It's better to be a subprime lender than a prime one these days, according to the chairman and chief executive of New Century Financial Corp.
"In the conforming world, most people have refinanced multiple times over the last few years, and we have either seen or are near the low point of the conforming interest-rate environment," Robert Cole said in an interview with ASR sister publication American Banker.
But subprime borrowers, who are usually less sensitive to movements in interest rates but are showing a tremendous appetite for leverage, will keep getting mortgages, even if rates rise, Cole said.
"People are paying off record amounts of consumer debt at high interest rates," and it is convenient for them to get a debt consolidation refinancing loan - the Irvine, Calif., lender's specialty - to combine their credit card, home equity and other debts into a lower-rate mortgage, he said.
"Our expectation is that we'll have refi volume at robust levels" for the next several quarters, Cole said.
During the strong refi market, New Century has moved up the subprime origination ranks. So far this year its share of the subprime market has risen a percentage point, to 8%; its goal is to increase that share to 10%. It has boosted its share by targeting expansion in the East Coast last year and in the Midwest this year, he said.
"We are aggressively hiring more sales staff for both the retail and wholesale channels," he added.
New Century's regional operating centers enable employees to make "more localized" decisions and to work more closely with brokers than a more centralized structure would offer, according to Cole. "We are expecting to originate $22 billion in production this year," he noted.
One of its profitability drivers is the fact that it sells 85% of its loans on the secondary whole loan markets for cash. It securitizes the other 15% on its own balance sheet.
This not only allows it to avoid the pitfalls of gain-on-sale accounting, but also brings New Century regular spread income.
Last week, New Century reported that its second-quarter earnings increased 41.7% from a year earlier, to $60.8 million, or $1.61 per share. That was 6 cents higher than the Wall Street consensus estimate. It is expected to earn between $5.83 and $6.17 per share this year after a three-for-two stock split.
Despite the strong showing, New Century's share price has dropped 18% since July 14. A New Century spokeswoman, however, attributed the drop to investor jitters over the recent Freddie Mac accounting scandal.
But Eric Fitzwater, a senior research analyst with SNL Financial in Charlottesville, Va., said investors might be pricing the potential for dilution into the stock.
New Century has $210 million of debt that can be converted to common stock if its share price reaches $34.80. If that were to happen, 6 million common shares would be created, and the number outstanding would rise 16.8%, Fitzwater said.