New Century Shuts Lending Unit as No Buyers Emerge (Update2)

New Century Financial Corp., the
biggest subprime mortgage company to declare bankruptcy, will
close its home-lending unit and fire about 2,000 people after
failing to find a buyer.

Chief Executive Officer Brad Morrice informed employees in a
conference call today, said Dan Gagnier, a spokesman for the
Irvine, California-based company. A court-administered auction
continues for the servicing business, which mails out monthly
statements and handles collections, Gagnier said. Separately, New
Century said KPMG LLP quit as the company's auditor.

New Century stopped taking applications in early March as
defaults by borrowers surged and bankers cut off its credit. The
company also faced state and federal probes of its lending
practices. It filed for bankruptcy April 2 and started trying to
sell the origination unit even as rival subprime lenders were
already seeking buyers.

``There's a lot of platforms available, and the New Century
platform hadn't originated any loans in 60 days,'' said Ron
Greenspan, a senior managing director at FTI Consulting Inc. who
is acting as financial adviser to New Century's unsecured
creditors. ``They were at a competitive disadvantage.''

New Century made about $60 billion in loans last year, and
employed 7,200 people at the end of 2005. It announced 3,200
dismissals when it filed for bankruptcy.

Housing Boom

The company rode the U.S. housing boom to become the largest
independent mortgage lender to subprime borrowers, only to
collapse as interest rates rose and home prices fell. Like rival
firms, the company lowered its lending standards to keep business
flowing after demand slumped.

The lending business consisted of a network of 57,000
independent mortgage brokers who locate borrowers and the
employee loan officers who handle applications and approvals.

The platform also included computer software and equipment
used to analyze applications, as well as 262 retail branches and
34 regional operations centers in 20 states.

``It is very expensive maintaining that platform,'' FTI's
Greenspan said. ``All the employees were still being paid and you
have rents, and if there was not a forthcoming bidder, the
committee did not feel it was a worthwhile expenditure to
continue to support it.''

The deadline to submit bids for the lending unit was
yesterday, and the job cuts take effect tomorrow, Gagnier said.

Carrington Capital Management LLC has agreed to bid at least
$139 million for the mortgage-servicing business.

Auditor Resigns

U.S. prosecutors opened a criminal probe of accounting
errors and trading in securities at New Century, the company said
March 2 in a filing with the U.S. Securities and Exchange
Commission. Since then, more than a dozen states have told the
company to halt operations, citing complaints from borrowers that
their loans weren't being funded.

New Century said in a regulatory filing today that KPMG had
resigned as the independent auditor on April 27, citing an
internal investigation of the company's accounting. New Century
said that since it's in liquidation, it doesn't expect to name a
replacement.

The company's shares fell 2.5 cents to 80.5 cents in over-
the-counter trading today. In May, 2006, they sold for as much as
$51.45.

Subprime Loans

Subprime mortgages are made to people with blemished credit
records or heavy debts, which make them among the riskiest for
lenders. The loans typically charge 2 to 3 percentage points more
than those to people with stronger credit profiles, and often
carry adjustable interest rates that can cause payments to jump
in later years, making defaults even more likely.

Subprime loans accounted for 86 percent of all New Century
loans last year, the company said in court filings.

New Century was founded in 1995 by a trio of former managers
at Option One Mortgage -- now a unit of H&R Block Inc. --
including current Chief Executive Officer Brad Morrice. In the
late 1990s the company survived an industry shakeout that led to
the bankruptcies of bigger rivals including United Cos.

Late payments on U.S. subprime mortgages reached a four-year
high in last year's final quarter, the Mortgage Bankers
Association reported. At least 50 mortgage companies have halted
operations or sought buyers since the start of 2006, according to
Bloomberg data.

Seeking Buyers

The surge in defaults forced Kansas City, Missouri-based
NovaStar Financial Inc. to hire Deutsche Bank AG last month to
advise on ``a range of strategic alternatives,'' including a
sale. H&R Block Inc. last month agreed to sell its subprime
mortgage unit, Option One, for 40 percent less than originally
sought. Fremont General Corp. said April 16 that it had agreed to
sell its mortgage business to an unidentified buyer.

Bose George, an analyst at Keefe Bruyette & Woods in New
York, said it's ``not all that surprising that capacity has to
get pulled out of the industry.'' He's forecasting that new
subprime mortgages will decline by 30 percent to 50 percent over
the next 12 to 18 months.

``Given the amount of excess capacity, you're going to have
to shut a lot of these platforms or pare a lot of them down
significantly,'' George said.

To contact the reporter on this story:
Bradley Keoun in New York at
.