ABS investors can expect even more home-equity ABS supply from New Century Financial Corp. in the second half of this year. The Irvine, Calif.-based subprime lender announced last week during its second quarter earnings call that it may add as much as $6 billion to its REIT portfolio - a $4 billion increase over previous estimates - in order to meet its $7.33 dividend target next year. New Century added that it has enough cash to complete between $2 billion and $6 billion of securitizations.

The lender defended itself against analysts on the call over its declining net operating margin, which fell to 0.84% in the second quarter from 1.07% in the first quarter and 2.66% a year ago. New Century's Chief Financial Officer Patti Dodge said the declining margin was due in large part to rising Libor rates. The lender has also experienced lower gain-on-sale premiums from whole loan sales. New Century's gain on the sale of mortgage loans fell 36% in 2Q05 to $138.7 million.

"Net gain on sale fell 70 basis points quarter-over-quarter," said Bob Napoli, a managing director and senior research analyst at Piper Jaffray during the call. "It seems that they are originating more and making less. That doesn't seem to me to be a great long-term strategy. If you take another jump on margin compression this quarter, it's not going to be pretty for anyone."

Dodge said competitive pressures have forced New Century to keep mortgage rates low, but that they have raised rates twice in the last two weeks. Dodge added that gain-on-sale pricing has decreased because of the lender's product mix, which includes 38% IO loans and 6% second liens.

The lender is anticipating more defaults as its two-year-old REIT portfolio ages, but said it was confident in its loan performance and underwriting standards. New Century doubled its allowance for losses on mortgage loans held for investment, allocating $36.9 million from $17.1 million one year ago.

(c) 2005 Asset Securitization Report and SourceMedia, Inc. All Rights Reserved.

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