New Century Financial Corp. does not intend to issue a securitization from its REIT portfolio during the quarter, Brad Morrice, the company's president and chief operating officer said last week during the lender's third quarter earnings conference call. The Irvine, Calif.-based subprime lender will instead sell the majority of its loans to the secondary market, although it may utilize off-balance sheet securitizations through its taxable REIT subsidiary.
The lender is holding back on growth of its $15.7 billion portfolio as it focuses on a share buyback program of up to five million - about 9% of the total outstanding - shares. According to CFO Patti Dodge, the purchase of undervalued stock is a more efficient investment than loan origination at the current low margins. Fueled by speculation of a downturn in the subprime lending market, New Century's stock price has plummeted by more than 50% to $32.40 as of Thursday's market close, from a high of $66.95 earlier this year. Asked whether the lender would consider joining the ranks of AmeriQuest Mortgage as a privately held company, Morrice said the company, at present, remains committed to its public charter.
"To the extent some of our callers have suggested we should buy back all the stock - yeah...that would take external financing at some point or future profitability. We're not going that far down the road today, we're just saying we are starting a meaningful buyback," Morrice said.
New Century's loans have not been pricing well in the secondary market because of a high concentration of California originations and I/O loans, among other market factors. The lender was running at a high of about 40% I/O to total production in earlier months, before announcing a strategy to reduce I/O concentration to below 20%. In September the company began offering its first prime loans, as well as the 40-year mortgage, which according to company executives is about 10% of current pipeline volume. According to Morrice, I/O loans price at a 25% discount in the whole loan market.
The company has also initiated a campaign toward higher interest rates to boost profitability. Low interest rates throughout the subprime lending market have led some investors to question whether weighted average coupons are adequate to cover anticipated losses, while rating agencies have increased required subordination, further cutting into subprime lender profit margins.
"Hindsight tells us we should have begun raising rates earlier," Morrice said. New Century loan pool average coupons were roughly 6.60% at the end of October, and it is expecting rates to reach somewhere north of 8% by mid-December. New Century's net operating margin decreased to 0.61% in the third quarter, compared with 0.84% in the second quarter.
New Century denied rumors of an uptick in first-payment defaults, saying its loans did not exhibit any "meaningful" increase of non-payment, but said it has noticed and is looking into the heightened credit default swap buying on its most subordinated home-equity ABS tranches. Morrice said that, while fourth quarter results are not anticipated to end the year reflecting much fruit borne from recent pipeline alterations, conversations with secondary market participants have led him to the conclusion that attitudes toward the subprime mortgage market in 2006 are "positive and more optimistic."
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