Following the sale of its servicing rights and portfolio to Ocwen Financial, New Century Financial Corp. will consider a second quarter term deal featuring a concurrent net interest margin (NIMs) securitization.

The company feels that with Ocwen's stronger servicing platform, New Century's residuals will be of greater value, which could help the company to repackage them more efficiently.

New Century describes the use of NIMlets as "cash positive" securitization, whereby all-in execution equals or exceeds the current whole loan bid, and also removes the residual asset which requires financing, said Robert Cole, chairman and chief executive officer at New Century.

"We informed the investment community that if the cash execution on that structure is pretty close to the whole loan cash price, we'd very well consider it," he added.

New Century sold the servicing rights associated with approximately $4.8 billion in loans to Ocwen, for roughly $20 million. The sale also alleviated a servicing advance burden of as much as $35 million per month from New Century.

With the freed-up capital, New Century was able to negotiate better terms with its creditors, including a 19-month extension on $40 million of subordinated debt with U.S. Bancorp. New Century also negotiated a $125 million term residual financing agreement with Salomon Smith Barney, an improvement over the previous month-to-month financing.

The company was also able to swap into an interest rate hedge on its residuals, effectively securing the cashflows.

Although New Century's collateral has been a part of several recent bank shelf deals, the company has not done its own securitization this year, opting to sell originations on a whole-loan basis.

According to the company, New Century has originated approximately $14 billion in loans since 1995, and has securitized $8 billion, selling $6 billion on a whole loan basis.

Ocwen/Fairbanks

As was circling in the press in early March, Ocwen managed to swipe the New Century deal from Fairbanks Capital, which had already performed much of its due diligence on the portfolio.

However, contrary to several reports, Ocwen's deal was not merely sweeter but altogether a different transaction than what Fairbanks had intended, in that Ocwen purchased the servicing rights, and is currently importing the loans into its own systems.

Fairbanks, on the other hand, was set to purchase New Century's platform, and serviced the loans for New Century on an outsourcing arrangement, according to sources familiar with the situation.

New Century felt that Ocwen's deal, in which the freed-up capital allowed for the debt restructuring, was a better match for the company. Contacts at Fairbanks did not return calls as of press time.

Ocwen's residential loan servicing platform will grow 33% to $20 billion following the transfer. According to the company, it has made significant investments in the technology and infrastructure to effectively expand its portfolio.

Special Servicers, Put to the Test

In the midst of a refi wave, a slowing economy and deteriorating consumer credit, subprime special servicers are scrambling for collateral while potentially facing their first true stress tests since becoming a substantial component of the subprime industry.

Moreover, as the industry tightens, the special servicing business is becoming more reliant on economies of scale, analysts said.

While capacity could become an issue for any operation expanding beyond its means, or too rapidly, in order to maintain profitability, the servicers need to continually add new loans to their portfolios.

"With the recent refis causing their portfolios to run off as fast as they are, all of these third party servicers have to be very active in finding loans," said Diane Pendley, managing director at Fitch. "They have to build back up either by acquiring whole portfolios or by taking on new contracts. The only way the can maintain their staff levels is to keep their loan levels at the right percentage."

The other view is that a slowing economy might benefit the special servicers, in terms of volume, as more originators look to refocus on core competencies.

"Some, both operators and investors, might be looking a little bit more carefully at the servicing operations, and if it doesn't look like it's really going to be worthwhile, more transfers and acquisitions could happen," said Diane Westerback, who heads the servicer ratings group at Moody's Investors Service.

Beyond Fairbanks and Ocwen, shops that could potentially be on the buyside of this trend include Option One, Countrywide Credit Industries, Litton Loan Servicing (C-Bass) and others. The sellside is any subprime loan originator with a portfolio in the under-$3 billion range.

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