New Century Selling MSRs

New Century Financial Corp. formally unveiled its bankruptcy reorganization plan as Mortgage Servicing News went to press in early April.

New Century, based in Irvine, Calif., said the pre-packaged plan involves seling its servicing assets and platform to Carrington Capital Management for $139 million, subject to bankruptcy court approval.

The company also said that CIT Group and Greenwich Capital had agreed to provide as much as $150 million in debtor in possession financing to keep the company in business as it reorganizes.

New Century said it would immediately cut more than half of its workforce, or 3,200 jobs, as part of the reorganization, according to published reports.

As New Century Financial Corp. weighed its bankruptcy options at the end of March, one of its warehouse lenders, Morgan Stanley, held a public auction for $2.48 billion in loans originated by the troubled subprime lender.

A source familiar with the matter said Morgan believes it has the legal right to the loans because NCFC is in default on its warehouse covenants. (Morgan is one of several warehouse lenders that recently informed NCFC that it no longer will fund its production.)

Morgan auctioned the residential loans "as is" with no representations and warranties. It was expected to pick three finalists who will then be allowed to conduct due diligence on the assets. Morgan had originally committed $2.5 billion in warehouse lines to NCFC.

The source said Morgan held a "clean auction" in order to establish a value for the mortgages in anticipation of a "prepackaged" bankruptcy sale of NCFC.

Separately, New Century is not alone in facing tough times. Another big subprime lender, Fremont General Corp., Santa Monica, Calif., recently sold $4 billion of subprime loans at a loss. The company has reportedly closed its loan origination business, and it was unclear if the loan sale included a transfer of servicing rights. Fremont is trying to sell its subprime division, which services $27 billion of home loans.

Subprime lender People's Choice Financial Corp., Irvine, Calif. - which had hoped to go public one day - filed for bankruptcy protection in March, leaving behind as unsecured creditors several banks and Wall Street warehouse lenders.

In total, warehouse providers - including GMAC-RFC and Merrill Lynch - are owed close to $100 million by PCFC and its affiliates, all of it unsecured.

Merrill - which now owns a subprime wholesaler, First Franklin - also is an unsecured creditor in two other high-profile subprime bankruptcies, Mortgage Lenders Network, Middletown, Conn., and Ownit Mortgage Solutions of California.

Meanwhile, two more wholesalers of note - LoanCity, San Jose, a mostly prime funder, and subprime lender Investaid Corp., Southfield, Mich. - also shut their doors last week.

Hedge fund Cerberus Capital and at least one Wall Street firm had been talking to the Irvine, Calif.-based NCFC about investing in the company or some of its assets through a "prepackaged" bankruptcy sale, according to industry sources.

NCFC is the subject of investigations by the Securities and Exchange Commission and Justice Department. It has retained Lazard Ltd. and the law firm of O'Melveny & Myers as bankruptcy advisors. New Century serviced $42.3 billion of subprime home loans in the third quarter of last year.

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