are named as a defendant in a number of lawsuits challenging
various aspects of our business operations and seeking
significant monetary damages. These cases allege violations of
the Fair Credit Reporting Act, or FCRA, failure to pay overtime
wages, the making of mortgage loans with fees greater than
permitted by law and advertising practices and interference with
broker relationships, among other matters. Additional litigation
may be filed against us or disputes may arise in the future
concerning these or other business practices. In addition,
lawsuits have been filed, and other lawsuits may be filed in the
future, against our competitors and other businesses, and
although we are not a party to such litigation, the results of
such lawsuits may create additional risks for, or impose
additional costs or limitations on, our business operations.
As courts resolve individual or class action litigation related
to our industry, regulations and standards could emerge
necessitating material increases in our costs of doing business
or preventing us from participating
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in certain business activities in which we currently engage. For
instance, if claims by various plaintiffs that prescreened
offers of credit do not qualify as firm offers of credit under
the FCRA, and thus that we are not authorized to access certain
consumer credit reports in relation to such offers, prevail, our
business practices and ability to offer and close certain lines
of credit would be impaired and our revenues, results of
operations, business and profitability could be harmed.
The outcome of litigation and other legal matters is always
uncertain. One or more legal matters could result in losses
material to our financial condition, results of operations,
business and profitability. A description of material legal
actions in which we are involved is included under Legal
Proceedings in Item 3.
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The scope of our lending and servicing operations exposes
us to risks of noncompliance with an increasing and inconsistent
body of complex laws and regulations at the federal, state and
local levels. |
Because we are authorized to originate and service mortgage
loans in all 50 U.S. states, we must comply with the laws and
regulations, as well as judicial and administrative decisions,
in all of these jurisdictions, as well as an extensive body of
federal law and regulations. The volume of new or modified laws
and regulations has increased in recent years, and individual
cities and counties have begun to enact laws that restrict
mortgage loan origination and servicing activities. The laws and
regulations of each of these jurisdictions are different,
complex and, in some cases, in direct conflict with each other.
Moreover, plaintiffs are beginning to attack the legality of
origination and servicing practices that are customary in the
mortgage loan industry. As our operations continue to grow, it
may be more difficult to comprehensively identify, accurately
interpret and properly program our technology systems and
effectively train our personnel with respect to all of these
laws and regulations, thereby potentially increasing our
exposure to the risks of noncompliance with these laws and
regulations.
Our failure to comply with these laws can lead to:
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civil and criminal liability; |
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loss of licensure; |
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damage to our reputation in the industry; |
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inability to sell or securitize our mortgage loans; |
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demands for indemnification or mortgage loan repurchases from
purchasers of our mortgage loans; |
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fines and penalties and litigation, including class action
lawsuits; or |
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administrative enforcement actions. |
Any of these results could harm our results of operations,
financial condition and business prospects.
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Our interest-only mortgage loans may have a higher risk of
default than our fully-amortizing mortgage loans and, therefore,
may be considered less valuable than other types of mortgage
loans in the sales and securitization process. |
During the year ended December 31, 2005, originations of
interest-only mortgage loans totaled $17.3 billion, or
30.7%, of total originations. Until the fourth quarter of 2005,
most of these interest only mortgage loans required the borrower
to make monthly payments only of accrued interest for the first
two or three years, corresponding to the initial fixed-rate
period of these mortgage loans. Since then, we changed our
product design to provide for interest only payments for at
least the first 5 years following origination. The
interest-only feature may reduce the likelihood of prepayment
during the interest-only period due to the smaller monthly
payments relative to a fully-amortizing mortgage loan. However,
upon expiration of the interest-only payment, the
borrowers payment will increase to cover the fully
amortizing payment. The adjustment to the higher payment amount
increases the risk that the borrower will default or prepay the
mortgage loan. Because no principal payments may be made on such
mortgage loans for an extended period following origination, if
the borrower defaults, the unpaid principal balance of the
related mortgage loan will be greater than otherwise would be
the case, increasing the risk of loss in that situation. For
those reasons,
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among others, these interest-only mortgage loans may be less
valuable in the secondary market and may result in lesser
proceeds to us when sold or securitized as compared to fully
amortizing mortgage loans.
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We may incur losses on our mortgage loans even if the
mortgage loans are insured by the Federal Housing Administration
or guaranteed by the Veterans Administration. |
Originations in connection with our recently acquired RBC
Mortgage platform include mortgage loans insured by the Federal
Housing Administration and mortgage loans guaranteed by the
Veterans Administration. While those insured mortgage loans and
guaranteed mortgage loans are generally subject to a lower risk
of default than mortgage loans that are not insured or
guaranteed, there can be no assurance that our insured mortgage
loans and guaranteed mortgage loans will not be subject to
credit losses. The Federal Housing Administration only insures
against foreclosure and the Veterans Administration only
partially guarantees the losses that we incur as a result of
foreclosure. Moreover, neither the insurance nor the guarantees
take into account the interest rate risks, prepayment risks,
extension risks or other risks associated with mortgage loans.
In addition, the insurance and the guarantees do not protect us
against a reduction in the market value of the mortgage loans.
As a result, while we attempt to mitigate our exposure to credit
risk for certain of our mortgage loans by obtaining insurance
from the Federal Housing Administration and guarantees from the
Veterans Administration, we cannot eliminate all such credit
risks and remain subject to other risks related to mortgage
loans and may suffer losses, which may harm the market price of
our securities.
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The loss of our exemption under the Investment Company Act
would harm us and the market price of our shares of common stock
and our ability to make distributions to our
stockholders. |
We are not currently regulated as an investment company under
the Investment Company Act of 1940, as amended, or the
Investment Company Act, and we intend to operate so as to not
become regulated as an investment company under the Investment
Company Act. For example, we intend to qualify for an exemption
under the Investment Company Act that is available to companies
that are primarily engaged in the business of purchasing
or otherwise acquiring mortgages and other liens on and
interests in real estate. Specifically, we intend to
invest at least 55% of our assets in mortgage loans or
mortgage-related assets securities that represent the entire
ownership in a pool of mortgage loans and at least an additional
25% of our assets in mortgages, mortgage-related assets
securities, securities of REITs and other real estate-related
assets. As of December 31, 2005, 61.7% of our assets
consisted of mortgage loans or mortgage-related assets that
represent the entire ownership in a pool of mortgage loans and
another 30.8% of our assets were invested in mortgages,
mortgage-related assets, securities of REITs and other real
estate-related assets.
If we fail to qualify for that exemption, we may be required to
restructure our activities. For example, if the market value of
our investments in equity securities were to increase by an
amount that caused less than 55% of our assets to be invested in
mortgage loans or mortgage-related assets that represent the
entire ownership in a pool of mortgage loans, we might have to
sell equity securities in order to qualify for an exemption
under the Investment Company Act. In the event we must
restructure our activities, such restructuring could harm our
results of operations, financial condition and business
prospects.
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Our inability to realize cash proceeds from mortgage loan
sales and securitizations in excess of the loan acquisition cost
could harm our financial position. |
The net cash proceeds received from mortgage loan sales consist
of the premiums we receive on sales of mortgage loans in excess
of the outstanding principal balance, plus the cash proceeds we
receive from securitizations structured as sales, minus the
discounts on mortgage loans that we have to sell for less than
the outstanding principal balance. If we are unable to originate
mortgage loans at a cost lower than the cash proceeds realized
from mortgage loan sales, such inability could harm our results
of operations, financial condition and business prospects.
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Our credit facilities are subject to margin calls based on
the lenders opinion of the value of our mortgage loan
collateral. An unanticipated large margin call could harm our
liquidity. |
The amount of financing we receive under our credit facilities
depends in large part on the lenders valuation of the
mortgage loans that secure the financings. Each such facility
provides the lender the right, under certain circumstances, to
reevaluate the mortgage loan collateral that secures our
outstanding borrowings at any time. In the event the lender
determines that the value of the mortgage loan collateral has
decreased, it has the right to initiate a margin call. A margin
call would require us to provide the lender with additional
collateral or to repay a portion of the outstanding borrowings.
Any such margin call could harm our liquidity, results of
operations, financial condition and business prospects.
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Our origination and servicing systems depend significantly
on automated controls and any failure of these systems could
harm our business. |
We are increasingly dependent on automated systems and
technology to operate our business, enhance customer service and
achieve low operating costs. Our origination and servicing
systems rely heavily on automated controls. The performance and
reliability of our automated systems are critical to our ability
to operate our business and compete effectively.
Given our high volume of transactions, certain errors in our
automated systems may be repeated or compounded before they are
discovered and successfully corrected. If we misinterpret or
incorrectly implement a legal standard in our automated systems,
the error may be replicated numerous times before it is fixed.
In addition, technical system flaws or employee tampering or
manipulation of our automated systems may result in losses that
are difficult to detect. We also face the risk that the design
of our controls and procedures prove inadequate or are
circumvented, thereby causing delays in detection or errors in
information. In addition, we are exposed to the risk that our
external vendors may not fulfill their contractual obligations
to us.
Our automated systems cannot be completely protected against
events that are beyond our control, including natural disasters,
computer viruses or telecommunications failures. Our business
continuity and data security systems may prove inadequate to
allow us to resume operations in the event of a disruption to
our operations. There can be no assurance that we will not
suffer losses from operational risks in the future that may be
material in amount. Substantial or sustained system failures
could impact customer service. Any disruptions in these systems
due to internal failures of technology or large-scale external
interruptions in technology infrastructure, such as power,
telecommunications or the internet, could result in the loss of
revenue or important data, increase our expenses and generally
harm our business.
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Our efforts to increase our servicing activities may be
unsuccessful and a decline in the quality of servicing could
lower the value of our residual interests and our ability to
sell or securitize mortgage loans and could harm the cash flows
from our securitizations structured as financings. |
We have devoted a significant amount of our resources and
expenditures in recent periods to expanding our servicing
capabilities. During the past two years, we have completed
several servicing platform technology initiatives and moved our
servicing platform to a new larger facility to allow for
increased servicing capacity and growth of our servicing
activity. We may not realize the expected benefits from these
initiatives and the expected benefits we do realize may not
occur until future periods. If we are unable to realize the
expected benefits of the expansion of our servicing
capabilities, our revenues, business, results of operations and
profitability could suffer and we would have less funds
available for distribution to our stockholders. In addition, a
weakened ability to service mortgage loans could disadvantage us
against our competitors in the market for sales and
securitizations of mortgage loans in the secondary market and
harm our ongoing business relationships, and ability to effect
repeat business, with borrowers in need of new mortgage loans or
seeking to refinance existing mortgage loans.
A decline in the quality of servicing we provide could lead to
higher levels of delinquencies, realized losses, interest
expenses and subordination levels of our securitizations. In
addition, our historical delinquency, bankruptcy, foreclosure or
default estimates may ultimately prove inaccurate, which would
prevent us from
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accurately predicting the future delinquency and loss experience
of the mortgage loans we service. The effectiveness of our loss
mitigation strategies may suffer as a result and any higher
default rate resulting from delinquencies may harm our revenues,
business, results of operations and profitability. High costs
and significant funding required to maintain large subordinated
interests in securitizations would reduce our profitability and
growth and harm our financial condition.
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We are subject to losses due to fraudulent and negligent
acts on the part of mortgage loan applicants, mortgage brokers,
other vendors and our employees. |
When we originate mortgage loans, we rely heavily upon
information supplied by third parties, including the information
contained in the mortgage loan application, property appraisal,
title information and employment and income documentation. If
any of this information is intentionally or negligently
misrepresented and such misrepresentation is not detected prior
to loan funding, the value of the mortgage loan may be
significantly lower than expected. Whether a misrepresentation
is made by the mortgage loan applicant, the mortgage broker,
another third party or one of our employees, we generally bear
the risk of loss associated with the misrepresentation. A
mortgage loan subject to a material misrepresentation is
typically unsaleable or subject to repurchase if it is sold
prior to detection of the misrepresentation, and the persons and
entities involved are often difficult to locate and it is often
difficult to collect any monetary losses that we have suffered
from them.
We have controls and processes designed to help us identify
misrepresented information in our mortgage loan origination
operations. However, no degree of controls can provide assurance
that we have detected or will detect all misrepresented
information in our mortgage loan originations.
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We may be subject to fines or other penalties based upon
the conduct of our independent brokers. |
The mortgage brokers from whom we obtain mortgage loans have
parallel and separate legal obligations to which they are
subject. While these laws may not explicitly hold the
originating lenders responsible for the legal violations of
mortgage brokers, increasingly federal and state agencies have
sought to impose such liability on parties that take assignments
of such mortgage loans. The United States Justice Department in
the past has sought to hold a mortgage lender responsible for
the pricing practices of its mortgage brokers, alleging that the
mortgage lender was directly responsible for the total fees and
charges paid by the borrower under the Fair Housing Act even if
the lender neither dictated what the mortgage broker could
charge nor kept the money for its own account. Accordingly, we
may be subject to fines or other penalties based upon the
conduct of our independent mortgage brokers.
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We are dependent upon third parties for many of our
significant administrative and financial processes. |
To lower our costs and provide more competitive products for our
customers, we are shifting various administrative and financial
processes, particularly in the areas of human resources,
accounts payable and procurement, to Accenture LLP and other
third party vendors. Our inability to properly transfer
administrative and financial processes or any failed or less
than optimal execution by a third party vendor, including any
disruptions, delays or failure in service, could harm our
revenues, business, results of operations and profitability, be
costly and disruptive to our business and decrease the funds we
would have available for distribution to our shareholders.
Delays in the implementation of Accentures business
process outsourcing capabilities or in the effective use of
other third party vendors could harm our ability to meet our
cost reduction goals.
Should Accenture or any of our other third party vendors wish to
terminate or modify our arrangements with them, we would incur
transition costs, which would likely be significant, to switch
to another vendor. A change in vendors may require significant
lead-time. A prolonged inability to obtain these processes could
have an adverse effect on our financial condition.
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Changes in the volume and cost of mortgage loans
originated by our Wholesale Division may decrease our mortgage
loan production and decrease our earnings. |
We depend primarily on independent mortgage brokers and, to a
lesser extent, on correspondent lenders for the origination and
purchase of our wholesale mortgage loans, which constitute the
majority of our mortgage loan production. These independent
mortgage brokers have relationships with multiple lenders and
are not obligated by contract or otherwise to do business with
us. We compete with these lenders for the independent
brokers business on pricing, service, loan fees, costs and
other factors. Competition from other lenders and purchasers of
mortgage loans could negatively affect the volume and pricing of
our wholesale mortgage loans, which could harm our results of
operations, financial condition and business prospects.
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If many of our borrowers become subject to the
Servicemembers Civil Relief Act of 2003, our cash flows from our
residual securities and our securitizations structured as
financings may be harmed. |
Under the Servicemembers Civil Relief Act, which in 2003
re-enacted the Soldiers and Sailors Civil Relief Act
of 1940, a borrower who enters military service after the
origination of the borrowers mortgage loan generally may
not be charged interest above an annual rate of 6% during the
period of the borrowers active duty status. The Act also
applies to a borrower who was on reserve status and is called to
active duty after origination of the mortgage loan. A prolonged,
significant military mobilization as part of the war on
terrorism or the war in Iraq could increase the number of the
borrowers in our securitized pools who are subject to the Act
and thereby reduce the interest payments collected from those
borrowers. To the extent the number of borrowers who are subject
to the Act is significant, the cash flows we receive from
mortgage loans underlying our securitizations structured as
financings and from our residual interests would be reduced,
which could cause us to reduce the carrying value of our
residual interests and could decrease our earnings. In addition,
the Act imposes limitations that would impair the ability of the
servicer to foreclose on an affected mortgage loan during the
borrowers period of active duty status, and, under certain
circumstances, during an additional three month period
thereafter. Any such reduction in our cash flows or impairment
in our performance could harm our results of operations,
financial condition and business prospects.
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The inability to attract and retain qualified employees
could significantly harm our business. |
We depend on our wholesale account executives and retail
mortgage loan officers to attract borrowers by, among other
things, developing relationships with financial institutions,
other mortgage companies and brokers, real estate agents,
borrowers and others. We believe that these relationships lead
to repeat and referral business. The market for skilled account
executives and mortgage loan officers is highly competitive and
historically has experienced a high rate of turnover. In
addition, if a manager is no longer employed by us, there is an
increased likelihood that other members of his or her team will
leave our employ as well. Competition for qualified account
executives and mortgage loan officers may lead to increased
hiring and retention costs. If we are unable to attract or
retain a sufficient number of skilled account executives at
manageable costs, we will be unable to continue to originate
quality mortgage loans that we are able to sell for a profit,
which would harm our results of operations, financial condition
and business prospects.
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An interruption in or breach of our information systems
may result in lost business. |
We rely heavily upon communications and information systems to
conduct our business. Any failure or interruption or breach in
security of our information systems or the third-party
information systems on which we rely could cause underwriting or
other delays and could result in fewer mortgage loan
applications being received, slower processing of applications
and reduced efficiency in mortgage loan servicing. We are
required to comply with significant federal and state
regulations with respect to the handling of customer
information, and a failure, interruption or breach of our
information systems could result in regulatory action and
litigation against us. We cannot assure you that such failures
or interruptions will not occur or if they do occur that they
will be adequately addressed by us or the third parties on which
we rely. The occurrence of any failures or interruptions could
harm our results of operations, financial condition and business
prospects.
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The success and growth of our business will depend upon
our ability to adapt to and implement technological
changes. |
Our mortgage loan origination business is currently dependent
upon our ability to effectively interface with our brokers,
borrowers and other third parties and to efficiently process
mortgage loan applications and closings. The origination process
is becoming more dependent upon technological advancement, such
as the ability to process applications over the Internet, accept
electronic signatures and provide process status updates
instantly and other customer-expected conveniences that are
cost-efficient to our process. In addition, we have recently
implemented a new mortgage loan origination system. Becoming
proficient with the new mortgage loan origination system and
other new technology will require significant financial and
personnel resources. There is no guarantee that the
implementation of our new mortgage loan origination system or
other new technology will be successful. To the extent that we
become reliant on any particular technology or technological
solution, we may be harmed to the extent that such technology or
technological solution (i) becomes non-compliant with
existing industry standards, (ii) fails to meet or exceed
the capabilities of our competitors equivalent
technologies or technological solutions, (iii) becomes
increasingly expensive to service, retain and update, or
(iv) becomes subject to third-party claims of copyright or
patent infringement. Any failure to acquire technologies or
technological solutions when necessary could limit our ability
to remain competitive in our industry and could also limit our
ability to increase the cost-efficiencies of our operating
model, which would harm our results of operations, financial
condition and business prospects.
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We may be required to repurchase mortgage loans or
indemnify investors if we breach representations and warranties,
which could harm our earnings. |
When we sell mortgage loans, we are required to make customary
representations and warranties about such mortgage loans to the
purchaser. Our whole loan sale agreements require us to
repurchase or substitute mortgage loans in the event we breach a
representation or warranty given to the mortgage loan purchaser
or make a misrepresentation during the mortgage loan origination
process. In addition, we may be required to repurchase mortgage
loans as a result of borrower fraud or in the event of early
payment default on a mortgage loan. Likewise, we are required to
repurchase or substitute mortgage loans if we breach a
representation or warranty in connection with our
securitizations. The remedies available to a purchaser of
mortgage loans are generally broader than those available to us
against the originating broker or correspondent. Further, if a
purchaser enforces its remedies against us, we may not be able
to enforce the remedies we have against the sellers. The
repurchased mortgage loans typically can only be financed at a
steep discount to their repurchase price, if at all. They are
also typically sold at a significant discount to the unpaid
principal balance. Significant repurchase activity could harm
our cash flow, results of operations, financial condition and
business prospects.
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We are exposed to risk of environmental liabilities with
respect to properties to which we take title. |
In the course of our business, we may foreclose and take title
to residential properties and could be subject to environmental
liabilities with respect to these properties. We may be held
liable to a governmental entity or to third parties for property
damage, personal injury, investigation, and cleanup costs
incurred by these parties in connection with environmental
contamination, or may be required to investigate or clean up
hazardous or toxic substances, or chemical releases at a
property. The costs associated with investigation or remediation
activities could be substantial. In addition, as the owner or
former owner of a contaminated site, we may be subject to common
law claims by third parties based on damages and costs resulting
from environmental contamination emanating from the property. If
we ever become subject to significant environmental liabilities,
our cash flow, results of operations, financial condition and
business prospects could be harmed.
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If we do not manage our growth effectively, our financial
performance could be harmed. |
In recent years, we have experienced rapid growth that has
placed, and will continue to place, certain pressures on our
management, administrative, operational and financial
infrastructure. As of December 31, 2000, we had
approximately 1,500 employees and by December 31, 2005, we
had approximately 7,200 employees. Many of these employees have
a limited understanding of our systems and controls. The increase
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in the size of our operations may make it more difficult for us
to ensure that we originate quality mortgage loans and that we
service them effectively. We will need to attract and hire
additional sales and management personnel in an intensely
competitive hiring environment in order to preserve and increase
our market share. At the same time, we will need to continue to
upgrade and expand our financial, operational and managerial
systems and controls.
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We may change our policies in ways that harm our financial
condition or results of operations. |
Our investment and financing policies and our policies with
respect to other activities, including our growth, debt
capitalization, distributions, REIT status and operating
policies are determined by our board of directors. Our board of
directors may change these policies at any time without a vote
of our stockholders. A change in these policies might harm our
financial condition, results of operations or business prospects.
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Compliance with the Sarbanes-Oxley Act of 2002 and
proposed and recently enacted changes in securities laws and
regulations are likely to increase our costs. |
The Sarbanes-Oxley Act of 2002 and rules and regulations
promulgated by the Securities and Exchange Commission and the
NYSE have increased the scope, complexity and cost of corporate
governance, reporting and disclosure practices for public
companies, including ourselves. These rules and regulations
could also make it more difficult for us to attract and retain
qualified executive officers and members of our board of
directors, particularly to serve on our audit committee.
Risks Related to New Century Securities
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The stock price and trading volume of New Century common
stock may be volatile, which could result in substantial losses
for stockholders and harm our ability to access the capital
markets in the future. |
The market price of New Century common stock may be highly
volatile and subject to wide fluctuations that are unrelated to
our operating performance. In addition, the trading volume in
New Century common stock may fluctuate and cause significant
price variations to occur. Some of the factors that could
negatively affect our share price or result in fluctuations in
the price or trading volume of New Century common stock include:
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general market and economic conditions; |
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actual or anticipated changes in our future financial
performance; |
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changes in market interest rates; |
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competitive developments, including announcements by us or our
competitors of new products or services or significant
contracts, acquisitions, strategic partnerships or capital
commitments; |
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the operations and stock performance of our competitors; |
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developments in the mortgage lending industry or the financial
services sector generally; |
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the impact of new state or federal legislation or court
decisions restricting the activities of lenders or suppliers of
credit in our market; |
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fluctuations in our quarterly operating results; |
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changes in financial estimates by securities analysts; |
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additions or departures of senior management and key personnel;
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actions by institutional stockholders. |
We cannot assure you that the market price of New Century common
stock will not fluctuate or decline significantly in the future.
In addition, the stock market in general can experience
considerable price and volume fluctuations. This volatility may
make it difficult for us to access the capital markets through
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additional secondary offerings of New Century common stock,
regardless of our financial performance, and such difficulty may
preclude us from being able to take advantage of certain
business opportunities or meet our obligations, which could, in
turn, harm our results of operations, financial condition and
business prospects.
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Future sales of shares of New Century common stock,
including shares of common stock by our insiders, may depress
the price of New Century common stock. |
Any sales of a substantial number of shares of New Century
common stock, or the perception that those sales might occur,
may cause the market price of New Century common stock to
decline. We are unable to predict whether significant numbers of
shares will be sold in the open market in anticipation of or
following a sale by insiders.
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Our board of directors may authorize the issuance of
additional securities that may cause dilution and may depress
the price of New Century securities. |
Our charter permits our board of directors, without our
stockholders approval, to:
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authorize the issuance of additional common stock or preferred
stock in connection with future equity offerings or acquisitions
of securities or other assets of companies; and |
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classify or reclassify any unissued common stock or preferred
stock and to set the preferences, rights and other terms of the
classified or reclassified shares, including the issuance of
shares of preferred stock that have preference rights over the
common stock and existing preferred stock with respect to
dividends, liquidation, voting and other matters or shares of
common stock that have preference rights over common stock with
respect to voting. |
The issuance of additional shares of New Century securities
could be substantially dilutive to our existing stockholders and
may depress the price of New Century securities.
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Future offerings of debt securities, which would be senior
to New Century common stock and preferred stock in liquidation,
or equity securities, which would dilute our existing
stockholders interests and may be senior to New Century
common stock or existing preferred stock for the purposes of
distributions, may harm the market price of New Century
securities. |
We will continue to seek to access the capital markets from time
to time by making additional offerings of debt and/or equity
securities, including commercial paper, medium-term notes,
senior or subordinated notes, preferred stock or common stock.
We are not precluded by the terms of our charter from issuing
additional indebtedness. Accordingly, we could become more
highly leveraged, resulting in an increase in debt service
obligations that could harm our ability to make expected
distributions to stockholders and in an increased risk of
default on our obligations. If we were to liquidate, holders of
our debt and lenders with respect to other borrowings would
receive a distribution of our available assets before the
holders of New Century common stock and preferred stock.
Additional equity offerings by us may dilute our existing
stockholders interest in us or reduce the market price of
existing New Century securities. Our Series A Preferred
Stock has, and our other preferred stock, if issued, could have,
a preference on distribution payments that could limit our
ability to make a distribution to holders of our common stock.
Because our decision to issue securities in any future offering
will depend on market conditions and other factors beyond our
control, we cannot predict or estimate the amount, timing or
nature of our future offerings. Further, market conditions could
require us to accept less favorable terms for the issuance of
our securities in the future. Thus, our existing stockholders
will bear the risk of our future offerings reducing the market
price of New Century securities and diluting their ownership
interest in us.
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The stock ownership limit imposed by our charter may
inhibit market activity in our stock and may restrict our
business combination opportunities. |
In order for us to maintain our qualification as a REIT under
the Code, not more than 50% in value of the outstanding shares
of our capital stock may be owned, directly or indirectly, by
five or fewer individuals (as defined in the Code to include
certain entities) at any time during the last half of each
taxable year after our first REIT taxable year. Our charter,
with certain exceptions, authorizes our board of directors to
take such actions as are necessary and desirable to preserve our
qualification as a REIT and provide that, unless exempted by our
board of directors, no single stockholder, or any group of
affiliated stockholders, may beneficially own more than 9.8%, as
such percentage may be modified by our board of directors from
time to time, in value or in number of shares, whichever is more
restrictive, of the aggregate of the outstanding shares of any
class or series of our capital stock. Our board of directors
also has authority under our charter to impose a similar
ownership limitation as to any separate class or series of
preferred stock we may issue in the future. Our board of
directors may grant an exemption from that ownership limit in
its sole discretion, subject to such conditions, representations
and undertakings as it may determine and as are consistent with
ensuring compliance with the REIT provisions of the Code.
Our charter also prohibits anyone from buying shares if the
purchase would result in us losing our REIT status. If you or
anyone else acquires shares in excess of the ownership limit or
in violation of the ownership requirements of the Code for
REITs, we:
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will consider the transfer to be null and void; |
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will not reflect the transaction on our books; |
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may institute legal action to enjoin the transaction; |
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will not pay dividends or other distributions with respect to
those shares; |
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will not recognize any voting rights for those shares; and |
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will consider the shares held in trust for the benefit of a
charitable beneficiary as designated by us. |
The trustee shall sell the shares held in trust and the owner of
the excess shares will be entitled to the lesser of:
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(1) the price paid by the transferee; |
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(2) if the transferee did not purchase the excess shares,
the closing price for the shares on the national securities
exchange on which the New Century securities are listed or
quoted on the day of the event causing the shares to be held in
trust; or |
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(3) the price received by the trustee from the sale of the
shares. |
This ownership limit could delay or prevent a transaction or a
change in our control that might involve a premium price for New
Century common stock or otherwise be in your best interest and
may result in the entrenchment of our board of directors and
management regardless of performance.
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Certain provisions of Maryland law and our charter and
bylaws could hinder, delay or prevent a change in
control. |
Certain provisions of Maryland law and our charter and bylaws
could have the effect of discouraging, delaying or preventing
transactions that involve an actual or threatened change in
control of us, and may have the effect of entrenching our
management and members of our board of directors, regardless of
performance. These provisions include the following:
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Classified board of directors. Our board of directors is
divided into three classes with staggered terms of office of
three years each. The classification and staggered terms of
office of our directors make it more difficult for a third party
to gain control of our board of directors. At least two annual
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stockholders, instead of one, generally would be required to
effect a change in a majority of our board of directors. |
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Removal of directors. Under our charter, subject to the
rights of one or more classes or series of preferred stock to
elect one or more directors, a director may be removed only for
cause and only by the affirmative vote of at least two-thirds of
all votes entitled to be cast by our stockholders generally in
the election of directors. |
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Number of directors, board vacancies, term of office.
Under our bylaws, we have elected to be subject to certain
provisions of Maryland law which vest in the board of directors
the exclusive right to determine the number of directors and the
exclusive right, by the affirmative vote of a majority of the
remaining directors, to fill vacancies on the board of directors
even if the remaining directors do not constitute a quorum.
These provisions of Maryland law, which are applicable even if
other provisions of Maryland law or the charter or bylaws
provide to the contrary, also provide that any director elected
to fill a vacancy shall hold office for the remainder of the
full term of the class of directors in which the vacancy
occurred, rather than the next annual meeting of stockholder as
would otherwise be the case, and until his or her successor is
elected and qualified. |
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Limitation on stockholder requested special meetings. Our
bylaws provide that our stockholders have the right to call a
special meeting only upon the written request of our
stockholders entitled to cast not less than a majority of all
the votes entitled to be cast by our stockholders at such
meeting. |
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Advance notice provisions for stockholder nominations and
proposals. Our bylaws require advance written notice for our
stockholders to nominate persons for election as directors at,
or to bring other business before, any meeting of our
stockholders. This bylaw provision limits the ability of our
stockholders to make nominations of persons for election as
directors or to introduce other proposals unless we are notified
in a timely manner prior to the meeting. |
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Exclusive authority of our board to amend our bylaws. Our
bylaws provide that the board of directors has the exclusive
power to adopt, alter or repeal any provision of our bylaws or
to make new bylaws. Thus, our stockholders may not effect any
changes to our bylaws. |
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Preferred stock. Under our charter, the board of
directors has authority to issue preferred stock from time to
time in one or more series and to establish the terms,
preferences and rights of any such series of preferred stock,
all without approval of our stockholders. |
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Duties of directors with respect to unsolicited takeovers.
Maryland law provides protection for Maryland corporations
against unsolicited takeovers by limiting, among other things,
the duties of the directors in unsolicited takeover situations.
The duties of directors of Maryland corporations do not require
them to (i) accept, recommend or respond to any proposal by
a person seeking to acquire control of the corporation,
(ii) authorize the corporation to redeem any rights under,
or modify or render inapplicable, any stockholders rights plan,
(iii) make a determination under the Maryland Business
Combination Act or the Maryland Control Share Acquisition Act,
or (iv) act or fail to act solely because of the effect of an
act or failure to act may have on an acquisition or potential
acquisition of control of the corporation or the amount or type
of consideration that may be offered or paid to the stockholders
in an acquisition. Moreover, under Maryland law the act of the
directors of a Maryland corporation relating to or affecting an
acquisition or potential acquisition of control is not subject
to any higher duty or greater scrutiny than is applied to any
other act of a director. Maryland law also contains a statutory
presumption that an act of a director of a Maryland corporation
satisfies the applicable standards of conduct for directors
under Maryland law. |
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Ownership limit. In order for us to maintain our
qualification as a REIT under the Code, our charter, with
certain exceptions, authorizes our board of directors to take
such actions as are necessary and desirable to preserve our
qualification as a REIT and provide that, unless exempted by our
board of directors, no single stockholder, or any group of
affiliated stockholders, may beneficially owning more than 9.8%,
as such percentage may be modified by the Board of Directors
from time to time, in value or number of shares, whichever is
more restrictive, of the aggregate of the outstanding shares of
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class or series of our capital stock. Our board of directors
also has authority under our charter to impose a similar
ownership limitation as to any separate class or series of
preferred stock we may issue in the future. Our board of
directors may grant an exemption from that ownership limit in
its sole discretion, subject to such conditions, representations
and undertakings as it may determine and as are consistent with
ensuring compliance with the REIT provisions of the Code. |
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Maryland Business Combination Act. The Maryland Business
Combination Act provides that unless exempted, a Maryland
corporation may not engage in business combinations, including
mergers, dispositions of 10% or more of its assets, certain
issuances of shares of stock and other specified transactions,
with an interested stockholder or an affiliate of an
interested stockholder for five years after the most recent date
on which the interested stockholder became an interested
stockholder, and thereafter unless specified criteria are met.
An interested stockholder is generally a person owning or
controlling, directly or indirectly, 10% or more of the voting
power of the outstanding stock of a Maryland corporation. Our
board of directors has adopted a resolution exempting it from
this statute. However, our board of directors may repeal or
modify this resolution in the future, in which case the
provisions of the Maryland Business Combination Act will be
applicable to business combinations between us and other persons. |
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Maryland Control Share Acquisition Act. Maryland law
provides that control shares of a corporation
acquired in a control share acquisition shall have
no voting rights except to the extent approved by a vote of
two-thirds of the votes eligible to be cast on the matter under
the Maryland Control Share Acquisition Act. Control
shares means shares of stock that, if aggregated with all
other shares of stock previously acquired by the acquiror, would
entitle the acquiror to exercise voting power in electing
directors within one of the following ranges of the voting
power: one tenth or more but less than one third, one third or
more but less than a majority or a majority or more of all
voting power. A control share acquisition means the
acquisition of control shares, subject to certain exceptions. If
voting rights or control shares acquired in a control share
acquisition are not approved at a stockholders meeting,
then subject to certain conditions and limitations, the issuer
may redeem any or all of the control shares for fair value. If
voting rights of such control shares are approved at a
stockholders meeting and the acquiror becomes entitled to
vote a majority of the shares of stock entitled to vote, all
other stockholders may exercise appraisal rights. Our bylaws
contain a provision exempting acquisitions of our shares from
the Maryland Control Share Acquisition Act. However, our board
of directors may amend our bylaws in the future to repeal or
modify this exemption, in which case any control shares acquired
in a control share acquisition will be subject to the Maryland
Control Share Acquisition Act. |
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We may be contractually prohibited from paying
dividends. |
Several of our credit agreements contain prohibitions against
our payment of any dividend at any time when there is a default
under those credit agreements. A default for this purpose
includes a failure to comply with various covenants, including
reporting obligations and other nonmonetary obligations, as well
as financial conditions that may be beyond our control. A
default for this purpose occurs as soon as the failure occurs,
even if the credit agreement allows a period for curing the
failure. If one of these defaults has occurred and is continuing
on the day when a dividend is otherwise payable on New
Centurys common stock, we will be unable to pay the
dividend unless the lenders on these credit agreements waive the
prohibition, or until we cure the default. Failure to pay
dividends could also jeopardize our continued qualification as a
REIT.
Federal Income Tax Risks and Risks Associated with Being a
REIT
We strongly urge you to consult with your own tax advisor
concerning the effects of federal, state and local income tax
law on an investment in New Century common stock and on your
individual tax situation.
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If we fail to qualify as a REIT, it could adversely affect
our stockholders. |
We elected to be taxed as a REIT under the Code commencing with
our taxable year ended December 31, 2004. To maintain REIT
status, we must meet a number of highly technical requirements
on a continuing basis. Those requirements seek to ensure, among
other things, (i) that the gross income and investments of
a REIT are largely real estate related (including mortgages
secured by real estate), (ii) that a REIT distributes
substantially all its ordinary taxable income to its
stockholders on a current basis and (iii) that the
REITs equity ownership is not overly concentrated. Due to
the complex nature of these rules, the available guidance
concerning interpretation of the rules, the importance of
ongoing factual determinations and the possibility of adverse
changes in the law, administrative interpretations of the law
and changes in our business, no assurance can be given that we
will qualify as a REIT for any particular year. For a summary of
these technical requirements, see Material U.S. Federal
Income Tax Considerations.
If we fail to qualify as a REIT, we will be taxed as a regular
corporation, and distributions to our stockholders will not be
deductible in computing our taxable income. The resulting
corporate income tax liabilities could materially reduce the
distributable cash flow to our stockholders and funds available
for reinvestment. Moreover, we might not be able to elect to be
treated as a REIT for the next four taxable years after the year
during which we ceased to qualify as a REIT. In addition, if we
later re-qualified as a REIT, we might be required to pay a full
corporate-level tax on any unrealized gains in our assets as of
the date of re-qualification and to make distributions to our
stockholders equal to any earnings accumulated during the period
of non-REIT status. If we do not maintain our status as a REIT,
we will not be required to make distributions to our
stockholders.
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REIT distribution requirements could adversely affect our
stockholders. |
To maintain our qualification as a REIT under the Code, we must
annually distribute to our stockholders at least 90% of our REIT
taxable income, exclusive of the income of our taxable REIT
subsidiaries and excluding the dividends paid deduction and our
net capital gains, if any. This requirement limits our ability
to accumulate capital. We may not have sufficient cash or other
liquid assets to meet the distribution requirements.
Difficulties in meeting the distribution requirements might
arise due to competing demands for our funds or to timing
differences between tax reporting and cash receipts and
disbursements, because income may have to be reported before
cash is received, because expenses may have to be paid before a
deduction is allowed or because deductions may be disallowed or
limited, or the IRS may make a determination that adjusts
reported income. In those situations, we might be required to
borrow funds on adverse terms in order to meet the distribution
requirements and interest and penalties could apply. If we fail
to make a required distribution, we would cease to be taxed as a
REIT.
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Complying with REIT requirements may cause us to forego
otherwise attractive opportunities, including certain
acquisitions. |
In order to qualify as a REIT for U.S. federal income tax
purposes, we must satisfy tests concerning, among other things,
our sources of income, the nature and diversification of our
assets, the amounts we distribute to our stockholders and the
ownership of our stock. We may also be required to make
distributions to our stockholders at disadvantageous times or
when we do not have funds readily available for distribution.
Thus, compliance with REIT requirements may cause us to forego
opportunities, including certain acquisitions, we would
otherwise pursue.
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The tax imposed on REITs engaging in prohibited
transactions will limit our ability to engage in
transactions, including certain methods of securitizing mortgage
loans, that would be treated as sales for federal income tax
purposes. |
A REITs net income from prohibited transactions is subject
to a 100% tax. In general, prohibited transactions are sales or
other dispositions of property, other than foreclosure property
but including any mortgage loans held in inventory primarily for
sale to customers in the ordinary course of business. We might
be subject to this tax if we were, at the REIT level, to sell a
mortgage loan or securitize the loans in a manner
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that was treated as a sale of such inventory for federal income
tax purposes. Therefore, in order to avoid the prohibited
transactions tax, we may choose not to engage in certain sales
of mortgage loans other than through our taxable REIT
subsidiaries and may limit the structures we utilize for our
securitization transactions even though such sales or structures
might otherwise be beneficial for us. In addition, this
prohibition may limit our ability to restructure our portfolio
of mortgage loans from time to time even if we believe it would
be in our best interest to do so.
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We will incur excess inclusion income that will increase
the tax liability of our stockholders. |
Excess inclusion income that is allocated to our tax-exempt
stockholders will be fully taxable as unrelated business taxable
income under Section 512 of the Code. If a stockholder is
foreign, it generally will be subject to U.S. federal income tax
withholding on the excess inclusion income without reduction
pursuant to any otherwise applicable income tax treaty. U.S.
stockholders will not be able to offset such income with net
operating losses.
Excess inclusion income is generated when we issue debt
obligations with two or more maturities and the terms of the
payments on these obligations bear a relationship to the
payments that we received on our mortgage loans or
mortgage-backed securities securing those debt obligations.
Since electing to be taxed as a REIT, we have engaged in
non-REMIC CMO securitizations. These CMO securitizations have
been structured so that these borrowings will give rise to
excess inclusion income, and it is probable that future CMO
securitizations will be structured in a similar manner. We may
also enter into various repurchase agreements that have
differing maturity dates and afford the lender the right to sell
any pledged mortgage securities if we default on our
obligations. Excess inclusion income could also result if we
were to hold a residual interest in a REMIC. Finally, we may
invest in equity securities of other REITs and it is possible
that we might receive excess inclusion income from those
investments. The amount of excess inclusion income in any given
year from these activities, transactions and investments could
be significant.
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Even if we continue to qualify as a REIT, the income
earned by our taxable REIT subsidiaries will be subject to
federal income tax and we could be subject to an excise tax on
non-arms-length transactions with our taxable REIT
subsidiaries. |
Our taxable REIT subsidiaries, including New Century TRS and its
subsidiaries, expect to earn income from activities that are
prohibited for REITs, and will owe income taxes on the taxable
income from these activities. For example, we expect that New
Century TRS and its subsidiaries will earn income from our
mortgage loan origination and sales activities, as well as from
other origination and servicing functions, which would generally
not be qualifying income for purposes of the gross income tests
applicable to REITs or might otherwise be subject to adverse tax
liability if the income were generated by a REIT. New Century
TRS and its subsidiaries will be taxable as C corporations and
will be subject to federal, state and local income tax at the
applicable corporate rates on their taxable income,
notwithstanding our qualification as a REIT.
In the event that any transactions between us and New Century
TRS and its subsidiaries are not conducted on an
arms-length basis, we could be subject to an excise tax on
certain amounts from such transactions. We believe that all such
transactions will be conducted on an arms-length basis,
but there can be no assurance that the IRS will not successfully
contest the arms-length nature of such transactions or
that we will otherwise be able to avoid application of the
excise tax varying in an amount equal to 20% to 100% of the
gross adjustment to the taxable portion of the intercompany
transaction depending on the character of the income or expense
event. Any such tax could affect our overall profitability and
the amounts of distributions to our stockholders.
We may, at some point in the future, borrow funds from one or
more of our corporate subsidiaries. Although any such
intercompany borrowings will be structured so as to constitute
indebtedness for all tax purposes, no assurance can be given
that the IRS will not challenge such arrangements, in which case
the borrowing may be re-characterized as a dividend distribution
to us by our subsidiary. Any such re-characterization may cause
us to fail one or more of the REIT requirements.
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We may be harmed by changes in tax laws applicable to
REITs, or the reduced 15% tax rate on certain corporate
dividends. |
Changes to the laws and regulations affecting us, including
changes to securities laws and changes to the Code applicable to
the taxation of REITs may harm our business. New legislation may
be enacted into law or new interpretations, rulings or
regulations could be adopted, any of which could harm us and our
stockholders, potentially with retroactive effect.
Generally, dividends paid by REITs are not eligible for the 15%
U.S. federal income tax rate on certain corporate dividends,
with certain exceptions. The more favorable treatment of regular
corporate dividends could cause domestic non-corporate investors
to consider stocks of other corporations that pay dividends as
more attractive than stocks of REITs. It is not possible to
predict whether the reduced 15% tax rate on certain corporate
dividends will affect the market price of our common stock or
what the effect will be.
Item 1B. Unresolved
Staff Comments
None.
Item 2. Properties
Our executive, administrative and some of our lending offices
are located in Irvine, California and consist of approximately
487,760 square feet. The twelve leases covering the executive,
administrative and lending offices expire at various points in
time from May 2006 to August 2010 and the combined monthly rent
for all twelve leases is $849,698. In addition, we have entered
into an agreement to lease 190,000 square feet for a new
corporate headquarters at 3161 Michelson Drive in Irvine
commencing in 2007. We lease space for our origination platform
acquired from RBC Mortgage in Houston, Texas consisting of
two leases totaling 97,800 square feet with a monthly aggregate
base rental of approximately $250,853. Both leases expire in
August 2006. We lease space for our regional operating centers
in Phoenix, AZ; Scottsdale, AZ; San Diego, CA; Campbell, CA;
Sacramento, CA; San Ramon, CA; Woodland Hills, CA; Englewood,
CO; Greenwood Village, CO; Miami Lakes, FL; Tampa, FL; Atlanta,
GA; Honolulu, HI; Itasca, IL; Foxboro, MA; Woburn, MA;
Bloomington, MN; Omaha, NE; Melville, NY; Pearl River, NY;
Columbus, OH; Westerville, OH; Plymouth Meeting, PA; Hurst, TX;
Plano, TX; Reston, VA; and Bellevue, WA. As of December 31,
2005, these facilities had a monthly aggregate base rental of
approximately $884,311. We also lease space for our sales
offices, which range in size from 100 to 15,400 square feet
(average size is 2,500-3,500 square feet) with lease terms
typically ranging from month-to-month to five years. As of
December 31, 2005, annual base rents for the sales offices
ranged from approximately $4,500 to $413,000. In general, the
terms of these leases expire at various points in time between
January 2006 and March 2011. We are currently in the process of
evaluating our portfolio to consolidate properties where
feasible and cost effective.
Item 3. Legal
Proceedings
Overman. In September 2002, Robert E. Overman and Martin
Lemp filed a class action complaint in the Superior Court of
Alameda County, California, against New Century Financial
Corporation and New Century Mortgage (collectively, the
New Century Entities), U.S. Bancorp, Loan Management
Services, Inc., and certain individuals affiliated with Loan
Management Services. The complaint alleges violations of the
California Consumers Legal Remedies Act, Unfair, Unlawful and
Deceptive Business and Advertising Practices in violation of
Business & Professions Code Sections 17200 and 17500,
Fraud-Misrepresentation and Concealment and Constructive Trust/
Breach of Fiduciary Duty and damages including restitution,
compensatory and punitive damages, and attorneys fees and
costs. The New Century Entities filed a Section 128.7
sanctions motion seeking dismissal of the case. On
December 8, 2003, the court granted the motion for
sanctions against the plaintiffs for filing a first amended
complaint with allegations against the New Century Entities that
were devoid of evidentiary support and ordered the claims
stricken without prejudice. On January 27, 2004, the court
entered a judgment of dismissal without prejudice in favor of
the New Century Entities. The plaintiffs filed a notice of
appeal on February 20, 2004 from the judgment entered in
favor of the New Century Entities and the order granting the New
Century Entities motion for sanctions. The plaintiffs also
filed a motion with the appellate court to consolidate this
appeal with three additional appeals sought in similar cases
against other lenders. On May 28, 2004, the court denied
the motion. On June 10, 2005, the
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court of appeals dismissed plaintiffs appeal for lack of
appellate jurisdiction. On August 10, 2005, the court
entered an order holding that the New Century Entities should
recover their costs.
England. In April 2003, two former, short-term employees,
Kimberly A. England and Gregory M. Foshee, filed a complaint
seeking class action status against the New Century Entities,
Worth Funding Incorporated (now known as New Century Credit
Corporation) (Worth) and The Anyloan Company (now
known as Home123 Corporation) (Anyloan). The action
was removed on May 12, 2003 from the 19th Judicial District
Court, Parish of East Baton Rouge, State of Louisiana to the
U.S. District Court for the Middle District of Louisiana in
response to the New Century Entities, Worth and Anyloans
Petition for Removal. The complaint alleges failure to pay
overtime wages in violation of the federal Fair Labor Standards
Act, or FLSA. The plaintiffs filed an additional action in
Louisiana state court (19th Judicial District Court, Parish of
East Baton Rouge) on September 18, 2003, adding James Gray
as a plaintiff and seeking unpaid wages under state law, with no
class claims. This second action was removed on October 3,
2003 to the U.S. District Court for the Middle District of
Louisiana, and was ordered consolidated with the first action.
In April 2004, the U.S. District Court unilaterally
de-consolidated the James Gray individual action. In September
2003, the plaintiffs also filed a motion to dismiss their claims
in Louisiana to enable them to join in a subsequently filed case
in Minnesota entitled Klas vs. New Century Financial
Corporation, et al. The New Century Entities, Worth and
Anyloan opposed the motion and the court agreed with their
position and refused to dismiss the plaintiffs case, as it
was filed first. The Klas case was consolidated with this case
and discovery is proceeding. The New Century Entities, Worth and
Anyloan filed a motion to dismiss Worth and Anyloan as
defendants. The court granted the motion to dismiss in April
2004. On June 28, 2004, the New Century Entities filed a
motion to reject conditional certification of a collective
action. The New Century Entities motion to reject the
class was granted on June 30, 2005. The plaintiffs had
30 days to file individual actions against the New Century
Entities, and approximately 450 actions were filed. Settlement
discussions commenced at mediation in January 2006 are ongoing.
Lum. In December 2003, New Century Mortgage was served
with a class action complaint filed by Elaine Lum in the Supreme
Court of the State of New York in Riverhead, Suffolk County. The
complaint alleged that certain payments New Century Mortgage
makes to mortgage brokers, sometimes referred to as yield spread
premiums, interfered with the contractual relationship between
Ms. Lum and her broker. The complaint also sought damages
related thereto for fraud, wrongful inducement/breach of
fiduciary duty, violation of deceptive acts and practices,
unjust enrichment and commercial bribing. The complaint sought
class certification for similarly situated borrowers in the
State of New York. New Century Mortgage filed a motion to
dismiss on January 30, 2004. The judge granted New Century
Mortgages motion and dismissed all claims on
March 23, 2004. On April 12, 2004, the plaintiff filed
a notice of appeal, seeking review of the courts order
granting the motion to dismiss. On June 20, 2005, the
Appellate Division of the Supreme Court of the State of New York
located in Brooklyn, New York, affirmed the order granting New
Century Mortgages motion to dismiss the complaint.
Plaintiff/appellant filed a motion with the appellate division
for reargument and/or for leave to appeal to the Court of
Appeals, which the Court denied in October 2005. In February
2006, the Court of Appeals denied plaintiff/appellants
motion for leave to appeal and affirmed the Supreme Courts
previous ruling, granting New Century Mortgages motion to
dismiss the complaint.
DOL Investigation. On August 2, 2004, the U.S.
Department of Labor, Wage and Hour Division, or DOL, informed
New Century Mortgage that it is conducting an investigation to
determine whether New Century Mortgage is in compliance with the
FLSA. The DOL has narrowed the scope of its investigation. New
Century Mortgage believes it is in compliance with the FLSA and
that it properly pays overtime wages. In April 2005, New Century
Mortgage provided requested documents and awaits a response from
the DOL.
Rubio. In March 2005, Daniel J. Rubio, a former employee
of New Century Mortgage filed a class action complaint against
New Century Mortgage in the Superior Court of Orange County,
California. The complaint alleges failure to pay overtime wages,
failure to provide meal and rest periods, and that New Century
Mortgage engaged in unfair business practices in violation of
the California Labor Code. The complaint seeks recovery of
unpaid wages, interest, and attorneys fees and costs. New
Century Mortgage filed a motion to strike and demurrer to the
complaint in May 2005. On July 8, 2005, the court overruled
the demurrer and granted the motion to strike. The amended
complaint was filed in July 2005 and New Century
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Mortgage filed its answer in August 2005. In December 2005, New
Century Mortgage filed a motion to strike portions of the
complaint, which was granted in New Century Mortgages
favor.
Bonner. In April 2005, Perrie Bonner and Darrell Bruce
filed a class action lawsuit against New Century Mortgage and
Home123 Corporation (Home123) in the U.S. District
Court, Northern District of Indiana, Hammond Division alleging
violations of the Fair Credit Reporting Act, or FCRA, claiming
that New Century Mortgage and Home123 accessed consumer credit
reports without authorization because the prescreened offers of
credit did not qualify as firm offers of credit. The proposed
class consists of all persons in Indiana, Illinois and Wisconsin
who received the prescreened offers from April 20, 2003 to
May 10, 2005. New Century Mortgage and Home 123 filed their
answer to the complaint on June 30, 2005. In September
2005, plaintiffs filed a motion for class certification and on
November 1, 2005, New Century Mortgage and Home123 filed a
motion for judgment on the pleadings.
Phillips. In July 2005, Pamela Phillips filed a class
action lawsuit against the New Century Entities and Home123 in
the District Court, Central District of California. Plaintiff
alleges violations of FCRA, claiming that the New Century
Entities and Home123 accessed consumer credit reports without
authorization because the prescreened offers of credit did not
qualify as firm offers of credit. The case also alleges that
certain disclosures were not made in a clear and conspicuous
manner. The proposed class consists of all persons nationwide
whose consumer reports were obtained or used by the New Century
Entities in connection with a credit transaction not initiated
by the consumer and who did not receive a firm offer of credit
from the New Century Entities. A proposed sub-class consists of
all persons whose consumer reports were obtained or used by the
New Century Entities in connection with a credit transaction not
initiated by them, and who received a written solicitation to
enter a credit transaction which did not provide clear and
conspicuous disclosures as required by 15 U.S.C. section
1681m(d). The complaint seeks damages of not more than $1,000
for each alleged violation, declaratory relief, injunctive
relief, attorneys fees and costs. The New Century Entities
and Home123 filed a motion to dismiss certain claims in October
2005. In November 2005, the Court granted the motion to dismiss
these claims. In early March 2006, the court, on its motion,
reversed its prior ruling on the motion to dismiss citing the
7th Circuit Court of Appeals recent decision in the Murray v.
GMAC Mortgage Corporation case.
Jeppesen. In October 2005, Patricia and Stephen Jeppesen
filed a class action lawsuit against New Century Mortgage in the
U.S. District Court, Northern District Of Indiana. The
plaintiffs allege that New Century Mortgage violated the Indiana
High Cost Loan Act by allegedly making loans with fees greater
than permitted by law unless certain disclosures are made. The
class is defined as all persons who obtained a mortgage loan
from New Century Mortgage after January 1, 2005 on their
principal residence in Indiana. A second claim in the complaint
alleges that New Century Mortgage improperly charged a document
preparation fee. The class also includes all persons in Indiana
who paid a document preparation fee to New Century Mortgage in
the six years prior to the filing of the complaint. The
complaint seeks statutory damages, attorneys fees, costs,
restitution and other relief. In December 2005, New Century
Mortgage filed its answer and affirmative defenses and
plaintiffs subsequently filed a motion to strike certain
affirmative defenses.
Forrest. In January 2006, Mary Forrest filed a class
action lawsuit against New Century Mortgage in the U.S. District
Court for the Eastern District of Wisconsin, Milwaukee Division.
The plaintiff alleges violations of FCRA, claiming that the
originator accessed prescreened credit reports without
authorization because the offers of credit allegedly did not
qualify as firm offers of credit. The proposed class consists of
persons with Wisconsin addresses to whom the originator sent a
particular prescreened offer of credit after November 20,
2004. In February 2006, New Century Mortgage filed both its
answer and a motion to transfer the case to the U.S. District
Court for the Central District of California.
We are also a party to various legal proceedings arising out of
the ordinary course of our business. Management believes that
any liability with respect to these legal actions, individually
or in the aggregate, will not have a material adverse effect on
our business, results of operations or financial position.
Item 4. Submission of
Matters to a Vote of Security Holders
No matters were submitted to a vote of our stockholders during
the fourth quarter of 2005.
50
PART II
Item 5. Market for the
Registrants Common Equity and Related Stockholder
Matters
New Century common stock has traded on the NYSE under the symbol
NEW since October 1, 2004. Prior to
October 1, 2004, the common stock of New Century TRS was
quoted on the Nasdaq National Market under the symbol
NCEN. New Century TRS common stock is no longer
listed on any national securities exchange or quoted on any
over-the-counter market. The dividends paid and the high and low
sales prices of New Century common stock and, for the period
prior to October 1, 2004, the common stock of New Century
TRS, during each quarter for the years 2005 and 2004 were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
|
|
|
Dividend | |
|
|
|
Dividend | |
Quarter |
|
High | |
|
Low | |
|
Per Share | |
|
High | |
|
Low | |
|
Per Share | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Fourth
|
|
$ |
40.70 |
|
|
|
30.22 |
|
|
|
1.65 |
|
|
$ |
66.95 |
|
|
|
50.95 |
|
|
|
0.23 |
|
Third
|
|
|
53.55 |
|
|
|
34.50 |
|
|
|
1.60 |
|
|
|
63.30 |
|
|
|
43.27 |
|
|
|
0.20 |
|
Second
|
|
|
54.00 |
|
|
|
41.45 |
|
|
|
1.55 |
|
|
|
50.76 |
|
|
|
38.50 |
|
|
|
0.20 |
|
First
|
|
|
64.38 |
|
|
|
43.99 |
|
|
|
1.50 |
|
|
|
52.28 |
|
|
|
37.91 |
|
|
|
0.16 |
|
As of March 10, 2006, the closing sales price of New
Century common stock, as reported on the NYSE, was $39.65.
We paid a cash dividend on New Century common stock of $1.70 per
share on January 30, 2006 to holders of record of New
Century common stock on December 30, 2005. On March 1,
2006, our board of directors declared a cash dividend on New
Century common stock of $1.75 per share payable on
April 28, 2006 to holders of record of New Century common
stock on March 31, 2006. The declaration of any future
dividends will be subject to our earnings, financial position,
capital requirements, contractual restrictions and other
relevant factors.
In order to maintain our qualification as a REIT under the Code,
we are required to distribute (within a certain period after the
end of each year) at least 90% of our REIT taxable income for
such year (determined without regard to the dividends paid
deduction and by excluding net capital gain). After-tax earnings
generated by our taxable REIT subsidiaries (including New
Century TRS) and not distributed to us are not subject to these
distribution requirements and may be retained by such
subsidiaries to provide for future growth, subject to the
limitations imposed by REIT tax rules. To the extent that we do
not distribute 100% of our REIT taxable income, we will be taxed
on any undistributed amounts. In addition, we cannot assure you
that we will have access to funds to meet the distribution and
other REIT qualification requirements. We anticipate paying
quarterly distributions during January, April, July and October
of each year for the preceding quarter. We anticipate that
distributions generally will be paid from cash available for
distribution (generally equal to cash from operations and
investing activities less capital expenditures and principal
amortization on indebtedness). However, to the extent that cash
available for distribution is insufficient to make such
distributions, we intend to borrow funds from one of our
subsidiaries or a third party in order to make distributions
consistent with this policy. We cannot assure you as to the
amount, if any, of future distributions.
As of March 10, 2006, the number of holders of record of
New Century common stock was approximately 165.
51
The following table shows Company repurchases of its common
stock for each calendar month during the quarter ended
December 31, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number of | |
|
|
|
|
|
|
|
|
Shares Purchased | |
|
Maximum Number of | |
|
|
Total Number | |
|
|
|
as Part of Publicly | |
|
Shares That May Yet Be | |
|
|
of Shares | |
|
Average Price Paid | |
|
Announced Plan | |
|
Purchased Under the | |
Calendar Month |
|
Purchased(1) | |
|
per Share | |
|
or Program(1) | |
|
Plan or Program(1) | |
|
|
| |
|
| |
|
| |
|
| |
October
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
5,000,000 |
|
November
|
|
|
879,200 |
|
|
$ |
33.52 |
|
|
|
879,200 |
|
|
|
4,120,800 |
|
December
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
4,120,800 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
879,200 |
|
|
$ |
33.52 |
|
|
|
879,200 |
|
|
|
4,120,800 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
On November 3, 2005, we publicly announced that our board
of directors had approved a stock repurchase program for up to
5 million shares of our common stock over the following
12 months. |
Recent Sales of Unregistered Securities
None.
Equity Compensation Plan Information
Information regarding our equity compensation plans, including
both stockholder approved plans and non-stockholder approved
plans, is included in Item 12.
Item 6. Selected
Financial Data
The following selected consolidated statements of income and
balance sheet data for the years ended December 31, 2005,
2004, 2003, 2002 and 2001 have been derived from our financial
statements. This information has been prepared on the same basis
as the audited consolidated financial statements contained
elsewhere in this report. Such selected financial data should be
read in conjunction with those financial
52
statements and the notes thereto and with
Managements Discussion and Analysis of Financial
Condition and Results of Operations also included
elsewhere herein.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
2002 | |
|
2001 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(Dollars in thousands, except per share data) | |
Statement of income data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$ |
1,759,567 |
|
|
|
898,647 |
|
|
|
353,691 |
|
|
|
154,054 |
|
|
|
99,062 |
|
Interest expense
|
|
|
(988,123 |
) |
|
|
(367,094 |
) |
|
|
(117,575 |
) |
|
|
(50,588 |
) |
|
|
(54,127 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
771,444 |
|
|
|
531,553 |
|
|
|
236,116 |
|
|
|
103,466 |
|
|
|
44,935 |
|
Provision for losses on mortgage loans held for investment
|
|
|
(140,233 |
) |
|
|
(70,250 |
) |
|
|
(26,304 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after provision for losses
|
|
|
631,211 |
|
|
|
461,303 |
|
|
|
209,812 |
|
|
|
103,466 |
|
|
|
44,935 |
|
Other operating income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on sale of mortgage loans
|
|
|
622,617 |
|
|
|
800,609 |
|
|
|
611,136 |
|
|
|
451,744 |
|
|
|
182,612 |
|
|
Servicing income
|
|
|
38,514 |
|
|
|
28,896 |
|
|
|
11,139 |
|
|
|
432 |
|
|
|
10,616 |
|
|
Other income
|
|
|
22,400 |
|
|
|
4,415 |
|
|
|
|
|
|
|
16 |
|
|
|
1,046 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other operating income
|
|
|
683,531 |
|
|
|
833,920 |
|
|
|
622,275 |
|
|
|
452,192 |
|
|
|
194,274 |
|
|
|
Other operating expenses
|
|
|
871,365 |
|
|
|
684,082 |
|
|
|
408,835 |
|
|
|
249,322 |
|
|
|
155,725 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before income taxes
|
|
|
443,377 |
|
|
|
611,141 |
|
|
|
423,252 |
|
|
|
306,336 |
|
|
|
83,484 |
|
Income taxes
|
|
|
26,834 |
|
|
|
235,570 |
|
|
|
177,769 |
|
|
|
126,636 |
|
|
|
35,464 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
$ |
416,543 |
|
|
|
375,571 |
|
|
|
245,483 |
|
|
|
179,700 |
|
|
|
48,020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$ |
7.42 |
|
|
|
10.20 |
|
|
|
7.26 |
|
|
|
5.19 |
|
|
|
1.83 |
|
Diluted earnings per share
|
|
|
7.17 |
|
|
|
8.29 |
|
|
|
6.32 |
|
|
|
4.73 |
|
|
|
1.54 |
|
Book value per share(1)
|
|
|
35.94 |
|
|
|
39.73 |
|
|
|
16.37 |
|
|
|
10.92 |
|
|
|
6.99 |
|
Book value per share(2)
|
|
|
35.17 |
|
|
|
32.90 |
|
|
|
17.96 |
|
|
|
10.20 |
|
|
|
6.70 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
2002 | |
|
2001 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(Dollars in thousands) | |
Balance sheet data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
503,723 |
|
|
|
842,854 |
|
|
|
278,598 |
|
|
|
176,669 |
|
|
|
100,263 |
|
Restricted cash
|
|
|
726,697 |
|
|
|
454,035 |
|
|
|
116,883 |
|
|
|
6,255 |
|
|
|
6,416 |
|
Mortgage loans held for sale at lower of cost or market
|
|
|
7,825,175 |
|
|
|
3,922,865 |
|
|
|
3,422,211 |
|
|
|
1,920,396 |
|
|
|
1,011,122 |
|
Mortgage loans held for investment, net
|
|
|
16,143,865 |
|
|
|
13,195,324 |
|
|
|
4,745,937 |
|
|
|
|
|
|
|
|
|
Residual interests in securitizations
|
|
|
234,930 |
|
|
|
148,021 |
|
|
|
179,498 |
|
|
|
246,964 |
|
|
|
306,908 |
|
Total assets
|
|
|
26,147,090 |
|
|
|
19,051,944 |
|
|
|
8,943,938 |
|
|
|
2,402,928 |
|
|
|
1,451,318 |
|
Credit facilities on mortgage loans held for sale
|
|
|
7,439,685 |
|
|
|
3,704,268 |
|
|
|
3,311,837 |
|
|
|
1,885,498 |
|
|
|
987,568 |
|
Financing on mortgage loans held for investment, net
|
|
|
16,045,459 |
|
|
|
13,105,973 |
|
|
|
4,686,323 |
|
|
|
|
|
|
|
|
|
Convertible senior notes, net
|
|
|
4,943 |
|
|
|
5,392 |
|
|
|
204,858 |
|
|
|
|
|
|
|
|
|
Subordinated debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
40,000 |
|
Residual financing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
79,941 |
|
Other liabilities
|
|
|
547,303 |
|
|
|
357,746 |
|
|
|
198,909 |
|
|
|
130,880 |
|
|
|
96,048 |
|
Total stockholders equity
|
|
|
2,109,700 |
|
|
|
1,878,565 |
|
|
|
542,011 |
|
|
|
386,550 |
|
|
|
247,761 |
|
|
|
(1) |
Book value per share is calculated by dividing ending common
equity by average basic shares for the most recent quarterly
period. |
53
|
|
(2) |
Book value per share is calculated by dividing ending common
equity by average diluted shares for the most recent quarterly
period. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
2002 | |
|
2001 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(Dollars in thousands) | |
Operating Statistics:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan origination and purchase activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale
|
|
$ |
49,224,321 |
|
|
|
38,126,322 |
|
|
|
25,187,569 |
|
|
|
12,392,562 |
|
|
|
5,068,466 |
|
|
Retail
|
|
|
6,883,920 |
|
|
|
4,073,318 |
|
|
|
2,195,269 |
|
|
|
1,808,934 |
|
|
|
1,176,505 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loan originations and purchases
|
|
$ |
56,108,241 |
|
|
|
42,199,640 |
|
|
|
27,382,838 |
|
|
|
14,201,496 |
|
|
|
6,244,971 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average principal balance per loan
|
|
$ |
181 |
|
|
|
174 |
|
|
|
167 |
|
|
|
151 |
|
|
|
138 |
|
Percent of loans secured by first mortgages
|
|
|
93.8 |
% |
|
|
95.9 |
% |
|
|
98.6 |
% |
|
|
99.6 |
% |
|
|
99.3 |
% |
Weighted average initial loan-to-value ratio(1)
|
|
|
81.0 |
% |
|
|
81.1 |
% |
|
|
80.4 |
% |
|
|
78.7 |
% |
|
|
77.8 |
% |
Originations by product type:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ARMs
|
|
|
41,101,125 |
|
|
|
31,113,241 |
|
|
|
19,185,517 |
|
|
|
10,492,558 |
|
|
|
5,101,783 |
|
|
Fixed-rate mortgages
|
|
|
15,007,116 |
|
|
|
11,086,399 |
|
|
|
8,197,321 |
|
|
|
3,708,938 |
|
|
|
1,143,188 |
|
Weighted average interest rates:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed-rate mortgages
|
|
|
7.6 |
% |
|
|
7.3 |
% |
|
|
7.3 |
% |
|
|
8.2 |
% |
|
|
9.5 |
% |
|
ARMs initial rate
|
|
|
7.2 |
% |
|
|
6.9 |
% |
|
|
7.3 |
% |
|
|
8.3 |
% |
|
|
9.4 |
% |
|
ARMs margin over index
|
|
|
5.8 |
% |
|
|
5.5 |
% |
|
|
5.8 |
% |
|
|
6.6 |
% |
|
|
6.6 |
% |
Secondary Market transactions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans sold through whole loan transactions
|
|
|
35,314,781 |
|
|
|
30,329,278 |
|
|
|
20,835,105 |
|
|
|
12,419,687 |
|
|
|
4,723,350 |
|
Securitizations structured as sales
|
|
|
6,442,201 |
|
|
|
|
|
|
|
|
|
|
|
845,477 |
|
|
|
898,244 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total sales
|
|
|
41,756,982 |
|
|
|
30,329,278 |
|
|
|
20,835,105 |
|
|
|
13,265,164 |
|
|
|
5,621,594 |
|
|
Securitizations structured as financings
|
|
|
10,961,658 |
|
|
|
10,111,131 |
|
|
|
4,946,781 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total secondary market transactions
|
|
$ |
52,718,640 |
|
|
|
40,440,409 |
|
|
|
25,781,886 |
|
|
|
13,265,164 |
|
|
|
5,621,594 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Weighted average LTV is the LTV of the first lien mortgages and
the combined LTV of the second lien mortgages. |
Item 7. Managements
Discussion and Analysis of Financial Condition and Results of
Operations
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 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, and 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.
General
New Century Financial Corporation is a real estate investment
trust, or REIT, that, through its taxable REIT subsidiaries,
operates one of the nations largest mortgage finance
companies. We began originating and purchasing loans in 1996,
and, in the fourth quarter of 2004, we began operating our
business as a REIT. We originate and purchase primarily first
mortgage loans nationwide. Historically, we have focused 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
54
lenders and loan buyers. In September 2005, we acquired a
mortgage origination platform from RBC Mortgage Company, or RBC
Mortgage, that expands our offerings to include conventional
mortgage loans, including Alt-A mortgage loans,
loans insured by the Federal Housing Administration, or FHA, and
loans guaranteed by the Veterans Administration, or VA. A
significant portion of the conventional loans, which are
generally referred to as conforming loans, we
produce qualify for inclusion in guaranteed mortgage securities
backed by the Federal National Mortgage Association, or Fannie
Mae, or the Federal Home Loan Mortgage Corp., or Freddie Mac. At
the same time, some of the conventional loans we produce either
have an original loan amount in excess of the Fannie Mae and
Freddie Mac loan limit for single-family loans or otherwise do
not meet Fannie Mae or Freddie Mac guidelines.
We have historically sold our loans through both whole loan
sales and securitizations structured as sales. Since 2003, we
have also retained a portion of our loan production for
investment on our balance sheet through securitizations
structured as financings rather than sales. Our decisions
regarding secondary marketing transactions in 2006 will be
affected by market conditions and our ability to access external
sources of capital. We do not currently intend to structure any
securitizations as sales in 2006.
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. 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.
Pursuant to the merger that implemented the restructuring of New
Century TRS in order for it to qualify as a REIT, New Century
became the publicly-traded parent listed on the New York Stock
Exchange, or NYSE, that succeeded to and continued to operate
substantially all of the existing businesses of New Century TRS
and its subsidiaries.
As a result of the merger and the related capital-raising
activities, a significant source of our revenue is, and we
expect will continue to 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.
|
|
|
Acquisition of RBC Mortgage Loan Origination
Platform |
During the third quarter of 2005, Home123 Corporation, one of
our wholly owned subsidiaries, purchased the origination
platform of RBC Mortgage, which has enabled us to expand our
mortgage product offerings, our retail presence on a nationwide
basis and our channels of distribution, particularly into the
realtor and builder channels. Additionally, we believe that
offering a broader range of mortgage products allows us to build
upon the success of our national Home123 branding and marketing
campaign.
The recently acquired RBC Mortgage origination platform, which
is more heavily weighted towards purchase financing as opposed
to refinancing transactions, includes approximately 140 branches
nationwide and originates residential mortgage loans, consisting
primarily of Alt-A, jumbo and
conforming mortgages, as well as home equity lines
of credit.
The following discussion of the results of operations includes
the origination platform we acquired from RBC Mortgage in
September 2005. Where the detailed results are discussed,
recently acquired operations refer to the operations
of the origination platform acquired from RBC Mortgage and
historical operations refer to the operations of New
Century that existed prior to the RBC Mortgage transaction.
Executive Summary
During 2005, we deployed the capital we raised in 2004 and 2005
by building our REIT portfolio while also growing the
profitability of the origination operations of our taxable REIT
subsidiaries. During this
55
period, our industry experienced significant narrowing of
margins as most originators kept the interest rates offered to
customers at historically low levels while the underlying LIBOR
indexes that determine our financing costs continued to rise. As
a result, our whole loan sale pricing and the execution for
securitizations structured as financings and sales deteriorated
relative to 2004.
In the latter part of 2005, we began to increase our interest
rates to keep pace with, or exceed, the growth in underlying
rates. We intend to continue this approach with a view toward
preserving or expanding our overall operating margin. We also
are striving to manage our cost structure to remain efficient
even if loan origination volume declines. We continue to focus
on maximizing the net execution of our whole loan sales and our
cost-cutting strategies.
The other major development in our business in recent months has
been the completion of our acquisition of the origination
platform of RBC Mortgage. This acquisition expands our loan
origination channel and product mix. We are concentrating
significant efforts on a successful integration that we expect
will ultimately allow us to offer a wider range of products to
all of our customers and add strong builder and realtor
relationships to our loan origination business.
Overview
Our two key business components are: (i) our
mortgage loan portfolio held by our REIT and our taxable REIT
subsidiaries; and (ii) our origination sales, and servicing
activities conducted through certain of 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 $16.1 billion at December 31, 2005.
During 2003, we shifted our strategy in an effort 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, we began to structure our
securitizations as financings during 2003. During the years
ended 2005 and 2004, we completed four securitizations totaling
$11.0 billion and five securitizations totaling
$10.1 billion, respectively, which were structured as on
balance sheet financings. In a securitization structured as a
financing, we make an initial cash investment so that the
securitization trusts begin to return cash flow to us in the
first month following securitization. Therefore, we require cash
and capital to make the initial investment, as well as to
support the loans on our balance sheet. During 2003, 2004 and
2005, we retained between 20% and 25% of our total loan
production through securitizations for investment on our balance
sheet.
Our portfolio of mortgage loans held for investment generally
consists of a representative cross-section of our overall loan
production volume. This portfolio earns net interest income over
its life, which is generally two to 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 2.5% 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 reduce variability in our interest margin
over the period of each securitization.
56
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. For the past several years, our secondary marketing
strategy has 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, among others. In
addition, the premiums we receive from the secondary market for
our loans also have 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. In light of our current strategy to raise interest
rates, our loan production volume may decrease as a result of
these higher interest rates on the mortgages we originate.
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 50 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 4.5%. During 2005, this margin decreased
to 2.7% as short-term rates increased more rapidly than our
average coupon rates. We seek to manage the timing of our sales
to enhance 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 all 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, as a result of
competitive pressures, we did not previously raise the interest
rates we charged our borrowers to the degree that underlying
short-term rates increased, reducing gain on sale margins in
2005 compared to 2004. More recently, we have taken steps to
strategically increase our rates in an effort to improve our
operating margins. We believe that the positive impact of these
steps will improve our gain on sale margins in the first and
second quarters of 2006.
Loan origination or acquisition cost We also
monitor the cost to originate our loans. We typically refer to
this as our loan acquisition costs. Loan acquisition costs are
comprised of the following: fees paid to wholesale brokers and
correspondents, plus direct loan origination costs, including
commissions and corporate overhead costs less points and fees
received from borrowers, divided by total loan production
volume. Loan acquisition costs do not include profit-based
compensation, servicing division overhead, parent company
expenses or startup operations. During 2004 and through the
first quarter of 2005, our loan acquisition costs remained
relatively stable and generally fluctuated inversely with our
loan production volume. As a result of the competitive
environment and its impact on the value of our loans, in 2005 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 to our
sales compensation, controlling growth in non-sales overhead and
more closely scrutinizing our discretionary spending, together
with an increase in our loan production, resulted in a
significant reduction of our loan acquisition costs during the
latter part 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.
In addition, during the fourth quarter of 2005, we closed
$2.5 billion in loans through the origination platform
recently acquired from RBC Mortgage and acted as a broker for an
additional $382.8 million to third parties. As we
previously expected, these operations negatively impacted our
net income in 2005, including certain integration costs. While
the loss was modestly greater than anticipated, we expect that
the origination
57
platform will be profitable in 2006. The mortgage loans
originated by our recently acquired operations consist primarily
of Alt-A, jumbo and
conforming and home equity lines of credit products
that are sourced through retail and wholesale channels as well
as with limited liability partnerships with builder/realtors. We
sell the majority of our mortgage loans originated through these
operations in the whole loan market.
|
|
|
Loan originations and purchases |
Historically, we have focused 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. In connection
with our recently acquired loan origination platform acquired
from RBC Mortgage we also originate Alt-A,
jumbo and conforming mortgages, as well
as home equity lines of credit.
As of December 31, 2005, our Wholesale Division operated
through 35 regional operating centers and originated or
purchased $49.2 billion in loans during the year ended
December 31, 2005. Our Retail Division originated loans
through 222 sales offices, including our centralized
telemarketing unit and our builder/realtor channel, and
originated $6.9 billion in loans during the year ended
December 31, 2005.
As of December 31, 2004, our Wholesale Division operated
through 26 regional operating centers. Our Wholesale Division
originated or purchased $38.1 billion in loans during the
year ended December 31, 2004. As of December 31, 2004,
our Retail Division originated loans through 74 sales offices,
including our centralized telemarketing unit. Our Retail
Division originated $4.1 billion in loans during the year
ended December 31, 2004.
For the year ended December 31, 2005, approximately
$27.1 billion, or 48.4%, of our mortgage production
consisted of cash-out refinancings, transactions in which the
borrowers refinanced their existing mortgages and received cash
representing a portion of the equity in their homes. For the
same period, approximately $23.6 billion, or 42.0%, of our
mortgage production consisted of home purchase finance loans.
The remainder of our mortgage production, $5.4 billion, or
9.6%, consisted of transactions in which borrowers refinanced
their existing mortgages to obtain a better interest rate or
loan maturity, or rate and term refinance transactions. For the
year ended December 31, 2004, total originations consisted
of $25.1 billion, or 59.5%, of cash-out refinancings,
$14.9 billion, or 35.3%, of home purchase financings, and
$2.2 billion, or 5.2%, of rate and term refinance
transactions. Market and economic conditions, as well as our
focus on increasing our home purchase business, have shifted our
product mix, resulting in a greater percentage of home purchase
financings as compared to cash-out refinancings. We believe that
our current product mix 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 reduced.
We have experienced considerable growth of our interest-only
product. During the year ended December 31, 2005,
originations of adjustable-rate, interest-only loans totaled
$16.6 billion, or 29.6%, of total originations and fixed,
interest-only loans totaled $0.7 billion, or 1.2%, of total
originations. Interest-only originations during the year ended
December 31, 2004 totaled $8.1 billion, or 19.3%, of
total originations during the period. We believe our strict
underwriting guidelines and the stronger credit characteristics
of these loans mitigate their perceived higher risk. In
September 2005, we implemented pricing strategies to reduce the
volume of our interest-only product to 25% of total loan
production to improve secondary market execution and
profitability. The strategies include pricing increases,
underwriting changes and new product offerings, including a
40-year mortgage
product. These changes reduced interest-only production to 22.4%
of total loan production for the fourth quarter of 2005. It is
important to note, however, that the credit performance of our
interest-only product continues to outperform our expectations.
For the year ended December 31, 2005, full documentation
loans as a percentage of originations totaled
$30.4 billion, or 54.2%, limited documentation loans
totaled $1.5 billion, or 2.7%, and stated documentation
loans totaled $24.2 billion, or 43.1%. 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.
58
Stated income documentation loans are based upon stated monthly
income if the applicant meets certain criteria. For the year
ended December 31, 2004, full documentation loans as a
percentage of total originations totaled $21.5 billion, or
51.0%, limited documentation loans totaled $2.0 billion, or
4.8%, and stated documentation loans totaled $18.7 billion,
or 44.2%. Generally, economic and market conditions, including
new product introductions and offerings by competitors,
influence product mix. As these factors change, product mix,
including the type of documentation required, 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 mix among full, limited and
stated documentation varies.
59
The following table sets forth selected information relating to
loan originations and purchases during the periods shown
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
|
Total | |
|
% | |
|
Total | |
|
% | |
|
|
| |
|
| |
|
| |
|
| |
Wholesale
|
|
$ |
49,224,321 |
|
|
|
87.7 |
|
|
|
38,126,322 |
|
|
|
90.3 |
|
Retail
|
|
|
6,883,920 |
|
|
|
12.3 |
|
|
|
4,073,318 |
|
|
|
9.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total originations and purchases
|
|
|
56,108,241 |
|
|
|
100.0 |
|
|
|
42,199,640 |
|
|
|
100.0 |
|
Fixed-rate mortgages:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Traditional
|
|
|
13,845,595 |
|
|
|
24.6 |
|
|
|
11,086,399 |
|
|
|
26.3 |
|
|
Interest-Only
|
|
|
671,824 |
|
|
|
1.2 |
|
|
|
|
|
|
|
|
|
|
40-Year
|
|
|
489,697 |
|
|
|
0.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sub-total Fixed
|
|
|
15,007,116 |
|
|
|
26.7 |
|
|
|
11,086,399 |
|
|
|
26.3 |
|
Adjustable-rate mortgages:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Traditional
|
|
|
21,194,109 |
|
|
|
37.8 |
|
|
|
22,969,212 |
|
|
|
54.4 |
|
|
Interest-Only
|
|
|
16,580,514 |
|
|
|
29.6 |
|
|
|
8,144,029 |
|
|
|
19.3 |
|
|
40-Year
|
|
|
3,298,913 |
|
|
|
5.9 |
|
|
|
|
|
|
|
|
|
|
HELOC
|
|
|
27,589 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sub-total ARM
|
|
|
41,101,125 |
|
|
|
73.3 |
|
|
|
31,113,241 |
|
|
|
73.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total originations and purchases
|
|
|
56,108,241 |
|
|
|
100.0 |
|
|
|
42,199,640 |
|
|
|
100.0 |
|
Purchases
|
|
|
23,571,645 |
|
|
|
42.0 |
|
|
|
14,880,034 |
|
|
|
35.3 |
|
Refinances:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash-out refinances
|
|
|
27,130,520 |
|
|
|
48.4 |
|
|
|
25,121,511 |
|
|
|
59.5 |
|
|
Rate/term refinances
|
|
|
5,406,076 |
|
|
|
9.6 |
|
|
|
2,198,095 |
|
|
|
5.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total originations and purchases
|
|
|
56,108,241 |
|
|
|
100.0 |
|
|
|
42,199,640 |
|
|
|
100.0 |
|
Full documentation
|
|
|
30,438,822 |
|
|
|
54.2 |
|
|
|
21,530,191 |
|
|
|
51.0 |
|
Limited documentation
|
|
|
1,501,367 |
|
|
|
2.7 |
|
|
|
2,014,253 |
|
|
|
4.8 |
|
Stated documentation
|
|
|
24,168,052 |
|
|
|
43.1 |
|
|
|
18,655,196 |
|
|
|
44.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total originations and purchases
|
|
$ |
56,108,241 |
|
|
|
100.0 |
|
|
|
42,199,640 |
|
|
|
100.0 |
|
Average principal balance of loans originated and purchased
|
|
$ |
181 |
|
|
|
|
|
|
|
174 |
|
|
|
|
|
Weighted average FICO score of loans originated and purchased
|
|
|
634 |
|
|
|
|
|
|
|
627 |
|
|
|
|
|
Percent of loans secured by first mortgages
|
|
|
93.8 |
% |
|
|
|
|
|
|
93.2 |
% |
|
|
|
|
Weighted average loan-to-value ratio(1)
|
|
|
81.0 |
% |
|
|
|
|
|
|
81.1 |
% |
|
|
|
|
Weighted average interest rates:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed-rate mortgages
|
|
|
7.6 |
% |
|
|
|
|
|
|
7.3 |
% |
|
|
|
|
|
Adjustable-rate mortgages initial rate
|
|
|
7.2 |
% |
|
|
|
|
|
|
6.9 |
% |
|
|
|
|
|
Adjustable-rate mortgages margin over index
|
|
|
5.8 |
% |
|
|
|
|
|
|
5.5 |
% |
|
|
|
|
|
|
|
Total originations and purchases
|
|
|
7.3 |
% |
|
|
|
|
|
|
7.0 |
% |
|
|
|
|
Percentage of loans originated in top two credit grades
|
|
|
84.0 |
% |
|
|
|
|
|
|
85.8 |
% |
|
|
|
|
Percentage of loans originated in bottom two credit grades
|
|
|
2.3 |
% |
|
|
|
|
|
|
3.2 |
% |
|
|
|
|
|
|
(1) |
Weighted average LTV is the LTV of the first lien mortgages and
combined LTV of the second lien mortgages. |
60
|
|
|
Secondary Market Transactions |
Historically, one of the major components of revenue has been
the recognition of gain on sale of our loans through whole loan
sales and securitizations structured as sales. In a whole loan
sale, we recognize and receive a cash gain upon the sale of a
pool of mortgage loans to third parties. In a securitization
structured as a sale for financial reporting purposes, we
typically recognize a gain on sale at the time we sell a pool of
loans to the trust that will raise the cash portion of the
purchase price by selling senior certificates representing
senior interests in the pool of loans. We also receive cash
flows over the actual life of the loans from the residual
interests we retain in the pool of loans after payment of
servicing fees, guarantor fees and other trust expenses if the
specified over-collateralization requirements are met.
Since the first quarter of 2003, we have structured most of our
securitizations as on balance sheet 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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
Amount | |
|
% of Sales | |
|
Amount | |
|
% of Sales | |
|
Amount | |
|
% of Sales | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Subprime whole loan sales
|
|
$ |
32,816,911 |
|
|
|
62.2 |
|
|
|
30,181,150 |
|
|
|
74.6 |
|
|
|
20,587,888 |
|
|
|
79.8 |
|
Prime and Alt-A whole loan sales
|
|
|
2,251,335 |
|
|
|
4.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securitizations structured as sales
|
|
|
6,442,201 |
|
|
|
12.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total premium sales
|
|
|
41,510,447 |
|
|
|
78.7 |
|
|
|
30,181,150 |
|
|
|
74.6 |
|
|
|
20,587,888 |
|
|
|
79.8 |
|
Discounted whole loan sales
|
|
|
246,535 |
|
|
|
0.5 |
|
|
|
148,128 |
|
|
|
0.4 |
|
|
|
247,217 |
|
|
|
1.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total sales
|
|
|
41,756,982 |
|
|
|
79.2 |
|
|
|
30,329,278 |
|
|
|
75.0 |
|
|
|
20,835,105 |
|
|
|
80.8 |
|
Securitizations structured as financings
|
|
|
10,961,958 |
|
|
|
20.8 |
|
|
|
10,111,131 |
|
|
|
25.0 |
|
|
|
4,946,781 |
|
|
|
19.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total secondary market transactions
|
|
$ |
52,718,940 |
|
|
|
100.0 |
|
|
|
40,440,409 |
|
|
|
100.0 |
|
|
|
25,781,886 |
|
|
|
100.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During 2005, we closed four securitizations structured as sales,
which resulted in recognition of gain on sale income and an
increase in our residual interests in securitizations. Whole
loan sales and securitizations structured as sales provide
greater current period earnings compared to investments in
securitizations structured as financings, which recognize income
over time. Although securitizations structured as sales may
provide greater current period earnings compared to whole loan
sales, the securitizations generally provide less cash at
closing than do whole loan sales.
During the year ended December 31, 2005, whole loan sales
and securitizations structured as sales accounted for
$41.8 billion, or 79.2%, of our total secondary market
transactions. During 2004, whole loan sales accounted for
$30.3 billion, or 75.0%, of our total secondary market
transactions. 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 in 2004
relative to historic levels and continued to decline in 2005.
Further, during most of 2005, as a result of competitive
pressures, we did not raise the interest rates we charged our
borrowers to the same degree that short-term rates increased,
further reducing margins in the year ended December 31,
2005 compared to the same periods in 2004.
We seek to increase our premiums on whole loan sales by closely
monitoring requirements of institutional purchasers and focusing
on originating or purchasing the types of loans for which
institutional purchasers tend to pay higher premiums. During the
year ended December 31, 2005, we sold $6.3 billion of
loans to Carrington Capital Management, LLC and
$5.8 billion of loans to Morgan Stanley Mortgage Capital,
Inc., which
61
represented 15.9% and 14.6%, respectively, of total loans sold.
While nearly one-third of our loans were sold to these two
investors, our loans are sold through a competitive bid process
that generally includes many more potential buyers.
|
|
|
Securitizations Structured as Financings |
During the year ended December 31, 2005, we completed four
securitizations totaling $11.0 billion, 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 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 year ended December 31,
2004, we completed five securitizations structured as financings
totaling $10.1 billion.
|
|
|
Securitizations Structured as Sales |
During the year ended December 31, 2005, we completed four
securitizations structured as sales totaling $6.4 billion,
resulting in a gain on sale of $141.5 million. During the
year ended December 31, 2004, we did not complete any
securitization transactions structured as sales, however, we
continue to hold residual interests on our balance sheet related
to securitizations structured as sales closed in 2002 and prior
years. The mortgage servicing rights related to the
securitizations structured as sales are sold within 30 to
60 days after securitization. Purchasers of securitization
bonds and certificates have no recourse against our other
assets, other than the assets of the trust. The value of our
retained interests is subject to credit, prepayment and interest
rate risk on the transferred financial assets.
At the closing of a securitization structured as a sale, we add
to our balance sheet the residual interest retained based on our
calculation of the present value of estimated future cash flows
that we will receive. The residual interest we record consists
of the overcollateralization, or OC, account and the net
interest receivable, or NIR. On a combined basis, these are
referred to as the residual interests.
On a quarterly basis, we review the underlying assumptions to
value each residual interest and adjust the carrying value of
the securities based on actual experience and industry trends.
To determine the residual asset value, we project the cash flow
for each security. To project cash flow, we use base assumptions
for the constant prepayment rate, or CPR, and losses for each
product type based on historical performance. We update each
security to reflect actual performance to date and we adjust
base assumptions for CPR and losses based on historical
experience to project performance of the security from that date
forward. Then, we use the LIBOR forward curve to project future
interest rates and compute cash flow projections for each
security. Next, we discount the projected cash flows at a rate
commensurate with the risk involved. At December 31, 2005,
we used discount rates of 12% for residual interests and 14% for
residual interests through net interest margin security, or
NIMS, transactions.
During the years ended December 31, 2005 and 2004, as a
result of our quarterly evaluations of the residual interests,
we recorded a $10.0 million decrease, including a hurricane
loss provision of $2.6 million, and a $7.7 million
decrease in the fair value of the residual assets, respectively.
These fair value adjustments represent the change in the
estimated present value of future cash flows from the residual
interests. Changes in the loss assumptions on certain loans
underlying our residual interests, as well as fluctuations in
the overall interest rate environment, resulted in a reduction
in fair value.
In the first quarter of 2004, we invested $2 million in
Carrington Capital Management, LLC, or the LLC, and
$25 million in Carrington Mortgage Credit Fund I, LP,
or Carrington, which is sponsored by the LLC. Carrington
acquires individual and pooled single-family residential
subprime loans and securitizes them in transactions structured
as sales. We were originally the majority investor in
Carrington, requiring us to consolidate Carringtons
results in our financial statements for financial reporting
purposes through Septem-
62
ber 30, 2004. In the fourth quarter of 2004, Carrington
raised additional capital, reducing our ownership position to
approximately 38%. Since that time, we have included Carrington
in our financial statements under the equity method of
accounting. As a result of Carringtons capital raising
activities, our ownership position is approximately 7% as of
December 31, 2005. The carrying value of our equity
investment in Carrington and the LLC is $39.7 million.
During the year ended December 31, 2005, we sold
$246.5 million in loans at a discount to their outstanding
principal balance. These loans consisted of repurchased loans,
loans with documentation defects or loans that whole loan buyers
rejected because of certain characteristics. For the year ended
December 31, 2004, discounted sales totaled
$148.1 million. On a percentage basis, discounted sales
increased slightly from 0.5% of total sales in 2004 to 0.6% in
2005. The severity of the discount also increased slightly from
5.8% during 2004 to 6.5% during 2005.
Critical Accounting Policies
We have established various accounting policies that govern the
application of accounting principles generally accepted in the
United States in the preparation of our financial statements.
Certain accounting policies require us to make significant
estimates and assumptions that may have a material impact on
certain assets and liabilities or our results of operations, and
we consider these to be critical accounting policies. The
estimates and assumptions we use are based on historical
experience and other factors which we believe to be reasonable
under the circumstances. Actual results could differ materially
from these estimates and assumptions, which could have a
material impact on the carrying value of assets and liabilities
and our results of operations.
We believe the following are critical accounting policies that
require the most significant estimates and assumptions and are
subject to significant change in the preparation of our
consolidated financial statements. These estimates and
assumptions include, but are not limited to, the interest rate
environment, the economic environment, secondary market
conditions and the performance of the loans underlying our
residual assets and mortgage loans held for investment.
|
|
|
Securitizations Structured as Financings |
Since January 2003, we have completed a total of 14
securitizations structured as financings under SFAS 140.
Such securitizations were collateralized by $26.0 billion
of mortgage loans.
These securitizations are structured legally as sales, but for
accounting purposes are treated as financings under
SFAS 140. The securitization trusts do not meet the
qualifying special purpose entity criteria under SFAS 140
and related interpretations, due to their ability to enter into
derivative contracts. Additionally, we have the option to
purchase loans from the trust at our discretion. Accordingly,
the loans, which we refer to as mortgage loans held for
investment, remain on our balance sheet, retained
interests are not created and financing on mortgage loans held
for investment replaces the credit facility debt originally
financing the mortgage loans. We record interest income on
securitized loans and interest expense on the bonds issued in
the securitizations over the life of the securitizations.
Deferred debt issuance costs and discount related to the bonds
are amortized on a level yield basis over the estimated life of
the bonds.
|
|
|
Allowance for Losses on Mortgage Loans Held for
Investment |
For our mortgage loans held for investment, we establish an
allowance for loan losses based on our estimate of losses
inherent and probable as of the balance sheet date. We charge
off uncollectible loans at the time of liquidation. We evaluate
the adequacy of this allowance each quarter, giving
consideration to factors such as the current performance of the
loans, credit characteristics of the portfolio, the value of the
underlying collateral and the general economic environment. In
order to estimate an appropriate allowance for losses on loans
held for investment, we estimate losses using static
pooling, which stratifies the loans held for investment
into separately identified vintage pools. Using historic
experience and taking into consideration the
63
factors above, we estimate an allowance for credit losses, which
we believe is adequate for known and inherent losses in the
portfolio of mortgage loans held for investment. We charge the
loss provision to our consolidated statement of income. We
charge losses incurred on mortgage loans held for investment to
the allowance.
The allowance for losses on mortgage loans held for investment
as a percentage of mortgage loans held for investment as of
December 31, 2005 was approximately 1.22% of the unpaid
principal balance of the loans compared to 0.73% for the same
period in the prior year.
|
|
|
Residual Interests and Securitizations Structured as
Sales |
Residual interests in securitizations are recorded as a result
of the sale of loans through securitizations that we structure
as sales rather than financings, also referred to as
off-balance sheet securitizations. We may also sell
residual interests in securitizations through NIMS.
In a securitization structured as a sale, we sell a pool of
loans to a trust for cash and a certificate evidencing our
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. We receive the cash flows
from the residual interests 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 us 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 interest rate
on the certificates. Accordingly, the residual interests in
securitizations described above are a significant asset. In
determining the value of the residual interests in
securitizations, we estimate the future rate of prepayments,
prepayment penalties that we will receive, delinquencies,
defaults and default loss severity as they affect the amount and
timing of the estimated cash flows. We estimate average
cumulative losses as a percentage of the original principal
balance of the mortgage loans of 1.75% to 4.86% for
adjustable-rate securities and 1.45% to 5.30% for fixed-rate
securities. We base 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 3.72% at December 31, 2005. We estimate
prepayments by evaluating historical prepayment performance of
our loans and the impact of current trends. We use 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 2.29 to
2.60 years for our adjustable-rate securities and 2.33 to
3.54 years for our fixed-rate securities.
During the year ended December 31, 2005, we completed four
securitizations structured as sales totaling $6.4 billion
structured as sales under SFAS 140. The gain on sale
recorded for the four securitizations was $141.5 million
and our retained interests totaled $97.5 million. During
the year ended December 31, 2004, we did not complete any
securitizations structured as sales. In this type of
securitization, the transferor of financial assets surrenders
effective control over those financial assets to the extent that
consideration other than beneficial interests in the transferred
assets is received in exchange and the trusts meet the
qualifying special purpose entity criteria under SFAS 140
and related interpretations. Thus, we are not required to
consolidate the trusts.
64
During the year ended December 31, 2005, residual interests
in securitizations provided $17.5 million in net cash flow
to us. We perform an evaluation of residual interests in
securitizations quarterly, taking into consideration trends in
actual cash flow performance, industry and economic
developments, as well as other relevant factors. For the year
ended December 31, 2005, we increased our prepayment
assumptions based on actual performance and made minor
adjustments to certain other assumptions, resulting in a
$10.0 million downward fair value adjustment, including a
hurricane loss provision of $2.6 million, for the year.
The bond and certificate holders and their securitization trusts
have no recourse to us for failure of mortgage loan borrowers to
pay when due. Our residual interests in securitizations are
subordinate to the bonds and certificates until the bond and
certificate holders are fully paid.
We are party to various transactions that have an off-balance
sheet component. In connection with our off-balance sheet
securitization transactions, there were $6.9 billion in
loans owned by the off-balance sheet trusts as of
December 31, 2005. The trusts have issued bonds secured by
these loans. The bondholders generally do not have recourse to
us in the event that the loans in the various trusts do not
perform as expected except for specific circumstances. Because
these trusts are qualifying special purpose
entities, in accordance with generally accepted accounting
principles, we have included only our residual interest in these
loans on our balance sheet. The performance of the loans in the
trusts will impact our ability to realize the current estimated
fair value of these residual assets.
|
|
|
Allowance for Repurchase Losses |
The allowance for repurchase losses on loans sold relates to
expenses incurred due to the potential repurchase of loans or
indemnification of losses based on alleged violations of
representations and warranties that are customary to the
business. Generally, repurchases are required within
90 days from the date the loans are sold. Occasionally, we
may repurchase loans after 90 days have elapsed. Provisions
for losses are charged to gain on sale of loans and credited to
the allowance while actual losses are charged to the allowance.
In order to estimate an appropriate allowance for repurchase
losses we use historic experience, taking into consideration
factors such as premiums received on and volume of recent whole
loan sales and the general secondary market and general economic
environment. As of December 31, 2005 and December 31,
2004, the repurchase allowance totaled $7.0 million and
$6.3 million, respectively. Approximately
$10.7 billion and $8.3 billion of loans were subject
to repurchase, representing loans sold during the fourth quarter
of 2005 and the fourth quarter of 2004, respectively. We believe
the allowance for repurchase losses is adequate as of
December 31, 2005 and 2004.
We recognize gains or losses resulting from sales or
securitizations of mortgage loans at the date of settlement
based on the difference between the selling price for the loans
sold or securitized and the carrying value of the loans sold.
Such gains and losses may be increased or decreased by the
amount of any servicing-released premiums received. We defer
recognition of non-refundable fees and direct costs associated
with the origination of mortgage loans until the loans are sold.
We account for loan sales and securitizations as sales when we
surrender control of the loans, to the extent that we receive
consideration other than beneficial interests in the loans
transferred in the exchange. Liabilities and derivatives
incurred or obtained by the transfer of loans are required to be
measured at fair value, if practicable. Also, we measure
servicing assets and other retained interests in the loans by
allocating the previous carrying value between the loans sold
and the interest retained, if any, based on their relative fair
values on the date of transfer.
Commencing in 2004, we have operated so as to qualify as a REIT
for federal income tax purposes and are not generally required
to pay federal and most state income taxes if we meet the REIT
requirements of the Internal Revenue Code of 1986, as amended,
or the Code. Also, our 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
65
income taxes. However, we must recognize income taxes in
accordance with Statement of Financial Accounting Standards
No. 109 Accounting for Income Taxes, or
SFAS 109, for our taxable REIT subsidiaries, or TRS, whose
income is fully taxable at regular corporate rates.
SFAS 109 requires that deferred tax assets and liabilities
are recognized for the future tax consequences attributable to
differences between financial statement carrying amounts of the
existing assets and liabilities and their respective tax bases.
Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered
or settled. The effect on deferred tax assets and liabilities of
a change in tax rates is recognized in income in the period that
includes the enactment date.
|
|
|
Derivative Instruments Designated as Hedges |
We account for certain Euro Dollar futures and interest rate cap
contracts, designated and documented as hedges pursuant to the
requirements of Statement of Financial Accounting Standard
No. 133, Accounting for Derivative Instruments and
Hedging Activities, or SFAS 133. Pursuant to
SFAS 133, these contracts have been designated as hedging
the exposure to variability of cash flows from our 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 cash flow hedge be
reported in other comprehensive income and the ineffective
portion be reported in current earnings. Additionally, certain
Euro Dollar futures contracts have been 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.
Results of Operations
Consolidated net earnings increased to $416.5 million in
2005 from $375.6 million in 2004 and $245.5 million in
2003. Although net earnings increased 10.9% from 2004 to 2005,
diluted earnings per share decreased from $8.29 per share
in 2004 to $7.17 in 2005 due to an increase in the average
number of diluted shares outstanding during the period resulting
from our capital raise in the fourth quarter of 2004, when we
converted to a REIT.
66
The following tables set forth our results of operations as a
percentage of total net interest income and other operating
income for the periods indicated (dollars in thousands, except
per share and share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Interest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
$ |
771,444 |
|
|
|
58.7 |
% |
|
|
531,553 |
|
|
|
41.1 |
% |
|
|
236,116 |
|
|
|
28.4 |
% |
|
Provision for losses on mortgage loans held for investment
|
|
|
(140,233 |
) |
|
|
(10.7 |
)% |
|
|
(70,250 |
) |
|
|
(5.4 |
)% |
|
|
(26,304 |
) |
|
|
(3.2 |
%) |
Other operating income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on sale of mortgage loans
|
|
|
622,617 |
|
|
|
47.4 |
% |
|
|
800,609 |
|
|
|
61.8 |
% |
|
|
611,136 |
|
|
|
73.5 |
% |
|
Servicing income
|
|
|
38,514 |
|
|
|
2.9 |
% |
|
|
28,896 |
|
|
|
2.2 |
% |
|
|
11,139 |
|
|
|
1.3 |
% |
|
Other income
|
|
|
22,400 |
|
|
|
1.7 |
% |
|
|
4,415 |
|
|
|
0.3 |
% |
|
|
|
|
|
|
0.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net interest income and other operating income
|
|
|
1,314,742 |
|
|
|
100.0 |
% |
|
|
1,295,223 |
|
|
|
100.0 |
% |
|
|
832,087 |
|
|
|
100.0 |
% |
Total operating expenses
|
|
|
871,365 |
|
|
|
66.3 |
% |
|
|
684,082 |
|
|
|
52.8 |
% |
|
|
408,835 |
|
|
|
49.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before income taxes
|
|
|
443,377 |
|
|
|
33.7 |
% |
|
|
611,141 |
|
|
|
47.2 |
% |
|
|
423,252 |
|
|
|
50.9 |
% |
|
Income taxes
|
|
|
26,834 |
|
|
|
2.0 |
% |
|
|
235,570 |
|
|
|
18.2 |
% |
|
|
177,769 |
|
|
|
21.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
$ |
416,543 |
|
|
|
31.7 |
% |
|
|
375,571 |
|
|
|
29.0 |
% |
|
|
245,483 |
|
|
|
29.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$ |
7.42 |
|
|
|
|
|
|
|
10.20 |
|
|
|
|
|
|
|
7.26 |
|
|
|
|
|
Diluted earnings per share
|
|
$ |
7.17 |
|
|
|
|
|
|
|
8.29 |
|
|
|
|
|
|
|
6.32 |
|
|
|
|
|
Basic weighted average shares outstanding
|
|
|
55,430,666 |
|
|
|
|
|
|
|
36,807,298 |
|
|
|
|
|
|
|
33,835,127 |
|
|
|
|
|
Diluted weighted average shares outstanding
|
|
|
57,323,991 |
|
|
|
|
|
|
|
46,214,837 |
|
|
|
|
|
|
|
39,234,833 |
|
|
|
|
|
As our portfolio of mortgage loans held for investment through
securitizations structured as financings increases, a greater
percentage of our revenues is derived from interest income and a
lesser percentage from gain on sale of loans.
67
Year Ended December 31, 2005 Compared to Year Ended
December 31, 2004
|
|
|
Originations and Purchases |
The following table sets forth selected information relating to
loan originations and purchases during the periods shown
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2005 | |
|
For the Year Ended December 31, 2004 | |
|
|
| |
|
| |
|
|
Wholesale | |
|
Retail | |
|
|
|
Wholesale | |
|
Retail | |
|
|
|
|
Division | |
|
Division | |
|
Total | |
|
% | |
|
Division | |
|
Division | |
|
Total | |
|
% | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Fixed-rate mortgages:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Traditional
|
|
$ |
10,647,365 |
|
|
|
3,198,230 |
|
|
|
13,845,595 |
|
|
|
24.6 |
|
|
$ |
9,343,706 |
|
|
|
1,742,693 |
|
|
|
11,086,399 |
|
|
|
26.3 |
|
|
Interest-Only
|
|
|
378,587 |
|
|
|
293,237 |
|
|
|
671,824 |
|
|
|
1.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
40-Year
|
|
|
386,570 |
|
|
|
103,127 |
|
|
|
489,697 |
|
|
|
0.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sub-total Fixed
|
|
|
11,412,522 |
|
|
|
3,594,594 |
|
|
|
15,007,116 |
|
|
|
26.7 |
|
|
|
9,343,706 |
|
|
|
1,742,693 |
|
|
|
11,086,399 |
|
|
|
26.3 |
|
Adjustable-rate mortgages:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Traditional
|
|
|
19,176,400 |
|
|
|
2,017,709 |
|
|
|
21,194,109 |
|
|
|
37.8 |
|
|
|
20,924,569 |
|
|
|
2,044,643 |
|
|
|
22,969,212 |
|
|
|
54.4 |
|
|
Interest-Only
|
|
|
15,622,152 |
|
|
|
958,362 |
|
|
|
16,580,514 |
|
|
|
29.6 |
|
|
|
7,858,047 |
|
|
|
285,982 |
|
|
|
8,144,029 |
|
|
|
19.3 |
|
|
40-Year
|
|
|
3,005,506 |
|
|
|
293,407 |
|
|
|
3,298,913 |
|
|
|
5.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
HELOC
|
|
|
7,741 |
|
|
|
19,848 |
|
|
|
27,589 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sub-total ARM
|
|
|
37,811,799 |
|
|
|
3,289,326 |
|
|
|
41,101,125 |
|
|
|
73.3 |
|
|
|
28,782,616 |
|
|
|
2,330,625 |
|
|
|
31,113,241 |
|
|
|
73.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total originations and purchases
|
|
|
49,224,321 |
|
|
|
6,883,920 |
|
|
|
56,108,241 |
|
|
|
100.0 |
|
|
|
38,126,322 |
|
|
|
4,073,318 |
|
|
|
42,199,640 |
|
|
|
100.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases
|
|
|
21,820,914 |
|
|
|
1,750,731 |
|
|
|
23,571,645 |
|
|
|
42.0 |
|
|
|
14,702,067 |
|
|
|
177,967 |
|
|
|
14,880,034 |
|
|
|
35.3 |
|
Refinances:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash-out refinances
|
|
|
23,175,478 |
|
|
|
3,955,042 |
|
|
|
27,130,520 |
|
|
|
48.4 |
|
|
|
21,775,187 |
|
|
|
3,346,324 |
|
|
|
25,121,511 |
|
|
|
59.5 |
|
|
Rate/term refinances
|
|
|
4,227,929 |
|
|
|
1,178,147 |
|
|
|
5,406,076 |
|
|
|
9.6 |
|
|
|
1,649,068 |
|
|
|
549,027 |
|
|
|
2,198,095 |
|
|
|
5.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total originations and purchases
|
|
|
49,224,321 |
|
|
|
6,883,920 |
|
|
|
56,108,241 |
|
|
|
100.0 |
|
|
|
38,126,322 |
|
|
|
4,073,318 |
|
|
|
42,199,640 |
|
|
|
100.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Full documentation
|
|
|
25,406,403 |
|
|
|
5,032,419 |
|
|
|
30,438,822 |
|
|
|
54.2 |
|
|
|
18,554,650 |
|
|
|
2,975,541 |
|
|
|
21,530,191 |
|
|
|
51.0 |
|
Limited documentation
|
|
|
1,355,655 |
|
|
|
145,712 |
|
|
|
1,501,367 |
|
|
|
2.7 |
|
|
|
1,814,807 |
|
|
|
199,446 |
|
|
|
2,014,253 |
|
|
|
4.8 |
|
Stated documentation
|
|
|
22,462,263 |
|
|
|
1,705,789 |
|
|
|
24,168,052 |
|
|
|
43.1 |
|
|
|
17,756,865 |
|
|
|
898,331 |
|
|
|
18,655,196 |
|
|
|
44.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total originations and purchases
|
|
$ |
49,224,321 |
|
|
|
6,883,920 |
|
|
|
56,108,241 |
|
|
|
100.0 |
|
|
|
38,126,322 |
|
|
|
4,073,318 |
|
|
|
42,199,640 |
|
|
|
100.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average principal balance of loans originated and purchased
|
|
$ |
185 |
|
|
|
154 |
|
|
|
181 |
|
|
|
|
|
|
|
178 |
|
|
|
142 |
|
|
|
174 |
|
|
|
|
|
Weighted average FICO score of loans originated and purchased
|
|
|
633 |
|
|
|
641 |
|
|
|
634 |
|
|
|
|
|
|
|
629 |
|
|
|
607 |
|
|
|
627 |
|
|
|
|
|
Weighted average loan-to-value ratio(1)
|
|
|
81.3 |
% |
|
|
78.7 |
% |
|
|
81.0 |
% |
|
|
|
|
|
|
81.4 |
% |
|
|
78.3 |
% |
|
|
81.1 |
% |
|
|
|
|
Weighted average interest rates:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed-rate mortgages
|
|
|
7.9 |
% |
|
|
6.7 |
% |
|
|
7.6 |
% |
|
|
|
|
|
|
7.4 |
% |
|
|
6.8 |
% |
|
|
7.3 |
% |
|
|
|
|
|
Adjustable-rate mortgages initial rate
|
|
|
7.2 |
% |
|
|
7.1 |
% |
|
|
7.2 |
% |
|
|
|
|
|
|
6.9 |
% |
|
|
6.9 |
% |
|
|
6.9 |
% |
|
|
|
|
|
Adjustable-rate mortgages margin over index
|
|
|
5.8 |
% |
|
|
5.5 |
% |
|
|
5.8 |
% |
|
|
|
|
|
|
5.5 |
% |
|
|
5.7 |
% |
|
|
5.5 |
% |
|
|
|
|
|
|
|
Total originations and purchases
|
|
|
7.4 |
% |
|
|
6.9 |
% |
|
|
7.3 |
% |
|
|
|
|
|
|
7.1 |
% |
|
|
6.9 |
% |
|
|
7.0 |
% |
|
|
|
|
|
|
(1) |
Weighted average LTV is the LTV of the first lien mortgages and
combined LTV of the second lien mortgages. |
We originated and purchased $56.1 billion in loans for the
year ended December 31, 2005, compared to
$42.2 billion for the year ended December 31, 2004.
For the year ended December 31, 2005, wholesale and retail
originations and purchases totaled $49.2 billion and
$6.9 billion, respectively, representing 87.7% and 12.3%,
respectively, of total originations and purchases. For the same
period in 2004, wholesale and retail originations and purchases
totaled $38.1 billion and $4.1 billion, respectively,
representing 90.3% and 9.7%, respectively, of total originations
and purchases. The increase in originations during 2005 was
primarily the result of incremental volume generated by our
growth strategies, as well as overall growth in subprime industry
68
volume. In addition, our recently acquired mortgage origination
platform contributed $3.4 billion of loan production in
2005. The remainder of the increase is due to our initiative to
expand our presence in the retail market. In May 2004, we
acquired the rights to
Home123®,
a new brand identity and customer value proposition for our
Retail Division. The Home123 brand rollout began in early 2005
with Internet, direct mail and television advertising, and we
have transitioned all of our retail-branch offices to the
Home123 brand.
|
|
|
Secondary Market Transactions |
Loan sales increased to $41.8 billion for the year ended
December 31, 2005, from $30.3 billion for the
corresponding period in 2004, an increase of 38.0%. Included in
our loan sales for the year ended December 31, 2005 was
$6.4 billion of securitizations structured as sales compared to
zero in 2004. We added approximately $11.0 billion to our
portfolio of mortgage loans held for investment during 2005
through securitizations structured as financings, compared to
the addition of $10.1 billion to our portfolio of mortgage
loans held for investment during 2004, which was consistent with
our goal of securitizing approximately 20% to 25% of our loan
production to grow our balance sheet. These increases were the
result of an increased inventory of mortgage loans available for
sale due to higher production volume.
Interest income increased by 95.8% to $1.8 billion for the
year ended December 31, 2005, compared to
$898.6 million for the same period in 2004, primarily as a
result of higher average balances of mortgage loans held for
investment and held for sale. The increase in mortgage loans
held for investment in 2005 was a result of higher overall loan
production volume coupled with our intent to retain
approximately 20% to 25% of our loan production volume to grow
our balance sheet in connection with our conversion to a REIT.
Interest expense increased by 169.2% to $988.1 million for
the year ended December 31, 2005 from $367.1 million
for the same period in 2004. This increase was due to an
increase in average outstanding balances on our credit
facilities due to higher production volume, as well as an
increase in financing on mortgage loans held for investment and
an increase in interest rates paid.
The following table presents for the years indicated:
|
|
|
|
|
the average balance of our mortgage loans held for investment,
held for sale, cash, and the liabilities financing our assets; |
|
|
|
the average interest rates earned or paid; |
|
|
|
the actual amount of interest income and expense; and |
|
|
|
the overall interest margin earned on our balance sheet. |
69
Interest-earning asset and interest-bearing liability balances
used in the calculation represent annual average balances
computed using the average of each months daily average
balance during the years ended December 31 (dollars in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
|
Average | |
|
Avg. | |
|
|
|
Average | |
|
Avg. | |
|
|
|
|
Balance | |
|
Yield | |
|
Income | |
|
Balance | |
|
Yield | |
|
Income | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage loans held for investment
|
|
$ |
17,141,462 |
|
|
|
7.14 |
% |
|
$ |
1,223,478 |
|
|
$ |
7,737,094 |
|
|
|
6.84 |
% |
|
$ |
528,933 |
|
|
Mortgage loans held for sale
|
|
|
7,143,827 |
|
|
|
7.12 |
|
|
|
508,878 |
|
|
|
4,985,628 |
|
|
|
7.03 |
|
|
|
350,562 |
|
|
Residual interests in securitizations
|
|
|
159,987 |
|
|
|
10.61 |
|
|
|
16,969 |
|
|
|
162,442 |
|
|
|
10.88 |
|
|
|
17,673 |
|
|
Cash and investments
|
|
|
1,003,829 |
|
|
|
1.02 |
|
|
|
10,242 |
|
|
|
403,377 |
|
|
|
0.37 |
|
|
|
1,479 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
25,449,105 |
|
|
|
6.91 |
% |
|
$ |
1,759,567 |
|
|
$ |
13,288,541 |
|
|
|
6.76 |
% |
|
$ |
898,647 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average | |
|
Avg. | |
|
|
|
Average | |
|
Avg. | |
|
|
|
|
Balance | |
|
Cost | |
|
Expense | |
|
Balance | |
|
Cost | |
|
Expense | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing on mortgage loans held for investment(1)
|
|
$ |
16,784,275 |
|
|
|
3.91 |
% |
|
$ |
655,757 |
|
|
$ |
7,635,930 |
|
|
|
2.91 |
% |
|
$ |
222,522 |
|
|
Credit Facilities
|
|
|
6,916,033 |
|
|
|
4.46 |
|
|
|
308,357 |
|
|
|
4,892,586 |
|
|
|
2.55 |
|
|
|
124,547 |
|
|
Convertible senior notes(2)
|
|
|
5,249 |
|
|
|
4.78 |
|
|
|
251 |
|
|
|
208,901 |
|
|
|
5.91 |
|
|
|
12,337 |
|
|
Notes payable
|
|
|
37,859 |
|
|
|
6.15 |
|
|
|
2,330 |
|
|
|
27,739 |
|
|
|
5.38 |
|
|
|
1,492 |
|
|
Other interest(3)
|
|
|
|
|
|
|
|
|
|
|
21,428 |
|
|
|
|
|
|
|
|
|
|
|
6,196 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
23,743,416 |
|
|
|
4.16 |
|
|
|
988,123 |
|
|
$ |
12,765,156 |
|
|
|
2.88 |
|
|
|
367,094 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest spread/income
|
|
|
|
|
|
|
2.75 |
% |
|
$ |
771,444 |
|
|
|
|
|
|
|
3.88 |
% |
|
$ |
531,553 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Interest expense includes impact of derivative instruments
accounted for as hedges of $82.2 million for 2005. Such
amounts are immaterial for 2004. |
|
(2) |
Expense includes accelerated amortization of $4.1 million
for 2004 related to the conversion of the convertible senior
notes. Such amounts are immaterial for 2005. |
|
(3) |
Other interest is comprised of interest related costs associated
with our servicing operation. |
As illustrated in the table above, the average balance of our
mortgage loans held for sale and the related credit facilities
grew in 2005 as compared with 2004 due to the growth in our
origination volume for 2005. However, during 2005, our industry
experienced significant narrowing of margins. The decrease in
the net interest spread was due to the fact that mortgage
originators kept the interest rates offered to customers at
historically low levels while the underlying LIBOR indexes that
determine our financing costs continued to rise. As a result,
net interest spread on our mortgage loans held for sale
deteriorated compared to 2004. During the third and fourth
quarters of 2005, we began to increase our interest rates to
keep pace with the increases in the underlying rates. We intend
to continue this approach with a view toward preserving or
expanding our net interest spread.
The average balance of our mortgage loans held for investment
and their related financings grew in 2005 from 2004 levels
consistent with our strategy to retain approximately 20% to 25%
of our loan production on our balance sheet. The average yield
on the mortgage loans held for investment increased slightly to
7.14% in 2005 from 6.84% in 2004. The average borrowing rate for
the financing on loans held for investment increased due to the
increase in the interest rates on these financings.
70
|
|
|
Provision for losses on mortgage loans held for
investment |
We establish an allowance for loan losses based on our estimate
of losses inherent and probable in our portfolio as of our
balance sheet date. The allowance for losses on mortgage loans
held for investment increased to $198.1 million as of
December 31, 2005 from $90.2 million as of
December 31, 2004, due to the increase in portfolio of
mortgage loans held for investment, portfolio seasoning and the
related provision for loan losses of $140.2 million for the
year ended December 31, 2005. The provision for loan losses
for the same period in 2004 was $70.3 million. Mortgage
loans held for investment grew from $13.2 billion at
December 31, 2004 to $16.1 billion at
December 31, 2005.
The following table presents a summary of the activity for the
allowance for losses on mortgage loans held for investment for
the years ended December 31 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Beginning balance
|
|
$ |
90,227 |
|
|
|
26,251 |
|
Additions
|
|
|
140,233 |
|
|
|
70,250 |
|
Charge-offs, net
|
|
|
(32,329 |
) |
|
|
(6,274 |
) |
|
|
|
|
|
|
|
|
|
$ |
198,131 |
|
|
|
90,227 |
|
|
|
|
|
|
|
|
Non-performing assets consist of loans which have ceased
accruing interest. Loans are placed on nonaccrual status when
any portion of principal or interest is 90 days past due,
or earlier when concern exists as to the ultimate collection of
principal or interest. At December 31, 2005 and 2004, we
had mortgage loans held for sale of approximately
$80.2 million and $23.4 million, respectively, 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 $5.9 million
and $1.4 million for the years ended December 31, 2005
and 2004, respectively. At December 31, 2005 and 2004, we
had mortgage loans held for investment of approximately
$666.6 million and $179.2 million, respectively, 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 $19.6 million
and $7.2 million in the years ended December 31, 2005
and 2004, respectively.
Gain on sale. Gain on sale of loans decreased from
$800.6 million for the year ended December 31, 2004 to
$622.6 million for the year ended December 31, 2005, a
22.2% decrease. The decrease in gain on sale of loans was
primarily the result of a reduction in net execution from 3.58%
for the year ended December 31, 2004 to 2.06% for the same
period in 2005. The reduction in our net execution was due
mainly to changes in and competitive pressures in the secondary
market, as well as the interest rate environment. This reduction
was partially offset by an increase in our loan sale volume from
$30.3 billion for the year ended December 31, 2004 to
$41.8 billion for the year ended December 31, 2005.
Net execution represents the premium paid to us by third-party
investors in whole loan sale transactions and the net gain
recorded for a securitization structured as a sale. Net
execution does not include premiums we pay to originate the
loans, fair value adjustments or net
71
deferred origination fees, although they are reported as
components of the gain on sale calculation. Each of the
components of the gain on sale of loans are illustrated in the
following table (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended | |
|
|
December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Cash gain from whole loan sale transactions
|
|
$ |
656,672 |
|
|
|
1,068,021 |
|
Gain from securitization of loans
|
|
|
141,136 |
|
|
|
|
|
Non-cash gain from servicing assets related to securitizations
|
|
|
24,744 |
|
|
|
|
|
Cash gain on sale of servicing rights related to securitizations
|
|
|
24,877 |
|
|
|
|
|
Non-cash gain from servicing assets related to whole loan sales
|
|
|
45,499 |
|
|
|
7,923 |
|
Cash gain on sale of servicing rights related to whole loan sales
|
|
|
|
|
|
|
214 |
|
Securitization expenses
|
|
|
(49,250 |
) |
|
|
|
|
Fair value adjustment of residual securities
|
|
|
(9,983 |
) |
|
|
(7,697 |
) |
Provision for repurchase losses
|
|
|
(17,524 |
) |
|
|
(2,736 |
) |
Non-refundable loan fees(1)
|
|
|
314,597 |
|
|
|
213,207 |
|
Premiums paid(2)
|
|
|
(325,068 |
) |
|
|
(272,754 |
) |
Origination costs
|
|
|
(203,000 |
) |
|
|
(203,900 |
) |
Derivative gains (losses)
|
|
|
19,917 |
|
|
|
(1,669 |
) |
|
|
|
|
|
|
|
Gain on sale of mortgage loans
|
|
$ |
622,617 |
|
|
|
800,609 |
|
|
|
|
|
|
|
|
|
|
(1) |
Non-refundable loan fees represent points and fees collected
from borrowers. |
|
(2) |
Premiums paid represent fees paid to brokers for wholesale loan
originations and purchases. |
Servicing income. Servicing income increased to
$38.5 million for the year ended December 31, 2005
from $28.9 million for the year ended December 31,
2004. This increase was due to a larger balance of loans
serviced with retained servicing rights and loans serviced for
others on an interim basis during 2005. We only recognize
servicing fees on the loans that are sold on a
servicing-retained basis and the loans serviced for others on an
interim basis pending transfer to investors. As of
December 31, 2005, the portfolio that contributed to
servicing income was $17.7 billion, consisting of
$10.0 billion of loans sold on a servicing-retained basis
and $7.7 billion of loans serviced for others on an interim
basis pending transfer to investors. As of December 31,
2004, the portfolio that contributed to servicing income was
$8.9 billion, consisting of $1.2 billion of loans sold
on a servicing-retained basis and $7.7 billion of loans
serviced for others on an interim basis pending transfer to
investors.
Our overall expenses increased by 27.4% to $871.4 million
for the year ended December 31, 2005, compared to
$684.1 million for the same period in 2004. These increases
were due primarily to increases in loan production volume in
2005, since most of our expenses are variable in nature, the
expenses fluctuate with our volume. In addition, the acquisition
of the mortgage origination platform from RBC mortgage accounted
for $58.8 million, or 31.4%, of the increase.
Our personnel expenses increased to $551.8 million for the
year ended December 31, 2005 from $419.7 million for
the same period in 2004, an increase of 31.5%. The increase was
due to growth in the number of employees, as well as higher
commission and bonus expenses that fluctuate with loan
production volume. Total loan production for 2005 was
$56.1 billion compared to $42.2 billion for 2004, an
increase of 32.9%. In addition, the growth of our servicing
platform and mortgage loan portfolio contributed to the
increase. These increases are partially offset by the cost
reduction strategies that we implemented in 2005.
Our advertising and promotion expenses increased from
$65.5 million to $83.7 million, or 27.8%, for the year
ended December 2005 compared to the same period in 2004. This
increase was primarily due to the
72
increase in total loan production volume for 2005, the
development and rollout of the Home123 brand for our Retail
Division and the rollout of our New Shade of Blue Chip corporate
branding campaign. Retail Division loan production volume for
2005 increased by 69.0% (including recently acquired retail
operations) and, because advertising expense is
disproportionately weighted to the Retail Division, the increase
in advertising expense was higher than the overall increase in
the Retail Divisions production volume.
Our income taxes decreased to $26.8 million for the year
ended December 31, 2005 from $235.6 million for the
comparable period in 2004. This decrease was due to a lower
effective tax rate as a result of our conversion to a REIT in
October of 2004, whereby $338.0 million of our pretax
income was attributable to the REIT and is not subject to income
tax. In addition, during the third quarter of 2005, we recorded
a tax benefit adjustment of $14.8 million from finalizing
amendments to our federal and state tax returns prompted by the
completion of a recent Internal Revenue Service examination.
Year Ended December 31, 2004 Compared to Year Ended
December 31, 2003
|
|
|
Originations and Purchases |
We originated and purchased $42.2 billion in loans for the
year ended December 31, 2004, compared to
$27.4 billion for the year ended December 31, 2003.
Wholesale loan originations and purchases were
$38.1 billion, representing 90.3% of total originations and
purchases for the year ended December 31, 2004. Retail loan
originations and purchases were $4.1 billion, representing
9.7% of total originations and purchases for the year ended
December 31, 2004. For the same period in 2003, wholesale
and retail originations and purchases totaled $25.2 billion
and $2.2 billion, respectively, representing 92.0% and
8.0%, respectively, of total originations and purchases for that
period. The increase in originations in 2004 was primarily the
result of incremental volume generated by our growth strategies,
as well as our strategy to price competitively within our market
in the face of a rising interest rate environment. This strategy
resulted in the origination of an incremental volume of mortgage
loans with higher FICO scores and a greater percentage of fixed
rate product than our historical core business, particularly
during the second quarter of 2004. In addition, we continued to
expand geographically and received additional contributions from
operating centers opened during 2003. The increase in the
percentage of total business originated by our retail franchise
was consistent with our initiative to expand our presence in the
retail market. During the year ended December 31, 2004,
originations of interest-only loans totaled $8.1 billion,
or 19.3%, of total originations. Our wholesale division
originated $7.9 billion, or 96.5%, of the total of
interest-only loans originated during this period. Interest-only
originations during the year ended December 31, 2003
totaled $568.0 million, or 2.1%, of total originations
during the period.
|
|
|
Secondary Market Transactions |
Loan sales increased to $30.3 billion for the year ended
December 31, 2004, from $20.8 billion for the
corresponding period in 2003, an increase of 45.7%. This
increase was the result of an increased inventory of mortgage
loans available for sale due to higher loan production volume.
In addition, we added approximately $10.1 billion to our
portfolio of mortgage loans held for investment during 2004
through securitizations structured as financings, compared to
the addition of $4.9 billion to our portfolio of mortgage
loans held for investment during 2003, which was consistent with
our goal of securitizing approximately 20% to 30% of our loan
production to grow our balance sheet.
Interest income increased by 154.1% to $898.6 million for
the year ended December 31, 2004, compared to
$353.7 million for the same period in 2003, primarily as a
result of higher average balances of mortgage loans held for
investment and held for sale. This increase was partially offset
by a reduction in the weighted average interest rates of the
mortgage loans during 2004. The increase in mortgage loans held
for investment
73
in 2004 was the result of higher overall loan production volume
coupled with our intent to retain approximately 20% to 30% of
our loan production volume in connection with our conversion to
a REIT.
Interest expense increased to $367.1 million for the year
ended December 31, 2004, from $117.6 million for the
same period in 2003. This increase was due to an increase in
average outstanding balances on our credit facilities due to
higher production volume, as well as an increase in financing on
mortgage loans held for investment.
The following table presents for the years indicated:
|
|
|
|
|
the average balance of our mortgage loans held for investment,
held for sale, cash, and the liabilities financing our assets; |
|
|
|
the average interest rates earned or paid; |
|
|
|
the actual amount of interest income and expense; and |
|
|
|
the overall interest margin earned on our balance sheet. |
Interest-earning asset and interest-bearing liability balances
used in the calculation represent annual average balances
computed using the average of each months daily average
balance during the years ended December 31 (dollars in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
|
Average | |
|
Avg. | |
|
|
|
Average | |
|
Avg. | |
|
|
|
|
Balance | |
|
Yield | |
|
Income | |
|
Balance | |
|
Yield | |
|
Income | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage loans held for investment
|
|
$ |
7,737,094 |
|
|
|
6.84 |
% |
|
$ |
528,933 |
|
|
$ |
1,418,632 |
|
|
|
7.38 |
% |
|
$ |
104,706 |
|
Mortgage loans held for sale
|
|
|
4,985,628 |
|
|
|
7.03 |
|
|
|
350,562 |
|
|
|
3,132,206 |
|
|
|
7.17 |
|
|
|
224,650 |
|
Residual interests in securitizations
|
|
|
162,442 |
|
|
|
10.88 |
|
|
|
17,673 |
|
|
|
211,125 |
|
|
|
11.48 |
|
|
|
24,228 |
|
Cash and investments
|
|
|
403,377 |
|
|
|
0.37 |
|
|
|
1,479 |
|
|
|
84,795 |
|
|
|
0.13 |
|
|
|
107 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
13,288,541 |
|
|
|
6.76 |
% |
|
$ |
898,647 |
|
|
$ |
4,846,758 |
|
|
|
7.30 |
% |
|
$ |
353,691 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average | |
|
Avg. | |
|
|
|
Average | |
|
Avg. | |
|
|
|
|
Balance | |
|
Cost | |
|
Expense | |
|
Balance | |
|
Cost | |
|
Expense | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing on mortgage loans held for investment(1)
|
|
$ |
7,635,930 |
|
|
|
2.91 |
% |
|
$ |
222,522 |
|
|
$ |
1,410,794 |
|
|
|
2.61 |
% |
|
$ |
36,836 |
|
Credit Facilities
|
|
|
4,892,586 |
|
|
|
2.55 |
|
|
|
124,547 |
|
|
|
2,870,001 |
|
|
|
2.56 |
|
|
|
73,532 |
|
Convertible senior notes(2)
|
|
|
208,901 |
|
|
|
5.91 |
|
|
|
12,337 |
|
|
|
99,355 |
|
|
|
4.08 |
|
|
|
4,049 |
|
Notes payable
|
|
|
27,739 |
|
|
|
5.38 |
|
|
|
1,492 |
|
|
|
16,055 |
|
|
|
6.96 |
|
|
|
1,117 |
|
Other interest(3)
|
|
|
|
|
|
|
|
|
|
|
6,196 |
|
|
|
|
|
|
|
|
|
|
|
2,041 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
12,765,156 |
|
|
|
2.88 |
|
|
$ |
367,094 |
|
|
$ |
4,396,205 |
|
|
|
2.67 |
|
|
$ |
117,575 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest spread/income
|
|
|
|
|
|
|
3.88 |
% |
|
$ |
531,553 |
|
|
|
|
|
|
|
4.63 |
% |
|
$ |
236,116 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Includes impact of derivative instruments accounted for as
hedges. Such amounts are not material. |
|
(2) |
2004 expense includes accelerated amortization of
$4.1 million related to the conversion of the convertible
senior notes. |
|
(3) |
Other interest is comprised of interest related costs associated
with our servicing operation. |
74
As illustrated in the table above, the average balance of our
mortgage loans held for sale and the related credit facilities
grew in 2004 as compared with 2003 due to the growth in our
origination volume for 2004. However, the average yield on our
mortgage loans held for sale declined in 2004 from 2003 levels
due to a combination of falling interest rates in early 2004 and
our decision not to increase our rates consistent with the
overall interest rate environment, when interest rates started
to rise in the second half of the year. The average rate on our
credit facilities did not increase in 2004 even though interest
rates rose due to our negotiation of more favorable terms.
The average balance of our mortgage loans held for investment
and their related financings grew in 2004 as compared to 2003,
consistent with our strategy to retain approximately 20% to 30%
of our loan production on our balance sheet. The average yield
on the mortgage loans held for investment declined in 2004 from
2003 levels due also to the reasons described above. The average
borrowing rate for the financing on loans held for investment
increased due to the increase in the interest rates on these
financings.
|
|
|
Provision for losses on mortgage loans held for
investment |
We establish an allowance for loan losses based on our estimate
of losses inherent and probable as of our balance sheet date.
Provision for losses on mortgage loans held for investment
increased to $70.3 million for the year ended
December 31, 2004 from $26.3 million for the same
period in 2003, due to the increase in the portfolio of mortgage
loans held for investment and related allowance for loan losses.
Mortgage loans held for investment grew from $4.7 billion
at December 31, 2003 to $13.2 billion at
December 31, 2004.
The following table presents a summary of the activity for the
allowance for losses on mortgage loans held for investment for
the years ended December 31 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
2004 | |
|
2003 | |
|
|
| |
|
| |
Beginning balance
|
|
$ |
26,251 |
|
|
|
|
|
Additions
|
|
|
70,250 |
|
|
|
26,304 |
|
Charge-offs, net
|
|
|
(6,274 |
) |
|
|
(53 |
) |
|
|
|
|
|
|
|
|
|
$ |
90,227 |
|
|
|
26,251 |
|
|
|
|
|
|
|
|
Non-performing assets consist of loans which have ceased
accruing interest. Loans are placed on nonaccrual status when
any portion of principal or interest is 90 days past due,
or earlier, when concern exists as to the ultimate collection of
principal or interest. At December 31, 2004 and 2003, we
had mortgage loans held for sale of approximately
$23.4 million and $11.0 million, respectively, 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 $1.4 million
and $783,000 for the years ended December 31, 2004 and
2003, respectively. At December 31, 2004 and 2003, we had
mortgage loans held for investment of approximately
$179.2 million and $27.7 million, respectively, 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 $7.2 million
and $889,000 in the years ended December 31, 2004 and 2003,
respectively.
Gain on sale. Gain on sale of loans increased to
$800.6 million, a 31.0% increase for the year ended
December 31, 2004 compared to the same period in 2003. The
increase in gain on sale of loans was the result of loan sale
volume increasing to $30.3 billion in 2004 from
$20.8 billion in 2003, and lower losses on discounted
sales, partially offset by a reduction in net execution to 3.58%
in 2004 from 4.18% in 2003. Net execution represents the premium
paid to us by third-party investors in whole loan sale
transactions. Net execution does not include premiums we pay to
originate the loans, hedging gains or losses, fair value
75
adjustments or net deferred origination fees, but are a
component of the gain on sale calculation. The components of the
gain on sale of loans are illustrated in the following table
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended | |
|
|
December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
|
| |
|
| |
Cash gain from whole loan sale transactions
|
|
$ |
1,068,021 |
|
|
|
861,310 |
|
Non-cash gain from servicing assets related to whole loan sales
|
|
|
7,923 |
|
|
|
7,777 |
|
Cash gain on sale of servicing rights related to whole loan sales
|
|
|
214 |
|
|
|
|
|
Fair value adjustment of residual securities
|
|
|
(7,697 |
) |
|
|
(19,363 |
) |
Provision for repurchase losses
|
|
|
(2,736 |
) |
|
|
(5,868 |
) |
Non-refundable loan fees(1)
|
|
|
213,207 |
|
|
|
142,745 |
|
Premiums paid(2)
|
|
|
(272,754 |
) |
|
|
(182,765 |
) |
Origination costs
|
|
|
(203,900 |
) |
|
|
(182,100 |
) |
Derivative losses
|
|
|
(1,669 |
) |
|
|
(10,600 |
) |
|
|
|
|
|
|
|
Gain on sale of mortgage loans
|
|
$ |
800,609 |
|
|
|
611,136 |
|
|
|
|
|
|
|
|
|
|
(1) |
Non-refundable loan fees represent points and fees collected
from borrowers. |
|
(2) |
Premiums paid represent fees paid to brokers for wholesale loan
originations and purchases. |
Servicing income. Servicing income increased to
$28.9 million for the year ended December 31, 2004,
from $11.1 million for the year ended December 31,
2003. This increase was due to a larger income-generating
mortgage loan servicing portfolio during 2004. As of
December 31, 2004, the portfolio that contributes to
servicing income was $8.9 billion, consisting of
$1.2 billion of loans sold on a servicing-retained basis
and $7.7 billion of loans serviced for others on an interim
basis pending transfer to investors. As of December 31,
2003, the portfolio that contributes to servicing income was
$3.5 billion, consisting of $0.4 billion of loans sold
on a servicing-retained basis and $3.1 billion of loans
serviced for others on an interim basis pending transfer to
investors.
Our overall expenses increased by 67.3% to $684.1 million
for the year ended December 31, 2004, compared to
$408.8 million for the same period in 2003. These increases
were due primarily to increases in loan production volume in
2004, since most of our expenses are variable and fluctuate with
our volume. In addition, we incurred $24.8 million in
expenses as a result of our tender offer to convert into shares
of New Century common stock all of the outstanding
3.50% convertible senior notes due 2008 of New Century TRS.
Our personnel expenses increased to $419.7 million for the
year ended December 31, 2004 from $248.8 million for
the same period in 2003, an increase of 68.7%. The increase was
due to growth in the number of employees, as well as higher
commission and bonus expenses that are variable expenses
dependent upon loan production volume and profits. Total loan
production for 2004 was $42.2 billion compared to
$27.4 billion for 2003, an increase of 54.0%. The remainder
of the increase was due to growth in the servicing platform and
the mortgage loan portfolio.
Our advertising and promotion expenses increased from
$26.1 million to $65.5 million, or 150.8%, for the
year ended December 2004 compared to the same period in 2003.
This increase was primarily due to the increase in total loan
production volume for 2004, the development and rollout of the
Home123 brand for the Retail Division and increases in marketing
initiatives for the Wholesale Division. Retail production volume
for 2004 increased by 85.5% and, because advertising expense is
disproportionately weighted to the Retail Division, the increase
in advertising expense was higher than the overall increase in
the Retail Divisions loan production volume. Moreover,
Wholesale Division marketing expense for broker education and
trade shows increased significantly in 2004.
76
Our income taxes increased to $235.6 million for the year
ended December 31, 2004 from $177.8 million for the
comparable period in 2003. This increase was partially
attributable to a $187.9 million increase in pretax income
resulting from higher production volume and net interest income
that was partially offset by a decrease in the effective tax
rate as a result of our conversion to a REIT in October of 2004,
whereby $42.8 million of our pretax income was attributable
to the REIT.
Inflation
Our mortgage banking and capital markets operations would be
most significantly impacted by an increase in inflation.
Interest rates normally increase during periods of rising
inflation. Historically, as interest rates increase, mortgage
loan production decreases, particularly from loan refinancing.
An environment of gradual interest rate increases may, however,
signify an improving economy or increasing real estate values,
which in turn may stimulate increased home buying activity.
Generally, in such periods of reduced mortgage loan production
the associated profit margins also decline due to increased
competition among mortgage loan originators and to higher unit
costs, thus further reducing our loan production earnings.
Conversely, in a rising interest rate environment, our loan
servicing earnings generally increase because mortgage
prepayment rates tend to slow down, thereby extending the
average life of our servicing portfolio.
Seasonality
The mortgage banking industry is generally subject to seasonal
trends. These seasonal trends reflect the pattern in the
national housing market. Home sales typically rise during the
spring and summer seasons and decline during the fall and winter
seasons. Seasonality has less of an effect on mortgage
refinancing activity, which is primarily driven by prevailing
mortgage rates. In addition, mortgage delinquency rates
typically rise temporarily in the winter months, driven by
mortgagor payment patterns.
Liquidity and Capital Resources
We need to borrow substantial sums of money each quarter to
originate and purchase mortgage loans. We need separate credit
arrangements to finance these loans until we have aggregated one
or more pools for sale or securitization. The amount of credit
we seek to have available is based on our expectation of future
origination volume.
We have credit facilities with Bank of America, N.A., Barclays
Bank PLC, Bear Stearns Mortgage Capital Corporation, Citigroup
Global Markets Realty Corp., Credit Suisse First Boston Mortgage
Capital LLC, Deutsche Bank Securities, Inc., IXIS Real Estate
Capital Inc. (formerly known as CDC Mortgage Capital Inc.),
Morgan Stanley Mortgage Capital Inc., UBS Real Estate
Securities, and we also have an asset-backed commercial paper
facility. We use these facilities to finance the actual funding
of our loan originations and purchases and to aggregate pools of
mortgage loans pending sale through securitizations or whole
loan sales. We typically sell all of our mortgage loans within
one to three months of their funding and pay down the credit
facilities with the proceeds.
Our credit facilities contain certain customary covenants,
which, among other provisions, require us to maintain specified
levels of liquidity, net worth and
debt-to-equity ratios,
restrict indebtedness and investments and require compliance
with applicable laws. The minimum level of liquidity required
under our credit facilities is $125.0 million, the minimum
amount of net worth required is approximately
$750.0 million, and
debt-to-equity ratio
limitations range from 12 to 1 to 16 to 1 and generally exclude
non-recourse debt. We deliver compliance certificates on a
monthly and quarterly basis to our lenders to certify to our
continued compliance with the covenants.
77
If we fail to comply with any of these covenants, the lender has
the right to terminate the facility and require immediate
repayment. In addition, if we default under one facility, it
would generally trigger a default under our other facilities.
The material terms and features of our various credit facilities
are as follows:
Asset-backed commercial paper facility. Von Karman
Funding Trust, a special-purpose, wholly owned subsidiary of New
Century Mortgage Corporation, or New Century Mortgage, has a
$2.0 billion asset-backed commercial paper facility. This
facility allows for the funding and aggregation of mortgage
loans using funds raised through the sale of short-term
commercial paper and long-term subordinated notes. The interest
and fees that we pay in connection with this facility are
similar to the interest rates based on LIBOR that we pay to our
other credit facility lenders. This facility will expire in
February 2009. As of December 31, 2005, the balance
outstanding under the facility was zero.
Bank of America line of credit. We have a
$2.0 billion credit facility with Bank of America,
$1.0 billion of which is uncommitted. The agreement allows
for both funding of loan originations and aggregation of loans
for up to four months pending their sale or securitization. The
facility expires in September 2006 and bears interest based on a
margin over the one-month LIBOR. As of December 31, 2005,
the balance outstanding under the facility was
$916.7 million. We expect to either renew or extend this
facility prior its expiration.
Bank of America line of credit. We have a
$1.0 billion credit facility with Bank of America, which
will be used solely for mortgage loan products originated
through Home 123 Corporation. The facility expires in September
2006 and bears interest based on a margin over the one-month
LIBOR. As of December 31, 2005, the balance outstanding
under the facility was $277.5 million. We expect to either
renew or extend this facility prior its expiration.
Barclays line of credit. We have a $1.0 billion
credit facility with Barclays Bank. The agreement allows for
both funding of loan originations and aggregation of loans
pending their sale or securitization. The facility expires in
March 2006 and bears interest based on a margin over one-month
LIBOR. As of December 31, 2005, the balance outstanding
under the facility was $821.9 million. We expect to either
renew or extend this facility prior its expiration.
Bear Stearns line of credit. We have an
$800.0 million uncommitted credit facility with Bear
Stearns Mortgage Capital. The facility expires in November 2006
and bears interest based on a margin over one-month LIBOR. As of
December 31, 2005, the balance outstanding under this
facility was $610.4 million. We expect to renew or extend
this facility prior to its expiration.
Citigroup warehouse line of credit. Our special-purpose,
wholly owned subsidiary, New Century Funding SB-1, has a
$150.0 million wet funding facility with Citigroup Global
Markets Realty. This facility expires in April 2006 and bears
interest based on a margin over the one-month LIBOR. As of
December 31, 2005, the outstanding balance under the
facility was zero. We expect to renew or extend this facility
prior to its expiration.
Citigroup aggregation line of credit. We have a
$650.0 million aggregation credit facility with Citigroup
Global Markets Realty. This facility expires in April 2006 and
bears interest based on a margin over the one-month LIBOR. We
may increase the size of this facility to $800 million,
provided that the value of the loans outstanding at any one time
under both this facility and our $150 million warehouse
credit facility described immediately above may not exceed
$800 million in the aggregate. As of December 31,
2005, the outstanding balance under this facility was
$276.8 million. We expect to renew or extend this facility
prior to its expiration.
Citigroup line of credit for delinquent and problem
loans. We have a $150.0 million master loan and
security agreement with Citigroup Global Markets Realty that is
secured by delinquent or problem loans and by properties we
obtain in foreclosures. This credit facility expires in March
2006 and bears interest based on a margin over the one-month
LIBOR. As of December 31, 2005, the balance outstanding
under this facility was $109.1 million. We expect to renew
or extend this facility prior to its expiration.
Credit Suisse First Boston line of credit. We have a
$1.5 billion credit facility with Credit Suisse First
Boston Mortgage Capital, $500 million of which is
uncommitted. The agreement allows for both funding of loan
originations and aggregation of loans for up to nine months
pending their sale or securitization. This
78
facility expires in December 2006 and bears interest based on a
margin over the one-month LIBOR. As of December 31, 2005,
the outstanding balance under the facility was
$452.2 million. We expect to renew or extend this facility
prior to its expiration.
Deutsche Bank line of credit. We have a $1.0 billion
credit facility with DB Structured Products, Inc. The agreement
allows for both funding of loan originations and aggregation of
loans for up to nine months pending their sale or
securitization. This facility expires in September 2006 and
bears interest based on a margin over the one-month LIBOR. As of
December 31, 2005, the outstanding balance under the
facility was $441.2 million. We expect to renew or extend
this facility prior to its expiration.
IXIS line of credit. We have a $850.0 million credit
facility with IXIS Real Estate Capital, $150 million of
which is uncommitted. The agreement allows for both funding of
loan originations and aggregation of loans for up to nine months
pending their sale or securitization. The facility expires in
October 2006 and bears interest based on a margin over the
one-month LIBOR. As of December 31, 2005, the balance
outstanding under this facility was $404.7 million. We
expect to renew or extend this facility prior to its expiration.
Morgan Stanley line of credit. We have a
$3.0 billion credit facility with Morgan Stanley Bank and
Morgan Stanley Mortgage Capital, Inc. The agreement allows for
both the funding of loan originations and aggregation of loans
for up to nine months pending their sale or securitization. This
facility expires in February 2007 and bears interest based on a
margin over the one-month LIBOR. As of December 31, 2005,
the balance outstanding under this facility was
$1.5 billion. We expect to renew or extend this facility
prior to its expiration.
UBS Real Estate Securities line of credit. New Century
Mortgages special-purpose subsidiary, New Century
Funding I, has a $2.0 billion asset-backed note
purchase and security agreement with UBS Real Estate Securities,
$500 million of which is uncommitted. The agreement allows
for both funding of loan originations and aggregation of loans
for up to nine months pending their sale or securitization. The
facility expires in June 2006 and bears interest based on a
margin over the one-month LIBOR. As of December 31, 2005,
the balance outstanding under this facility was
$1.7 billion. We expect to renew or extend this facility
prior to its expiration.
On July 8, 2003, New Century TRS closed a private offering
of $175.0 million of 3.50% convertible senior notes
due July 3, 2008 pursuant to Rule 144A under the
Securities Act of 1933. On March 17, 2004, the convertible
senior notes became convertible into New Century TRS common
stock at a conversion price of $34.80 per share. As a
result of the merger that affected our conversion to a REIT, the
convertible senior notes became convertible into shares of New
Century common stock. As of December 31, 2005, $5,000,000
in aggregate principal amount of convertible senior notes
remained outstanding and the convertible senior notes were
convertible into 165,815 shares of our common stock. On
February 17, 2006, a holder of our convertible senior notes
elected to convert the remaining $5,000,000 aggregate principal
amount of convertible senior notes into 165,815 shares of
our common stock.
In June 2005, we sold 4,500,000 shares of our 9.125%
Series A Cumulative Redeemable Preferred Stock, raising
$108.7 million in net proceeds. The shares have a
liquidation value of $25.00 per share, pay an annual coupon
of 9.125% and are not convertible into any other securities. We
may, at our 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 Statement of Financial Accounting Standards
No. 150, Accounting for Certain Financial Instruments
with Characteristics of both Liabilities and Equity, and
is therefore classified as a component of equity.
79
|
|
|
Securitizations Structured as Financings |
Prior to 2003, we realized net cash proceeds in our
securitization transactions in an amount similar to whole loan
sales, as a result of NIMS transactions closed concurrently with
our securitizations. During the years ended December 31,
2005 and 2004, we completed four and five securitizations
structured as financings, respectively, resulting in the
recording of loans held for investment as an asset and financing
on loans held for investment as a liability. Without a
concurrent NIMS transaction, securitizations structured as
financings generally require an initial cash investment ranging
from approximately 2% to 4% of the principal balance of the
loans. Immediately following the securitization, we start to
receive interest payments on the underlying mortgage loans and
pay interest payments to the bondholders, creating positive cash
flow. As the loans age, losses on the portfolio begin to reduce
this cash flow.
For the year ended December 31, 2005, the initial cash
investment in securitizations structured as financings was
$407.4 million. During 2004, the initial cash investment in
securitizations structured as financings was
$347.3 million, partially offset by $43.8 million of
financing on retained bonds. For the years ended
December 31, 2005 and 2004, we received $625.8 million
and $347.2 million, respectively, in cash flows from these
securitizations.
We periodically enter into equipment financing arrangements that
are treated as notes payable for financial statement purposes.
As of December 31, 2005 and December 31, 2004, the
balances outstanding under these borrowing arrangements were
$39.1 million and $37.6 million, respectively.
During the third quarter of 2003, we entered into a
$20.0 million servicer advance agreement, which allows us
to borrow up to 95% of servicing advances on our servicing
portfolio. As of December 31, 2005, the balance outstanding
under this facility was $18.5 million. As of
December 31, 2004, the balance outstanding under this
facility was $6.5 million. This facility expires in August
2006.
|
|
|
Off-Balance Sheet Arrangements |
We are party to various transactions that have an off-balance
sheet component. In connection with our off-balance sheet
securitization transactions, as of December 31, 2005, there
were $6.9 billion in loans owned by off-balance sheet
trusts. The trusts have issued bonds secured by these loans. The
bondholders generally do not have recourse to us 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, we have included only our residual interest in these
loans on our balance sheet. The performance of the loans in the
trusts will impact our ability to realize the current estimated
fair value of these residual assets.
As of December 31, 2005, in connection with our strategy to
mitigate interest rate risk in our mortgage loans held for
investment and certain of our mortgage loans held for sale, we
had approximately $91.2 billion notional amount of Euro
Dollar futures contracts outstanding, expiring between March
2006 and September 2009. The notional amount of Euro Dollar
futures contracts is greater than the outstanding balance of
items they hedge because we have multiple Euro Dollar futures
contracts at various maturities covering the same hedged items
for different periods. The fair value of these Euro Dollar
futures contracts was $80.5 million as of December 31,
2005, of which $81.5 million is included in prepaid
expenses and other assets and $(1.0) million is included in
accounts payable and accrued liabilities. In addition, we enter
into commitments to fund loans that we intend to sell to
investors that set the interest rate of the loans prior to
funding. These interest rate lock commitments are considered to
be derivatives and are recorded on our balance sheet at fair
value. As of December 31, 2005, the approximate value of
the underlying principal balance of loan commitments was
$674.6 million.
80
The following table summarizes our material contractual
obligations as of December 31, 2005 (dollars in thousands).
The maturity of our financing on mortgage loans held for
investment is based on certain prepayment assumptions (see
Results of Operations for further
details).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment Due By Period | |
|
|
|
|
| |
|
|
|
|
Less Than | |
|
1 to 3 | |
|
3 to 5 | |
|
More Than | |
|
|
Total | |
|
1 Year | |
|
Years | |
|
Years | |
|
5 Years | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
Notes payable
|
|
$ |
39,140 |
|
|
|
20,999 |
|
|
|
18,141 |
|
|
|
|
|
|
|
|
|
Operating leases
|
|
|
194,117 |
|
|
|
34,292 |
|
|
|
65,348 |
|
|
|
43,692 |
|
|
|
50,785 |
|
Credit facilities on mortgage loans held for sale
|
|
|
7,439,685 |
|
|
|
7,439,685 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing on mortgage loans held for investment
|
|
|
16,045,459 |
|
|
|
5,207,914 |
|
|
|
6,029,869 |
|
|
|
2,291,616 |
|
|
|
2,516,060 |
|
The stock repurchase program of New Century TRS, which was
initially approved by the New Century TRS board of directors in
the third quarter of 2002, authorized the repurchase of up to
5.8 million shares of New Century TRS common stock. From
the time the New Century TRS board of directors approved the New
Century TRS stock repurchase program through December 31,
2003, New Century TRS repurchased 4.2 million shares of its
common stock. For the year ended December 31, 2004, New
Century TRS did not make any stock repurchases.
In the fourth quarter of 2005, our board of directors approved a
new share repurchase program for up to 5 million shares of
New Century common stock over the following 12 months. In
the fourth quarter of 2005, we repurchased 879,200 shares
at an average price of $33.52 per share for an aggregate
amount of $29.5 million pursuant to this share repurchase
program. We periodically direct our stock transfer agent to
cancel repurchased shares. All repurchased common shares were
canceled as of December 31, 2005.
We expect to fund future stock repurchases with excess corporate
liquidity. Stock repurchases may be made on the open market
through block trades or in privately negotiated sales in
accordance with applicable law. The number of shares to be
purchased and the timing of the purchases will be based upon the
level of our cash balances, general business conditions and
other factors including alternative investment opportunities. We
may terminate, suspend, reduce or increase the size of the stock
repurchase program at any time.
For the year ended December 31, 2005, our cash flow from
operations increased by $260.1 million to
$549.5 million compared to $289.4 million for the same
period in 2004. This increase was due primarily to (i) a
$41.0 million increase in net income, (ii) a
$223.7 million increase due to changes in income tax
receivable, (iii) a $145.6 million increase in
mortgage loan sales and increases in credit facilities, net of
increases in mortgage loans originated or acquired for sale,
(iv) a $127.4 million increase due to changes in other
assets and liabilities, (v) an increase of
$109.6 million of NIR gains, (vi) a $57.8 million
increase due to changes in depreciation and amortization, and
(vii) a $70.0 million increase due to changes in
provision for losses on mortgage loans held for investment.
These increases were partially offset by: (i) a decrease of
$87.2 million due to non-cash servicing gains, (ii) an
increase in initial deposits to over-collateralization accounts
of $207.0 million, and (iii) a $185.7 million
decrease due to changes in principal payments on mortgage loans
held for sale, for the year December 31, 2005 compared to
the same period in 2004.
For the year ended December 31, 2005, our cash flow used in
investing activities decreased by $5.3 billion to
$3.3 billion compared to $8.6 billion for the same
period in 2004. This decrease in cash usage was due to
(i) a $4.7 billion increase in principal payments
received on mortgage loans held for investment to
$7.1 billion for the year ended December 31, 2005 from
$2.4 billion in 2004 and (ii) a $746.6 million
decrease in mortgage
81
loans originated or acquired for investment to
$10.3 billion for the year ended December 31, 2005
from $11.0 billion for the year ended December 31,
2004, partially offset by $80.6 million of cash used to
purchase our mortgage origination platform of RBC Mortgage.
For the year ended December 31, 2005, cash from financing
activities decreased by $6.5 billion to $2.4 billion
compared to $8.9 billion for the year ended
December 31, 2004. This decrease was due mainly to
(i) higher repayments of securitization financing on
mortgage loans held for investment of $6.9 billion for the
year ended December 31, 2005 compared to $2.2 billion
for the same period in 2004, (ii) lower net financing on
mortgage loans held for investment of $9.8 billion in the
year ended December 31, 2005 compared to $10.6 billion
for the same period in 2004, (iii) higher common stock
dividend payments of $352.5 million for the year ended
December 31, 2005 compared to $26.6 million for the
same period in 2004 and (iv) a reduction in net proceeds
from issuance of common stock from $788.4 million for the
year ended December 31, 2004 to $26.5 million for the
same period in 2005, partially offset by a decrease in
restricted cash to $272.7 million compared to
$337.2 million for the same period in 2004 and proceeds
from the issuance of preferred stock of $108.7 million for
the year ended December 31, 2005.
For the year ended December 31, 2004, our cash flow from
operations was $289.4 million compared to
$203.0 million for the same period in 2003. This increase
was due primarily to (i) a $130.1 million increase in
net income, (ii) a $43.9 million increase in provision
for losses on mortgage loans held for investment, (iii) a
decrease in deferred income taxes of $141.3 million, and
(iv) a $50.2 million increase in depreciation and
amortization. These increases were partially offset by
(i) an increase in income taxes receivable of
$129.9 million, (ii) a cash usage of
$84.7 million related to the net change in other assets and
liabilities, and (iii) a decrease of $30.9 million in
cash received from residual interests in securitizations for the
year ended December 31, 2004 compared to the same period in
2003.
For the year ended December 31, 2004, our cash flow used in
investing activities was $8.6 billion compared to
$4.8 billion for the same period in 2003. This increase in
cash usage was due to $11.0 billion of cash used to acquire
mortgage loans for investment for the year ended
December 31, 2004 compared to $5.0 billion in 2003,
partially offset by $2.4 billion in payments received on
our mortgage loans held for investment for the year ended
December 31, 2004 compared to $219.2 million for the
same period in 2003.
For the year ended December 31, 2004, cash from financing
activities was $8.9 billion compared to $4.7 billion
for the year ended December 31, 2003. This increase was due
mainly to (i) proceeds from the issuance of stock of
$788.4 million, (ii) net financing on mortgage loans
held for investment of $10.6 billion in 2004 compared to
$4.9 billion in 2003, (iii) proceeds from fixed asset
financing (net of repayments) of $18.7 million in 2004
compared to $2.3 million in 2003, and (iv) no stock
repurchases in 2004 compared to $72.0 million in 2003.
These increases were partially offset by (i) higher
repayments of securitization financing on mortgage loans held
for investment of $2.2 billion in 2004 compared to
$235.5 million in 2003, (ii) an increase in restricted
cash of $337.2 million in 2004 compared to
$110.6 million in 2003, and (iii) a net of
$204.3 million of convertible senior note proceeds received
in 2003.
Our loan origination and purchase and servicing programs require
significant cash investments, including the funding of
(i) fees paid to brokers and correspondents in connection
with generating loans through wholesale lending activities,
(ii) commissions paid to sales employees to originate
loans, (iii) any difference between the amount funded per
loan and the amount advanced under our credit facilities,
(iv) our hedging activities, (v) servicing-related
advance requirements, and (vi) income tax payments in our
taxable REIT subsidiaries. We also require cash to fund
securitizations structured as financings, ongoing operating and
administrative expenses, dividend payments, and capital
expenditures and our stock repurchase program. Our sources of
operating cash flow include (i) net interest income,
(ii) cash premiums obtained in whole loan sales,
(iii) mortgage origination income and fees, (iv) cash
flows from residual interests in securitizations, and
(v) servicing fee income.
We establish target levels of liquidity and capital based on a
number of factors including our loan production volume, the
general economic environment, the condition of the secondary
market for our loans,
82
the size and composition of our balance sheet and our
utilization of various interest rate hedging techniques. We also
consider those factors that enable us to qualify as a REIT under
the requirements of the Code. See Material
U.S. Federal Income Tax Considerations. Requirements
for qualification as a REIT include various restrictions on
ownership of New Century stock, requirements concerning
distribution of our taxable income and certain restrictions on
the nature of our assets and sources of our income. As a REIT,
we must distribute at least 90% of our taxable income to our
stockholders, 85% of which income we must distribute within the
taxable year in order to avoid the imposition of an excise tax.
The remaining balance may extend until timely filing of our tax
return in the subsequent taxable year. Qualifying distributions
of taxable income are deductible by a REIT in computing taxable
income. If in any tax year we should not qualify as a REIT, we
would be taxed as a corporation and distributions to
stockholders would not be deductible in computing taxable
income. If we were to fail to qualify as a REIT in any tax year,
we would not be permitted to qualify for that year and the
succeeding four years.
Our principal strategies to effectively manage our liquidity and
capital include managing the percentage of loans sold through
whole loan sale transactions, off-balance sheet securitizations,
and securitizations structured as financings, including the use
of NIM structures as appropriate, giving consideration to whole
loan prices, the amount of cash required to finance
securitizations structured as financings, the expected returns
on such securitizations and REIT qualification requirements. In
addition, we may access the capital markets when appropriate to
support our business operations. In the fourth quarter of 2005,
our board announced and approved a common stock repurchase
program. We intend to execute the repurchase program while
maintaining our targeted cash and liquidity levels. There can be
no assurance that we will be able to achieve these goals and
operate in a cash flow-neutral or cash flow-positive basis.
Subject to the various uncertainties described above, and
assuming that we will be able to successfully execute our
liquidity strategy, we anticipate that our liquidity, credit
facilities and capital resources will be sufficient to fund our
operations for the foreseeable future, while enabling us to
maintain our qualification as a REIT under the requirements of
the Code.
Cash and liquidity, which includes available borrowing capacity,
was $530.4 million at December 31, 2005 compared to
$987.4 million at December 31, 2004. This decrease in
cash and liquidity was due mainly to the deployment of capital
raised in connection with our conversion to a REIT in the fourth
quarter of 2004, primarily related to our securitizations
structured as financings. Available borrowing capacity
represents the excess of mortgage loan collateral for our
mortgage loans held for sale, net of the amounts borrowed under
our short-term credit facilities.
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Access Lending Acquisition |
On February 3, 2006, one of our wholly owned subsidiaries,
New Century Warehouse Corporation, completed the purchase of
certain assets and assumption of certain related liabilities of
Access Lending Corporation. Access Lending is a privately held
specialty finance company located in Sugar Land, Texas that
provides warehouse lending services to middle-market
residential-mortgage bankers (mortgage originations
approximating $5 million to $100 million per month).
Based on Access Lendings adjusted net assets as of the
closing date, the purchase price was approximately
$10 million in cash. Additionally, Access Lending is
entitled to receive additional payments for two years, based
upon profitability.
During the third quarter of 2005, Home123 Corporation, one of
our wholly owned subsidiaries, purchased a mortgage origination
platform from RBC Mortgage, which has enabled us to expand our
mortgage product offerings, our retail presence on a nationwide
basis and our channels of distribution, particularly into the
realtor and builder channels. Additionally, we believe that
being a full-service mortgage provider allows us to build upon
the success of our national Home123 branding and marketing
campaign.
The recently-acquired RBC Mortgage origination platform, which
is more heavily weighted towards purchase financing as opposed
to refinancing transactions, includes approximately 140 branches
nationwide and originates residential mortgage loans, consisting
primarily of Alt-A, jumbo and
conforming mortgages, as well as home equity lines
of credit. As expected, these operations negatively affected our
net
83
income in the fourth quarter by $4.3 million, including
certain integration costs. While the loss was modestly greater
than anticipated, we expect the origination platform to be
profitable in 2006.
On February 2, 2005, we declared a quarterly cash dividend
at the rate of $1.55 per share that was paid on
April 29, 2005 to stockholders of record at the close of
business on April 15, 2005. On May 16, 2005, we
declared a quarterly cash dividend at the rate of $1.60 per
share that was paid on July 29, 2005 to stockholders of
record at the close of business on July 20, 2005. On
August 3, 2005, we declared a quarterly cash dividend at
the rate of $1.65 per share that was paid on
October 31, 2005 to stockholders of record at the close of
business on October 20, 2005. On December 16, 2005, we
declared a quarterly cash dividend at the rate of $1.70 per
share that was paid on January 30, 2006 to stockholders of
record at the close of business on December 30, 2005. On
March 1, 2006, we declared a quarterly cash dividend at the
rate of $1.75 per share that will be paid on April 28,
2006 to stockholders of record at the close of business on
March 31, 2006. Any future declarations of dividends will
be subject to our earnings, financial position, capital
requirements, contractual restrictions and other relevant
factors.
We are required to pay to holders of our Series A
Cumulative Redeemable Preferred Stock cumulative dividends from
the date of original issuance on June 21, 2005 in the
amount of $2.28125 per share each year, which is equivalent
to 9.125% of the $25.00 liquidation preference per share. On
August 3, 2005, we declared a cash dividend at the rate of
$0.63368 per share that was paid on September 30, 2005
to holders of our Series A Cumulative Redeemable Preferred
Stock at the close of business on September 1, 2005. The
dividend paid on September 30, 2005 was for more than a
full quarter. On October 26, 2005, we declared a cash
dividend at the rate of $0.5703125 per share that was paid
on December 30, 2005 to holders of our Series A
Cumulative Redeemable Preferred Stock at the close of business
on December 1, 2005. On February 6, 2006, we declared
a cash dividend at the rate of $0.5703125 per share that
will be paid on March 31, 2006 to holders of our
Series A Cumulative Redeemable Preferred Stock at the close
of business on March 1, 2006. Future dividends on our
Series A Cumulative Redeemable Preferred Stock will be
payable quarterly in arrears on March 31, June 30,
September 30 and December 31 of each year, or if not a
business day, the prior preceding business day.
Recent Accounting Developments
In December 2004, the FASB issued Statement of Financial
Accounting Standards No. 123 (revised 2004),
Share-Based Payment (SFAS 123R),
which replaces Statement of Financial Accounting Standards
No. 123, Accounting for Stock-Based
Compensation (SFAS 123), and supersedes
Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees
(APB 25). Securities and Exchange Commission
(SEC) registrants originally would have been
required to adopt SFAS 123Rs provisions at the
beginning of their first interim period after June 15,
2005. On April 14, 2005, the SEC announced that registrants
could delay adoption of SFAS 123Rs provisions until
the beginning of their next fiscal year. We adopted
SFAS 123R on January 1, 2006, using the modified
prospective transition method. The scope of SFAS 123R
includes a wide range of stock-based compensation arrangements
including stock options, restricted stock plans,
performance-based awards, stock appreciation rights, and
employee stock purchase plans. SFAS 123R will require us to
measure the cost of employee services received in exchange for
an award of equity instruments based on the fair value of the
award on the grant date. That cost must be recognized in the
income statement over the vesting period of the award. Under the
modified prospective transition method, awards that
are granted, modified or settled beginning at the date of
adoption will be measured and accounted for in accordance with
SFAS 123R. In addition, expense must be recognized in the
statement of income for unvested awards that were granted prior
to the date of adoption. The expense will be based on the fair
value determined at the grant date. We estimate the 2006 pre-tax
expense related to the adoption of SFAS 123R to be
approximately $12 million.
The notes to financial statements 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. We have currently
provided pro forma disclosure as to the impact of SFAS 123
in footnote 1 of the Notes to Condensed Consolidated
Financial Statements Stock-Based Compensation.
84
FORWARD-LOOKING STATEMENTS
This annual report on Form 10-K, including our
Managements Discussion and Analysis of Financial
Condition and Results of Operations, contains or
incorporates by reference certain forward-looking statements and
we intend that such forward-looking statements be subject to the
safe harbor provisions of the federal securities laws.
Forward-looking statements are those that predict or describe
future events or trends and that do not relate solely to
historical matters. You can generally identify forward-looking
statements as statements containing the words
believe, expect, will,
anticipate, intend,
estimate, project, plan,
assume, seek to or other similar
expressions, although not all forward-looking statements contain
these identifying words. Statements regarding the following
subjects contained or incorporated by reference in this offering
memorandum are forward-looking by their nature:
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our business strategy, including our investment of capital to
maintain a portfolio of mortgage loans; |
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our ability to manage risk, including credit risk; |
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our understanding of our competition; |
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market trends; |
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projected sources and uses of funds from operations; |
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potential liability with respect to legal proceedings; |
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potential effects of proposed legislation and regulatory action; |
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our expectation that our decisions regarding secondary marketing
transactions in 2006 will be based on market conditions and our
ability to access external sources of capital; |
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our current intention that we will not structure any
securitizations as sales in 2006; |
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our intention to maintain, if not increase, our mortgage loan
portfolio by executing securitizations of loans originated
through our TRS, and structuring those securitizations as
financings; |
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our belief that as we increase our mortgage loan portfolio, our
interest income will increase and, in turn, we will have a
larger pool of earnings that can be distributed to stockholders; |
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our expectation that our capacity to originate loans at our TRS
will enable us to grow our mortgage loan portfolio by providing
us with a significant volume of loans at a lower cost and with
greater reliability than if we purchased our mortgage loan
portfolio from a third party; |
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our plan to grow our production franchise by expanding our
product and service offerings through each of our delivery
channels; |
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our intention to offer prime and Alt-A products
through all of our delivery channels by mid-2006; |
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our belief that we can profitably gain market share despite the
projected contraction of overall mortgage industry volume in
2006 by expanding the product lines available through each of
our delivery channels; |
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our expectation that we may increase our capital and liquidity
by accessing the capital markets, when appropriate; |
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our belief that our competitive strengths distinguish our
business model from those of other mortgage REITs and
residential mortgage lenders and enable us to implement our
business strategy; |
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our belief that our taxable REIT subsidiaries have the potential
to generate significant earnings through our mortgage loan
origination franchise; |
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our belief that the flexibility of our structure and business
strategy allows us to provide a broader product offering, better
manage our cash flows and respond to changing conditions in the
secondary market environment, thus enhancing returns to our
stockholders; |
85
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our belief that our proprietary automated credit grading and
pricing methodology gives us the ability to more effectively
evaluate credit risk and more efficiently price our products; |
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our belief that our origination process is easier for our
borrowers and brokers to use than the origination processes of
most of our competitors because of our ability to provide quick
responses and consistent and clear procedures; |
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our intention to use a variety of risk management strategies to
monitor and address interest rate risk; |
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our belief that our risk management strategies will allow us to
monitor and evaluate our exposure to interest rates and manage
the risk profile of our mortgage loans held for investment,
mortgage loans held for sale and our residual interests in
securitizations in response to changes in market conditions; |
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our expectation that we may continue to use derivative financial
instruments such as Euro Dollar futures contracts, interest rate
cap agreements and interest rate swap agreements and may start
using Treasury futures and options on interest rates; |
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our expectation that we may use other hedging instruments
including mortgage derivative securities, as necessary; |
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our expectation that, if our board of directors determines that
additional financing is required, we may raise funds through
additional equity offerings, debt financings, retention of cash
flow or a combination of these methods; |
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our expectations with respect to our future financing activities; |
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our expectation that we will grow our Retail Division through
the value proposition of the Home123 brand supported by our
other retail marketing efforts; |
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our expectation that we will continue to retain the servicing
rights on a portion of the mortgage loans sold to third parties
in whole mortgage loan sales transactions and on all of the
mortgage loans that we hold in our portfolio in the future; |
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our expectation that a significant source of our revenue will
continue to be interest income generated from our portfolio of
mortgage loans held by our REIT and our qualified REIT
subsidiaries; |
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our expectation that we will continue to generate revenue
through our taxable REIT subsidiaries from the sale of loans,
servicing income and loan origination fees; |
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our beliefs regarding our legal proceedings; |
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our expectation that the primary components of our expenses will
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; |
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our belief that offering a broader range of mortgage products
allows us to build upon the success of our national Home123
branding and marketing campaign; |
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our intention that we will increase our interest rates to keep
pace with, or exceed, the growth in underlying rates with a view
toward preserving or expanding our overall operating margin; |
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our efforts to manage our cost structure to remain efficient
even if loan origination volume declines; |
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our expectation that we will continue to focus on maximizing the
net execution of our whole loan sales and continue our
cost-cutting strategies; |
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our expectation that the acquisition of the origination platform
of RBC Mortgage will ultimately allow us to offer a wider range
of products to all of our customers and add strong builder and
realtor relationships to our loan origination business; |
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our belief that, in light of our current strategy to raise
interest rates, our loan production volume may decrease as a
result of these higher interest rates on the mortgages we
originate; |
86
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our belief that the positive impact of our steps to
strategically increase our interest rates in an effort to
improve operating margins will most likely occur in the first
and second quarters of 2006; |
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our expectation that the origination platform recently acquired
from RBC Mortgage will be profitable in 2006; |
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our belief that our current product mix is sustainable and that
our origination strategies and initiatives are consistent with
that belief; |
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our belief that if we are successful in maintaining our current
product mix, our exposure to interest rate cyclicality will be
reduced; |
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our belief that our strict underwriting guidelines and the
stronger credit characteristics of our interest only loans
mitigate their perceived higher risk; |
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our estimates with respect to our loan loss and repurchase
allowances and the underlying assumptions we use to value our
residual interests; |
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our beliefs, estimates and assumptions with respect to our
critical accounting policies; |
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our estimates and assumptions relating to the interest rate
environment, the economic environment, secondary market
conditions and the performance of the loans underlying our
residual assets and mortgage loans held for investment; |
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our use of a prepayment curve to estimate the prepayment
characteristics of our mortgage loans; |
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our intention to retain 20 to 25 percent of our mortgage
loan production on our balance sheet; |
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our principal strategies to effectively manage our liquidity and
capital; |
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our intention to execute our stock repurchase program while
maintaining our targeted cash and liquidity levels; |
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our expectation that we will continue to manage the percentage
of loans sold through whole loan sales transactions, off-balance
sheet securitizations, and securitizations structured as
financings, including the use of NIM structures as appropriate,
giving consideration to whole loan prices, the amount of cash
required to finance securitizations structured as financings,
the expected returns on such securitizations and REIT
qualification requirements; |
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our expectation that our liquidity, credit facilities and
capital resources will be sufficient to fund our operations for
the foreseeable future, while enabling us to maintain our
qualification as a REIT under the requirements of the Code; and |
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our expectation that any future declarations of dividends on our
common stock will be subject to our earnings, financial
position, capital requirements, contractual restrictions and
other relevant factors. |
You should not place undue reliance on our forward-looking
statements because the matters they describe are subject to
known and unknown risks, uncertainties and other unpredictable
factors, many of which are beyond our control. Our
forward-looking statements are based on the information
currently available to us and are applicable only as of the date
on the cover of this annual report on Form 10-K or, in the
case of forward-looking statements incorporated by reference, as
of the date of the filing that includes the statement. New risks
and uncertainties arise from time to time, and it is impossible
for us to predict these matters or how they may affect us. Over
time, our actual results, performance or achievements will
likely differ from the anticipated results, performance or
achievements that are expressed or implied by our
forward-looking statements, and such difference might be
significant and materially adverse to our stockholders. Such
factors include, but are not limited to:
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those identified under the Risk Factors section of
this annual report on Form 10-K; |
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those identified from time to time in the our public filings
with the Securities and Exchange Commission; |
87
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the negative impact of economic slowdowns or recessions; |
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the effect of changes in interest rates; |
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the condition of the secondary markets for our products; |
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our ability to expand origination volume while maintaining low
overhead; |
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our access to funding sources and our ability to renew, replace
or add to our existing repurchase arrangements and existing
credit facilities on terms comparable to the current terms; |
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the initiation of a margin call under our credit facilities; |
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the assumptions underlying our residual values and repurchase
and loan loss allowances, including our loan loss assumptions
with respect to Hurricanes Katrina, Rita and Wilma; |
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the impact of new state or federal legislation or court
decisions on our operations; |
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the impact of more vigorous and aggressive enforcement actions
by federal or state regulators; |
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the impact of new state or federal legislation or court
decisions restricting the activities of lenders or suppliers of
credit in our market; |
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an increase in the prepayment speed or default rate of our
borrowers; |
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the effect of competition from finance and mortgage banking
companies and from Internet-based lending companies; |
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our ability to adequately hedge our residual values, cash flows
and fair values; |
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the assumptions required by our critical accounting policies; |
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the performance of the loans underlying our residual assets and
mortgage loans held for investment; |
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the ability of our servicing operations to maintain high
performance standards; |
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our limited experience managing a REIT; |
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our ability to maintain REIT status; |
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our ability to attract and retain qualified employees,
including, in particular, our senior executives; |
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the stability of residential property values; |
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our ability to adapt to and implement technological changes; |
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our ability to close our forward sale commitments; |
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managements ability to manage our growth and planned
expansion; and |
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the outcome of litigation or regulatory actions pending against
us. |
Other risks, uncertainties and factors, including those
discussed under Risk Factors in this annual report
on Form 10-K, could cause our actual results to differ
materially from those projected in any forward-looking
statements we make. We are not obligated to publicly update or
revise any forward-looking statements, whether as a result of
new information, future events or otherwise.
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Item 7A. |
Quantitative and Qualitative Disclosures About Market
Risk |
General
We carry interest-sensitive assets on our balance sheet that are
financed by interest-sensitive liabilities. Since the interval
for re-pricing of the assets and liabilities is not matched, we
are subject to interest-rate risk. A sudden, sustained increase
or decrease in interest rates would affect our net interest
income, as well as the fair value of our mortgage loans held for
investment and related financing and our residual interests in
securitizations. We employ hedging strategies designed to manage
some of the interest-rate risks inherent in
88
our assets and liabilities. These strategies are designed to
create gains when movements in interest rates cause our cash
flows and/or the value of our assets to decline, and result in
losses when movements in interest rates cause our net cash flows
and/or the value of our net assets to increase.
Changes in market interest rates affect our estimations of the
fair value of mortgage loans held for sale and the fair value of
our mortgage loans held for investment and related derivatives.
The changes in fair value that are stated below are derived
based upon hypothetical immediate and equal changes to market
interest rates of various maturities. The effects of the
hypothetical adjustment to the base or current interest rate
curve are adjusted by the levels shown below (dollars in
thousands):
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As of December 31, 2005: |
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Hypothetical Change in Interest Rate (basis points) |
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+50 | |
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+100 | |
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-50 | |
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-100 | |
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Change in fair value of residual interests in securitizations
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$ |
(15,440 |
) |
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(30,801 |
) |
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14,457 |
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28,716 |
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Change in fair value of derivatives related to residual
interests in securitizations
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12,913 |
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25,825 |
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(12,913 |
) |
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(25,825 |
) |
Change in fair value of mortgage loans held for investment
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(86,166 |
) |
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(169,337 |
) |
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89,367 |
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176,368 |
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Change in fair value of derivatives related to financing on
mortgage loans held for investment
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82,038 |
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164,075 |
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(82,038 |
) |
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(164,075 |
) |
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Net change
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$ |
(6,655 |
) |
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(10,238 |
) |
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8,873 |
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15,184 |
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As of December 31, 2004: |
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Hypothetical Change in Interest Rate (basis points) |
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+50 | |
|
+100 | |
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-50 | |
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-100 | |
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| |
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| |
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Change in fair value of residual interests in securitizations
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$ |
(550 |
) |
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(1,869 |
) |
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474 |
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1,425 |
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Change in fair value of derivatives related to residual
interests in securitizations
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1,138 |
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|
2,275 |
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|
(1,138 |
) |
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|
(2,275 |
) |
Change in fair value of mortgage loans held for investment
|
|
|
(79,008 |
) |
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|
(158,523 |
) |
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68,012 |
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|
138,502 |
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Change in fair value of derivatives related to financing on
mortgage loans held for investment
|
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66,013 |
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132,025 |
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(66,013 |
) |
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|
(132,025 |
) |
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Net change
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$ |
(12,407 |
) |
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|
(26,092 |
) |
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|
1,335 |
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5,627 |
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Item 8. |
Financial Statements and Supplementary Data |
Information with respect to this item is set forth in the
Consolidated Financial Statements and is incorporated herein by
reference. See Index to Consolidated Financial
Statements.
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Item 9. |
Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure |
Not applicable.
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Item 9A. |
Controls and Procedures |
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(a) |
Evaluation of Disclosure Controls and Procedures |
As of December 31, 2005, the end of our fourth quarter, our
management, including our Chief Executive Officer, Vice
Chairman-Finance, Chief Financial Officer, and President and
Chief Operating Officer, has evaluated the effectiveness of our
disclosure controls and procedures, as such term is defined in
Rule 13a-15(e)
promulgated under the Securities Exchange Act of 1934. Based on
that evaluation, our Chief Executive Officer, Vice
Chairman-Finance, Chief Financial Officer and President and
Chief Operating Officer concluded, as of December 31, 2005,
that our disclosure controls and procedures were effective to
ensure that information required to be disclosed by us in
reports that we file or submit under the Securities Exchange Act
of 1934 is recorded, processed, summarized and reported within
the time periods specified in the Securities and Exchange
Commission rules and forms.
89
|
|
(b) |
Managements Report on Internal Control over
Financial Reporting |
Our management is responsible for establishing and maintaining
effective internal control over financial reporting as defined
in Rules 13a-15(f)
under the Securities Exchange Act of 1934. Our internal control
over financial reporting is designed to provide reasonable
assurance to our management and board of directors regarding the
preparation and fair presentation of published financial
statements, in accordance with generally accepted accounting
principles.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Therefore, even those systems determined to be effective can
provide only reasonable assurance with respect to financial
statement preparation and presentation.
Our management assessed the effectiveness of our internal
control over financial reporting as of December 31, 2005.
In making this assessment, our management used the criteria set
forth by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO) in Internal
Control Integrated Framework. Not included in
this evaluation of our internal control over financial reporting
was an evaluation of the mortgage origination platform that
Home123 Corporation, our indirect wholly owned subsidiary,
acquired from RBC Mortgage Company in September 2005. The total
fiscal year 2005 revenue of the recently acquired mortgage
origination platform was approximately $59.6 million and
total assets as of December 31, 2005 were
$1.2 billion. Based on our assessment, management has
concluded that, as of December 31, 2005, our internal
control over financial reporting is effective based on those
criteria.
Our managements assessment of the effectiveness of
internal control over financial reporting as of
December 31, 2005, has been audited by KPMG LLP, the
independent registered public accounting firm who also audited
our consolidated financial statements. KPMGs report on
managements assessment of our internal control over
financial reporting appears on page F-3 hereof.
|
|
(c) |
Changes in Internal Control Over Financial
Reporting |
There have not been any changes in our internal control over
financial reporting (as such term is defined in
Rules 13a-15(f)
and 15d-15(f) under the
Exchange Act) during the quarter to which this report relates
that have materially affected, or are likely to materially
affect, our internal control over financial reporting.
It should be noted that any system of controls, however well
designed and operated, can provide only reasonable, and not
absolute, assurance that the objectives of the system will be
met. In addition, the design of any control system is based in
part upon certain assumptions about the likelihood of future
events. Because of these and other inherent limitations of
control systems, there is only reasonable assurance that our
controls will succeed in achieving their goals under all
potential future conditions.
|
|
Item 9B. |
Other Information |
None.
90
PART III
|
|
Item 10. |
Directors and Executive Officers of the Registrant |
The names and ages of our executive officers and the positions
each of them has held for the past five years are included in
Part I of this
Form 10-K as
permitted by the General Instruction G(3). The information
required by this item regarding our directors will be included
in our proxy statement with respect to our 2006 Annual Meeting
of Stockholders to be filed with the Commission within
120 days of December 31, 2005 under the captions
Proposals You May Vote On
Proposal 1 Election of Directors and
Corporate Governance. As of the filing date of this
Current Report on Form 10-K, seven out of 10 of our
directors are independent within the meaning of the Securities
and Exchange Commission regulations and the NYSE independence
standards.
Audit Committee Financial Expert
Our Board of Directors has determined that each of the members
of our Audit Committee, Marilyn A. Alexander, Donald E. Lange,
Michael M. Sachs and Richard A Zona, is an audit committee
financial expert as defined by Item 401(h) of
Regulation S-K of
the Exchange Act. Each of Ms. Alexander and
Messrs. Lange, Sachs and Zona is independent as that term
is used in Item 7(d)(3)(iv) of Schedule 14A under the
Exchange Act.
Audit Committee
We have a separately designated standing Audit Committee
established in accordance with Section 3(a)(58)(A) of the
Exchange Act. The members of our Audit Committee are
Ms. Marilyn Alexander and Messrs. Donald E. Lange,
Michael M. Sachs and Richard A. Zona. Mr. Sachs is the
Chairman of our Audit Committee.
Code of Ethics
We have adopted a Code of Business Conduct and Ethics applicable
to our directors, officers and employees and a Code of Ethics
for Senior Financial Officers applicable to our Chief Executive
Officer, Vice Chairman-Finance, President and Chief Operating
Officer, Chief Financial Officer and other of our senior
financial officers. Both our Code of Business Conduct and Ethics
and our Code of Ethics for Senior Financial Officers are posted
on the Investor Relations section of our Web site at
http://www.ncen.com/
investor relations/corporate governance/index.html.
We intend to satisfy the disclosure requirements regarding any
amendment to, or waiver from, a provision of our Code of
Business Conduct and Ethics or Code of Ethics for Senior
Financial Officers by disclosing such matters in the Investor
Relations section of our Web site. Any stockholder may obtain a
copy of these codes free of charge by sending a request in
writing to: New Century Financial Corporation, Investor
Relations Department, 18400 Von Karman, Suite 1000, Irvine,
California 92612, or emailing our Vice President of Investor
Relations, Ms. Carrie Marrelli, at cmarrell@ncen.com.
Corporate Governance Guidelines
We have adopted Corporate Governance Guidelines, which are
posted on the Investor Relations section of our Web site at
http://www.ncen.com/investor relations/corporate governance/index.html.
Any stockholder may obtain a copy of our Corporate Governance
Guidelines free of charge by sending a request in writing to:
New Century Financial Corporation, Investor Relations
Department, 18400 Von Karman, Suite 1000, Irvine,
California 92612, or emailing our Vice President of Investor
Relations, Ms. Carrie Marrelli, at cmarrell@ncen.com.
Section 16(a) Beneficial Ownership Reporting
Compliance
The information required by this item will be included in our
proxy statement with respect to our 2006 Annual Meeting of
Stockholders to be filed with the Commission within
120 days of December 31, 2005, under the caption
Executive Compensation Section 16(a)
Beneficial Ownership Reporting Compliance, and is
incorporated herein by this reference as if set forth in full
herein.
91
|
|
Item 11. |
Executive Compensation |
The information required by this item will be included in our
proxy statement with respect to our 2006 Annual Meeting of
Stockholders to be filed with the Commission within
120 days of December 31, 2005, under the captions
Executive Compensation, Corporate
Governance, Report of Compensation Committee
and Performance Graph and is incorporated herein by
this reference as if set forth in full herein.
|
|
Item 12. |
Security Ownership of Certain Beneficial Owners and
Directors and Executive Officers and Related Stockholder
Matters |
The information required by this item will be included in our
proxy statement with respect to our 2006 Annual Meeting of
Stockholders to be filed with the Commission within
120 days of December 31, 2005, under the caption
Security Ownership of Certain Beneficial Owners and
Directors and Executive Officers, and is incorporated
herein by this reference as if set forth in full herein.
|
|
Item 13. |
Certain Relationships and Related Transactions |
The information required by this item will be included in our
proxy statement with respect to our 2006 Annual Meeting of
Stockholders to be filed with the Commission within
120 days of December 31, 2005, under the caption
Certain Relationships and Related Transactions, and
is incorporated herein by this reference as if set forth in full
herein.
|
|
Item 14. |
Principal Accountant Fees and Services |
The information required by this item will be included in our
proxy statement with respect to our 2006 Annual Meeting of
Stockholders to be filed with the Commission within
120 days of December 31, 2005, under the caption
Corporate Governance, and is incorporated herein by
this reference as if set forth in full herein.
92
PART IV
|
|
Item 15. |
Exhibits and Financial Statements and Schedules |
(a) Financial Statements
and Schedules:
|
|
|
1. Consolidated Financial Statements See
Index to Consolidated Financial Statements |
|
|
2. Consolidated Financial Statement Schedule
See Index to Consolidated Financial Statements |
(b) Exhibits:
The documents set forth below are filed herewith or incorporated
herein by reference to the location indicated.
93
EXHIBIT INDEX
|
|
|
|
|
Exhibit |
|
|
Number |
|
Description of Document |
|
|
|
|
2 |
.1 |
|
Agreement and Plan of Merger, dated as of April 21, 2004,
by and among New Century TRS Holdings, Inc. (f/k/a New Century
Financial Corporation), New Century Financial Corporation (f/k/a
New Century REIT, Inc.) and NC Merger Sub, Inc.(26) |
|
3 |
.1 |
|
Articles of Amendment and Restatement of New Century Financial
Corporation.(56) |
|
3 |
.2 |
|
Certificate of Correction to the Articles of Amendment and
Restatement of New Century Financial Corporation, dated as of
January 13, 2006 and filed with the State Department of
Assessments and Taxation of the State of Maryland on
January 20, 2006.(88) |
|
3 |
.3 |
|
Amended and Restated Bylaws of New Century Financial
Corporation.(56) |
|
3 |
.4 |
|
Second Amended and Restated Bylaws of New Century Financial
Corporation.(76) |
|
3 |
.5 |
|
Third Amended and Restated Bylaws of New Century Financial
Corporation.(83) |
|
3 |
.6 |
|
Articles Supplementary of New Century Financial
Corporation.(48) |
|
3 |
.7 |
|
Articles Supplementary of New Century Financial Corporation
relating to 9.125% Series A Cumulative Redeemable Preferred
Stock, liquidation preference $25.00 per share. (72) |
|
4 |
.1 |
|
Registration Rights Agreement, dated May 30, 1997, by and
between New Century TRS Holdings, Inc. and certain of its
stockholders.(1) |
|
4 |
.2 |
|
Indenture, dated as of July 8, 2003, between New Century
TRS Holdings, Inc. and Wells Fargo Bank, National
Association.(21) |
|
4 |
.3 |
|
First Supplemental Indenture, dated as of September 30,
2004, by and among New Century TRS Holdings, Inc., New Century
Financial Corporation and Wells Fargo Bank, National
Association.(48) |
|
4 |
.4 |
|
Second Supplemental Indenture, dated as of February 14,
2005, by and among New Century TRS Holdings, Inc., New Century
Financial Corporation and Wells Fargo Bank, National
Association.(67) |
|
4 |
.5 |
|
Registration Rights Agreement, dated as of October 6, 2004,
by and between New Century Financial Corporation and Friedman,
Billings, Ramsey Group, Inc.(50) |
|
4 |
.6 |
|
Specimen Certificate for New Century Financial
Corporations Common Stock (incorporated by reference to
the joint filing of New Century Financial Corporations
Form S-3 Registration Statement (333-119753) and New
Century TRS Holdings, Inc.s Post-Effective Amendment
No. 3 to the Registration Statement (No. 333-109727) on
Form S-3, as filed with the Securities and Exchange
Commission on October 14, 2004.) |
|
10 |
.1 |
|
Industrial Lease, dated October 11, 1999, between New
Century TRS Holdings, Inc. and The Irvine Company.(4) |
|
10 |
.2 |
|
Master Loan & Security Agreement, among New Century
Mortgage Corporation, NC Capital Corporation and Salomon
Brothers Realty Corp., dated April 1, 2000.(3) |
|
|
|
|
(a) Amendment No. 1 to the Master Loan and Security
Agreement, dated as of March 30, 2001, among New Century
Mortgage Corporation, NC Capital Corporation and Salomon
Brothers Realty Corp.(6) |
|
|
|
|
(b) Amendment No. 2 to the Master Loan and Security
Agreement, dated as of May 1, 2001, among New Century
Mortgage Corporation, NC Capital Corporation and Salomon
Brothers Realty Corp.(6) |
|
|
|
|
(c) Amendment No. 3 to the Master Loan &
Security Agreement, dated as of November 13, 2002, among
New Century Mortgage Corporation, NC Capital Corporation and
Salomon Brothers Realty Corp.(14) |
|
|
|
|
(d) Amendment No. 4 to the Master Loan and Security
Agreement, dated December 23, 2002, among New Century
Mortgage Corporation, NC Capital Corporation and Salomon
Brothers Realty Corp.(14) |
94
|
|
|
|
|
Exhibit |
|
|
Number |
|
Description of Document |
|
|
|
|
|
|
|
(e) Amendment No. 5 to the Master Loan and Security
Agreement, dated May 13, 2003, among New Century Mortgage
Corporation, NC Capital Corporation and Citigroup Global Markets
Realty Corp., as successor to Salomon Brothers Realty Corp.(16) |
|
|
|
|
(f) Amendment Number Six to the Master Loan and Security
Agreement, dated as of December 29, 2003, among New Century
Mortgage Corporation, NC Capital Corporation and Citigroup
Global Markets Realty Corp., as successor to Salomon Brothers
Realty Corp.(23) |
|
|
|
|
(g) Amendment Number Seven to the Master Loan and Security
Agreement, dated as of April 19, 2004, among New Century
Mortgage Corporation, NC Capital Corporation and Citigroup
Global Markets Realty Corp., as successor to Salomon Brothers
Realty Corp.(27) |
|
10 |
.3 |
|
Limited Guaranty, dated as of April 1, 2000, by New Century
Mortgage Corporation in favor of Salomon Brothers Realty Corp.
and Salomon Smith Barney Inc.(17) |
|
10 |
.4 |
|
Servicing Rights Purchase Agreement, dated February 28,
2001, between Ocwen Federal Bank FSB and New Century Mortgage
Corporation.(5) |
|
10 |
.5 |
|
Fifth Amended and Restated Credit Agreement, dated May 23,
2001, among New Century Mortgage Corporation, NC Capital
Corporation and U.S. Bank National Association.(7) |
|
|
|
|
(a) First Amendment to the Fifth Amended and Restated
Credit Agreement, dated January 11, 2002, among New Century
Mortgage Corporation, NC Capital Corporation and U.S. Bank
National Association.(9) |
|
|
|
|
(b) Second Amendment to Fifth Amended and Restated Credit
Agreement, dated as of March 25, 2002, among New Century
Mortgage Corporation, NC Capital Corporation and U.S. Bank
National Association.(10) |
|
10 |
.6 |
|
Master Repurchase Agreement, dated July 19, 2001, among CDC
Mortgage Capital Inc., New Century Mortgage Corporation and NC
Capital Corporation.(7) |
|
|
|
|
(a) Amendment No. 1 to Master Repurchase Agreement,
dated August 31, 2001, among CDC Mortgage Capital, Inc.,
New Century Mortgage Corporation and NC Capital Corporation.(8) |
|
|
|
|
(b) Amendment No. 2 to the Master Repurchase
Agreement, dated as of December 2001, among CDC Mortgage Capital
Inc., New Century Mortgage Corporation and NC Capital
Corporation.(9) |
|
|
|
|
(c) Amendment No. 3 to the Master Repurchase
Agreement, dated as of February 22, 2002, among CDC
Mortgage Capital Inc., New Century Mortgage Corporation and NC
Capital Corporation.(9) |
|
|
|
|
(d) Amendment No. 4 to the Master Repurchase
Agreement, dated as of March 15, 2002, among New Century
Mortgage Corporation, NC Capital Corporation and CDC Mortgage
Capital, Inc.(10) |
|
10 |
.7 |
|
Guarantee, dated as of July 19, 2001, by New Century TRS
Holdings, Inc. in favor of CDC Mortgage Capital Inc.(17) |
|
10 |
.8 |
|
Letter Agreement, dated as of April 28, 2004, among CDC
Mortgage Capital Inc., New Century Mortgage Corporation and NC
Capital Corporation.(27) |
|
10 |
.9 |
|
Letter Agreement, dated as of May 14, 2004, among New
Century TRS Holdings, Inc., NC Capital Corporation, New Century
Mortgage Corporation and CDC Mortgage Capital Inc.(28) |
|
10 |
.10 |
|
Amended and Restated Master Loan and Security Agreement, dated
December 1, 2001, between NC Capital Corporation and Morgan
Stanley Dean Witter Mortgage Capital Inc.(9) |
|
|
|
|
(a) Amendment No. 1 to the Amended and Restated Master
Loan and Security Agreement, dated February 15, 2002, among
NC Capital Corporation and Morgan Stanley Dean Witter Mortgage
Capital Inc.(9) |
|
|
|
|
(b) Amendment No. 2 to Amended and Restated Master
Loan and Security Agreement, dated as of May 9, 2002,
between NC Capital Corporation and Morgan Stanley Dean Witter
Mortgage Capital Inc.(12) |
95
|
|
|
|
|
Exhibit |
|
|
Number |
|
Description of Document |
|
|
|
|
|
|
|
(c) Amendment No. 3 to Amended and Restated Master
Loan and Security Agreement, dated as of June 20, 2002,
between NC Capital Corporation and Morgan Stanley Dean Witter
Mortgage Capital Inc.(13) |
|
|
|
|
(d) Amendment No. 4 to Amended and Restated Master
Loan and Security Agreement, dated as of August 15, 2002,
between NC Capital Corporation and Morgan Stanley Dean Witter
Mortgage Capital Inc.(13) |
|
10 |
.11 |
|
Letter Agreement, dated January 1, 2002, between NC Capital
Corporation, New Century Mortgage Corporation and Salomon
Brothers Realty Corp.(9) |
|
|
|
|
(a) Amendment No. 1 to the Letter Agreement, dated
December 23, 2002, among NC Capital Corporation, New
Century Mortgage Corporation and Salomon Brothers Realty
Corp.(15) |
|
|
|
|
(b) Amendment No. 2 to the Letter Agreement, dated
April 30, 2003, among NC Capital Corporation, New Century
Mortgage Corporation and Salomon Brothers Realty Corp.(20) |
|
|
|
|
(c) Amendment Number Three to Letter Agreement, dated
September 16, 2003, among NC Capital Corporation, New
Century Mortgage Corporation and Citigroup Global Markets Realty
Corp., as successor to Salomon Brothers Realty Corp.(23) |
|
|
|
|
(d) Amendment Number Four to the Letter Agreement, dated
December 29, 2003, among New Century Mortgage Corporation,
NC Capital Corporation and Citigroup Global Markets Realty
Corp., as successor to Salomon Brothers Realty Corp.(25) |
|
|
|
|
(e) Amendment Number Five to the Letter Agreement, dated as
of March 31, 2004, among New Century Mortgage Corporation,
NC Capital Corporation and Citigroup Global Markets Realty
Corp., as successor to Salomon Brothers Realty Corp.(25) |
|
|
|
|
(f) Amendment Number Six to the Letter Agreement dated as
of June 25, 2004, among New Century Mortgage Corporation,
NC Capital Corporation and Citigroup Global Markets Realty
Corp., as successor to Salomon Brothers Realty Corp.(33) |
|
10 |
.12 |
|
Limited Guaranty, dated as of January 1, 2002, by New
Century Mortgage Corporation in favor of Salomon Brothers Realty
Corp. and Salomon Smith Barney Inc.(17) |
|
10 |
.13 |
|
Master Contribution Agreement, dated as of May 13, 2002,
between New Century Mortgage Corporation and New Century Funding
A.(11) |
|
10 |
.14 |
|
Amended and Restated Master Repurchase Agreement, dated as of
May 21, 2004, between New Century Funding A and Bank of
America, N.A.(34) |
|
|
|
|
(a) Amendment No. 1 to the Amended and Restated Master
Repurchase Agreement, dated as of October 1, 2004, between
New Century Funding A and Bank of America, N.A.(49) |
|
|
|
|
(b) Amendment Number Two to Amended and Restated
Master Repurchase Agreement, dated as of May 5, 2005, by
and between New Century Funding A and Bank of America,
N.A. |
|
|
|
|
(c) Amendment Number Three to Amended and Restated Master
Repurchase Agreement, dated as of July 6, 2005, by and
between New Century Funding A and Bank of America, N.A.(84) |
|
|
|
|
(d) Amendment Number Four to Amended and Restated Master
Repurchase Agreement, dated as of August 5, 2005, by and
between New Century Funding A and Bank of America, N.A.(84) |
|
|
|
|
(e) Amendment Number Five to Amended and Restated Master
Repurchase Agreement, dated as of August 9, 2005, by and
between New Century Funding A and Bank of America, N.A.(84) |
|
10 |
.15 |
|
Amended and Restated Guaranty and Pledge Agreement, dated as of
May 21, 2004, among New Century TRS Holdings, Inc., New
Century Mortgage Corporation and Bank of America, N.A.(34) |
|
10 |
.16 |
|
Amended and Restated Master Repurchase Agreement, dated as of
May 10, 2002, among CDC Mortgage Capital, Inc., New Century
Mortgage Corporation and NC Capital Corporation.(11) |
|
|
|
|
(a) Amendment No. 1 to the Amended and Restated Master
Repurchase Agreement, dated as of July 26, 2002, among CDC
Mortgage Capital Inc., New Century Mortgage Corporation and NC
Capital Corporation.(13) |
|
|
|
|
(b) Amendment No. 2 to the Amended and Restated Master
Repurchase Agreement, dated as of August 5, 2002, among CDC
Mortgage Capital Inc., New Century Mortgage Corporation and NC
Capital Corporation.(13) |
96
|
|
|
|
|
Exhibit |
|
|
Number |
|
Description of Document |
|
|
|
|
|
|
|
(c) Amendment No. 3 to the Amended and Restated Master
Repurchase Agreement, dated March 14, 2003, among CDC
Mortgage Capital Inc., New Century Mortgage Corporation and NC
Capital Corporation.(15) |
|
10 |
.17 |
|
Committed Note Purchase Agreement and Security Agreement,
dated as of May 10, 2002, among New Century Funding I,
UBS Warburg Real Estate Securities Inc. and each person party
thereto as a Purchaser or a Noteholder from time to time.(11) |
|
|
|
|
(a) Amendment No. 1 to the Committed
Note Purchase and Security Agreement, dated as of
June 15, 2002, among New Century Funding I, UBS
Warburg Real Estate Securities Inc. and each person party
thereto as a Purchaser or a Noteholder from time to time.(13) |
|
|
|
|
(b) Amendment No. 2 to the Committed
Note Purchase and Security Agreement, dated as of
November 21, 2002, among New Century Funding I, UBS
Warburg Real Estate Securities Inc. and each person party
thereto as a Noteholder from time to time.(14) |
|
|
|
|
(c) Amendment No. 3 to the Committed
Note Purchase and Security Agreement, dated as of
June 23, 2003, among New Century Funding I, UBS
Warburg Real Estate Securities Inc. and each person party
thereto as a Purchaser or a Noteholder from time to time.(17) |
|
|
|
|
(d) Amendment No. 4 to the Committed
Note Purchase and Security Agreement, dated as of
May 14, 2004, among New Century Funding I, UBS Real
Estate Securities Inc. (f/k/a UBS Warburg Real Estate Securities
Inc.) and each person party thereto as a Purchaser or a
Noteholder from time to time.(28) |
|
|
|
|
(e) Amendment No. 5 to the Committed
Note Purchase and Security Agreement, dated as of
June 11, 2004, among New Century Funding I and UBS Real
Estate Securities Inc. (f/k/a UBS Warburg Real Estate Securities
Inc.) and each person party thereto as a Purchaser or a
Noteholder from time to time.(30) |
|
|
|
|
(f) Amendment No. 6 to the Committed
Note Purchase and Security Agreement, dated June 18,
2004, between New Century Funding I and UBS Real Estate
Securities Inc. (f/k/a UBS Warburg Real Estate Securities Inc.)
and each person party thereto as a Purchaser or a Noteholder
from time to time.(31) |
|
|
|
|
(g) Amendment No. 7 to the Committed
Note Purchase and Security Agreement, dated as of
September 30, 2004, between New Century Funding I and UBS
Real Estate Securities Inc. (f/k/a UBS Warburg Real Estate
Securities Inc.) and each person party thereto as a Purchaser or
a Noteholder from time to time.(49) |
|
10 |
.18 |
|
Loan Purchase Agreement, dated as of May 10, 2002, among
New Century Mortgage Corporation, New Century TRS Holdings, Inc.
and New Century Funding I.(11) |
|
|
|
|
(a) Amendment No. 1 to Loan Purchase Agreement, dated
as of November 21, 2002, among New Century Mortgage
Corporation, New Century TRS Holdings, Inc. and New Century
Funding I.(14) |
|
|
|
|
(b) Amendment No. 2 to Loan Purchase Agreement, dated
as of June 23, 2003, among New Century Mortgage
Corporation, New Century TRS Holdings, Inc. and New Century
Funding I.(17) |
|
|
|
|
(c) Amendment No. 3 to Loan Purchase Agreement, dated
June 18, 2004, among New Century Funding I, New
Century TRS Holdings, Inc., New Century Mortgage Corporation and
NC Capital Corporation.(31) |
|
10 |
.19 |
|
Waiver and Consent, dated May 13, 2002, under the
Subordinated Loan Agreement between New Century Mortgage
Corporation and U.S. Bank National Association dated as of
April 28, 2000.(11) |
|
10 |
.20 |
|
First Amendment to Lease, dated May 1, 2000, between The
Irvine Company and New Century TRS Holdings, Inc.(12) |
|
10 |
.21 |
|
Office Lease Agreement, dated April 23, 2002, between Koll
Center Irvine Number Two, L.L.C. and New Century Mortgage
Corporation.(12) |
|
|
|
|
(a) First Amendment to Office Lease Agreement, dated
May 12, 2003, between Koll Center Irvine Number Two, L.L.C.
and New Century Mortgage Corporation.(45) |
97
|
|
|
|
|
Exhibit |
|
|
Number |
|
Description of Document |
|
|
|
|
10 |
.22 |
|
Unit Purchase Agreement, dated as of May 24, 2002, among
Gary Busacca, Marc Loewenthal, Jeffrey Lemieux, David Logsdon,
eGarden, Inc., and New Century Mortgage Corporation.(12) |
|
10 |
.23 |
|
Master Repurchase Agreement, dated as of May 30, 2002,
between Salomon Brothers Realty Corp. and New Century Funding
SB-1.(12) |
|
|
|
|
(a) Amendment No. 1 to the Master Repurchase
Agreement, dated December 23, 2002, between New Century
Funding SB-1 and Salomon Brothers Realty Corp.(14) |
|
|
|
|
(b) Amendment No. 2 to the Master Repurchase
Agreement, dated May 13, 2003, between New Century Funding
SB-1 and Citigroup Global Markets Realty Corp., as successor to
Salomon Brothers Realty Corp.(16) |
|
|
|
|
(c) Amendment Number Three to the Master Repurchase
Agreement, dated September 16, 2003, between New Century
Funding SB-I and Citigroup Global Markets Realty Corp., as
successor to Salomon Brothers Realty Corp.(19) |
|
|
|
|
(d) Amendment Number Four to the Master Repurchase
Agreement, dated as of December 29, 2003, between New
Century Funding SB-1 and Citigroup Global Markets Realty Corp.,
as successor to Salomon Brothers Realty Corp.(23) |
|
|
|
|
(e) Amendment Number Five to the Master Repurchase
Agreement, dated as of March 31, 2004, between New Century
Funding SB-1 and Citigroup Global Markets Realty Corp., as
successor to Salomon Brothers Realty Corp.(27) |
|
|
|
|
(f) Amendment Number Six to the Master Repurchase
Agreement, dated as of June 25, 2004, between New Century
Funding SB-1 and Citigroup Global Markets Realty Corp., as
successor to Salomon Brothers Realty Corp.(33) |
|
|
|
|
(g) Amendment Number Seven to the Master Repurchase
Agreement, dated as of October 1, 2004, between New Century
Funding SB-1 and Citigroup Global Markets Realty Corp.(49) |
|
|
|
|
(h) Amendment Number Eight to the Master Repurchase
Agreement, dated as of December 29, 2004, between New
Century Funding SB-1 and Citigroup Global Markets Realty
Corp.(62) |
|
|
|
|
(i) Amendment Number Nine to the Master Repurchase
Agreement, dated as of March 30, 2005, by and between New
Century Funding SB-1 and Citigroup Global Markets Realty
Corp.(71) |
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|
|
|
(j) Amendment Number Ten to the Master Repurchase
Agreement, dated as of June 1, 2005, by and between New
Century Funding SB-1 and Citigroup Global Markets Realty Corp.
|
|
|
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|
(k) Amendment Number Eleven to the Master Repurchase
Agreement, dated as of September 28, 2005, between New
Century Funding SB-1 and Citigroup Global Markets Realty
Corp.(84) |
|
|
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|
(l) Amendment Number Twelve to the Master Repurchase
Agreement, dated as of December 28, 2005, by and between
New Century Funding SB-1 and Citigroup Global Markets Realty
Corp. |
|
|
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|
(m) Amendment Number Thirteen to the Master Repurchase
Agreement, dated as of January 20, 2006, by and between New
Century Funding SB-1 and Citigroup Global Markets Realty Corp.
|
|
|
|
|
(n) Amendment Number Fourteen to the Master Repurchase
Agreement, dated as of February 28, 2006, by and between
New Century Funding SB-1 and Citigroup Global Markets Realty
Corp. |
|
10 |
.24 |
|
Master Contribution Agreement, dated as of May 30, 2002,
between New Century Mortgage and New Century Funding SB-1.(12) |
|
10 |
.25 |
|
Guaranty and Pledge Agreement, dated as of May 30, 2002, by
New Century TRS Holdings, Inc. and New Century Mortgage
Corporation in favor of Salomon Brothers Realty Corp.(17) |
|
|
|
|
(a) Amended and Restated Guaranty and Pledge Agreement,
dated as of October 1, 2004, among New Century Financial
Corporation, New Century Mortgage Corporation and Citigroup
Global Markets Realty Corp.(49) |
|
10 |
.26 |
|
Lease, dated May 31, 2002, between The Irvine Company and
New Century Mortgage Corporation.(12) |
98
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|
|
|
|
Exhibit |
|
|
Number |
|
Description of Document |
|
|
|
|
10 |
.27 |
|
Second Amendment to Lease, dated June 17, 2002, between The
Irvine Company and New Century TRS Holdings, Inc.(12) |
|
|
|
|
(a) Third Amendment to Lease, dated September 12,
2002, between The Irvine Company and New Century TRS Holdings,
Inc.(45) |
|
|
|
|
(b) Fourth Amendment to Lease, dated October 14, 2003,
between The Irvine Company and New Century TRS Holdings, Inc.(45) |
|
|
|
|
(c) Fifth Amendment to Lease, dated February 5, 2004,
between The Irvine Company and New Century TRS Holdings, Inc.(45) |
|
|
|
|
(d) Sixth Amendment to Lease, dated September 10,
2004, between The Irvine Company and New Century TRS Holdings,
Inc.(46) |
|
|
|
|
(e) Seventh Amendment to Lease, dated October 12,
2004, by and between New Century TRS Holdings, Inc. and The
Irvine Company.(52) |
|
10 |
.28 |
|
Lease, dated June 17, 2002, between The Irvine Company and
New Century Mortgage Corporation.(12) |
|
|
|
|
(a) First Amendment to Lease dated November 5, 2002 by
and between The Irvine Company, New Century Mortgage Corporation
and the Anyloan Company.(45) |
|
10 |
.29 |
|
Office Space Lease, dated June 29, 2002, between National
Office Partners Limited Partnership and New Century Mortgage
Corporation.(12) |
|
|
|
|
(a) Amendment to Office Space Lease dated
September 17, 2003 by and between National Office Partners
Limited Partnership and New Century Mortgage Corporation.(45) |
|
10 |
.30 |
|
Master Loan and Security Agreement, dated December 1, 2002,
between NC Capital Corporation and Morgan Stanley Mortgage
Capital Inc.(14) |
|
|
|
|
(a) Amendment No. 1 to Master Loan and Security
Agreement, dated as of March 27, 2003, between NC Capital
Corporation and Morgan Stanley Mortgage Capital, Inc.(15) |
|
10 |
.31 |
|
Amended and Restated Master Loan and Security Agreement, dated
June 20, 2003, among NC Capital Corporation, New Century
Mortgage Corporation and Morgan Stanley Mortgage Capital,
Inc.(17) |
|
|
|
|
(a) Amendment No. 1 to the Amended and Restated Master
Loan and Security Agreement, dated as of September 15,
2003, among NC Capital Corporation, New Century Mortgage
Corporation and Morgan Stanley Mortgage Capital, Inc.(19) |
|
|
|
|
(b) Amendment No. 2 to the Amended and Restated Master
Loan and Security Agreement, dated as of December 11, 2003,
among NC Capital Corporation, New Century Mortgage Corporation
and Morgan Stanley Mortgage Capital, Inc.(22) |
|
|
|
|
(c) Amendment No. 3 to the Amended and Restated Master
Loan and Security Agreement, dated as of January 13, 2004,
among NC Capital Corporation, New Century Mortgage Corporation
and Morgan Stanley Mortgage Capital Inc.(23) |
|
10 |
.32 |
|
Amended and Restated Guaranty, dated as of June 20, 2003,
by New Century TRS Holdings, Inc. in favor of Morgan Stanley
Mortgage Capital, Inc.(17) |
|
|
|
|
(a) Amendment No. 1 to the Amended and Restated
Guaranty, dated as of September 18, 2003, by New Century
TRS Holdings, Inc. in favor of Morgan Stanley Mortgage Capital
Inc.(19) |
|
10 |
.33 |
|
Second Amended and Restated Master Repurchase Agreement, dated
as of June 23, 2003, among CDC Mortgage Capital Inc., New
Century Mortgage Corporation and NC Capital Corporation.(17) |
|
|
|
|
(a) Amendment No. 1 to the Second Amended and Restated
Master Repurchase Agreement, dated as of June 30, 2003,
among CDC Mortgage Capital Inc., New Century Mortgage
Corporation and NC Capital Corporation.(17) |
|
|
|
|
(b) Amendment No. 2 to the Second Amended and Restated
Master Repurchase Agreement, dated as of September 3, 2003,
among New Century Mortgage Corporation, NC Capital Corporation
and CDC Mortgage Capital Inc.(18) |
99
|
|
|
|
|
Exhibit |
|
|
Number |
|
Description of Document |
|
|
|
|
|
|
|
(c) Amendment No. 3 to the Second Amended and Restated
Master Loan Purchase Agreement, dated September 30, 2003,
among NC Capital Corporation, New Century Mortgage Corporation
and CDC Mortgage Capital Inc.(19) |
|
|
|
|
(d) Amendment No. 4 to the Second Amended and Restated
Master Loan Purchase Agreement, dated February 12, 2004,
among NC Capital Corporation, New Century Mortgage Corporation
and CDC Mortgage Capital, Inc.(24) |
|
|
|
|
(e) Letter Agreement, dated as of June 18, 2004, among
New Century Mortgage Corporation, NC Capital Corporation and CDC
Mortgage Capital Inc.(31) |
|
|
|
|
(f) Letter Agreement, dated as of July 1, 2004, among
New Century Mortgage Corporation, NC Capital Corporation and CDC
Mortgage Capital Inc.(35) |
|
|
|
|
(g) Letter Agreement, dated as of July 15, 2004, among
New Century Mortgage Corporation, NC Capital Corporation and CDC
Mortgage Capital Inc.(36) |
|
|
|
|
(h) Letter Agreement, dated as of July 29, 2004, among
New Century Mortgage Corporation, NC Capital Corporation and CDC
Mortgage Capital Inc.(38) |
|
|
|
|
(i) Letter Agreement, dated as of August 11, 2004,
among New Century Mortgage Corporation, NC Capital Corporation
and CDC Mortgage Capital Inc.(42) |
|
|
|
|
(j) Letter Agreement, dated as of August 30, 2004,
among New Century Mortgage Corporation, NC Capital Corporation
and CDC Mortgage Capital Inc.(43) |
|
10 |
.34 |
|
Master Loan and Security Agreement, dated June 26, 2003,
between New Century Mortgage Corporation and Greenwich Capital
Financial Products, Inc.(17) |
|
10 |
.35 |
|
Servicer Advance Financing Facility Agreement, dated as of
August 28, 2003, between Citigroup Global Markets Realty
Corp. and New Century Mortgage Corporation.(18) |
|
|
|
|
(a) Amendment Number One to Servicer Advance Financing
Facility Agreement, dated as of August 27, 2004, between
Citigroup Global Markets Realty Corp. and New Century Mortgage
Corporation.(43) |
|
|
|
|
(b) Amend Number Two to the Servicer Advance Financing
Facility Agreement, dated as of October 1, 2004, between
New Century Mortgage Corporation and Citigroup Global Markets
Realty Corp. (49) |
|
|
|
|
(c) Amendment Number Three to the Servicer Advance
Financing Facility Agreement, dated as of August 25, 2005,
between New Century Mortgage Corporation and Citigroup Global
Markets Realty Corp.(84) |
|
10 |
.36 |
|
Guaranty, dated as of August 28, 2003, by New Century TRS
Holdings, Inc. in favor of Citigroup Global Markets Realty
Corp.(18) |
|
|
|
|
(a) Amended and Restated Guaranty, dated as of
October 1, 2004, by New Century Financial Corporation in
favor of Citigroup Global Markets Realty Corp.(49) |
|
10 |
.37 |
|
Master Repurchase Agreement, dated September 25, 2003,
between NC Capital Corporation and Bear Stearns Mortgage Capital
Corporation.(19) |
|
10 |
.38 |
|
Guaranty, dated as of September 25, 2003, by New Century
TRS Holdings, Inc. in favor of Bear Stearns Mortgage Capital
Corporation.(19) |
|
10 |
.39 |
|
Master Repurchase Agreement, dated as of October 31, 2003,
by and between Bear Stearns Mortgage Capital Corporation and NC
Capital Corporation.(20) |
|
|
|
|
(a) Amendment No. 1 to Master Repurchase Agreement,
dated as of January 14, 2004, between Bear Stearns Mortgage
Capital Corporation and NC Capital Corporation.(24) |
|
|
|
|
(b) Amendment No. 2 to Master Repurchase Agreement,
dated as of June 29, 2004, among NC Capital Corporation, NC
Residual II Corporation and Bear Stearns Mortgage Capital
Corporation.(33) |
|
|
|
|
(c) Amendment and Joinder No. 3 to the Master
Repurchase Agreement, dated as of October 1, 2004, among NC
Residual II Corporation, NC Capital Corporation, New
Century Credit Corporation and Bear Stearns Mortgage Capital
Corporation.(49) |
100
|
|
|
|
|
Exhibit |
|
|
Number |
|
Description of Document |
|
|
|
|
|
|
|
(d) Amendment No. 4 to Master Repurchase Agreement,
dated as of December 30, 2004, among New Century Credit
Corporation, NC Capital Corporation, NC Residual II
Corporation and Bear Stearns Mortgage Capital Corporation.(62) |
|