New Century's Fate May Depend on Wall Street Funding (Update3)

By Bradley Keoun and Christine Harper - March 5, 2007 18:45 EST

March 5 (Bloomberg) -- The fate of New Century Financial Corp. may rest with securities firms including
Morgan Stanley and UBS AG that once staked the U.S. mortgage company to more than $17 billion and
bought its loans by the thousands.

New Century, the Irvine, California-based home lender in default because of losses from bad loans, said
March 2 that U.S. prosecutors have begun a criminal probe of accounting errors and trading in its
securities. The company also said it may not survive unless lenders ease terms for providing new
financing.

``These credit lines are the lifeblood of subprime mortgage companies,'' said Vince Arscott, an analyst in
the structured- finance division of Fitch Ratings. ``It's really going to be up to the respective credit
committees of the banks, whether they want to be exposed to this risk. They may just slowly start to
turn off the nozzle.''

New Century, led by Chief Executive Officer Brad Morrice, owed $1.5 billion each to Morgan Stanley and
UBS at the end of September. With delinquent home loans rising nationwide, Wall Street firms may
scale back or cut off mortgage-company credit. The brokerages financed ``subprime'' lenders like New
Century to create a steady flow of mortgages that were packaged into AAA- rated bonds and then resold
to clients -- a business worth about $5.6 billion in fees last year.

Shares Plunge

Shares of the four biggest independent subprime lenders -- New Century, Fremont General Corp.,
Accredited Home Lenders Holding Co. and NovaStar Financial Inc. -- lost at least half their market value
in the year ending March 2. New Century shares, which traded at almost $52 last May, today fell $10.09,
or 69 percent, to $4.56 in New York Stock Exchange composite trading.

Fremont said March 2 that a regulatory order will require it to stop giving mortgages to people who
can't repay, and it plans to exit the subprime business. The Santa Monica, California-based company's
shares dropped 32 percent to $5.89.

Standard & Poor's downgraded New Century's credit rating to B from BB- and said it may reduce
Fremont's B+ rating.
About 10 percent of subprime loans were more than 60 days delinquent or in foreclosure as of Dec. 31,
up from almost 5.4 percent in May 2005, according to a March 2 report by Friedman Billings Ramsey
Group Inc. of Arlington, Virginia. The rate was the highest in seven years, the report showed.

Subprime mortgages are extended at rates at least 2 or 3 percentage points above the safest, so-called
prime loans, and they're given to people with poor or limited credit histories or high debt burdens
relative to their incomes. Such loans made up about a fifth of all new mortgages last year, the
Washington- based Mortgage Bankers Association reported.

Failing Lenders

More than 20 lenders have gone bankrupt, closed or sought buyers since the start of 2006. Because New
Century hasn't filed its annual report, and the March 2 statement didn't update the status of New
Century's lenders, it isn't clear who's still backing the company.

As of Sept. 30, New Century had a $3 billion credit line with Morgan Stanley, the second-largest
securities firm by market value, and an outstanding balance of $1.5 billion. That line was supposed to
expire last month, according to a regulatory filing in November. New Century didn't say in last week's
filing whether the credit line was renewed and Morgan Stanley spokesman Mark Lake didn't have an
immediate comment.

Past Credit Extensions

A credit line with Barclays Plc, Britain's third-biggest bank, was set to expire this month, according to the
November filing. Goldman Sachs Group Inc. extended through May a credit line scheduled to end in
February. Credit Suisse Group, whose credit line expired in December, gave New Century an extension
through next January.

There also was a $2 billion line with UBS, Europe's biggest bank, that's good until September 2008, with
$1.5 billion outstanding. Bank of America Corp. had two credit lines for a combined $3 billion, and $1.3
billion outstanding. Other backers included Bear Stearns Cos., Citigroup Inc. and Deutsche Bank AG.

Spokesmen for London-based Barclays, Zurich-based Credit Suisse and UBS, Frankfurt-based Deutsche
Bank, and New York-based Citigroup and Goldman declined to comment. Spokesmen for Bank of
America and Bear Stearns didn't return calls.

New Century said in last week's filing it had 16 credit lines and other financing agreements totaling
$17.4 billion. Terms of those accords called for timely and accurate financial results, a requirement New
Century failed to meet when it didn't produce an annual report by March 1.

`50-50'

Eleven of the credit lines also require New Century to be profitable over ``any rolling two-quarter
period,'' a test flunked in the second half of 2006, the company said. So far, six lenders waived the
requirement.
If the remaining lenders don't consent, New Century's auditor, KPMG LLP, will include a statement in its
annual report saying ``substantial doubt exists as to the company's ability to continue as a going
concern,'' according to the filing.

The lenders help subprime mortgage companies by providing ``warehouse'' lines of credit. They're called
warehouse financing because the banks and brokerages fund individual mortgage loans and then store
them until there's an inventory large enough to sell as a batch.

``Right now it's 50-50'' whether the investment banks pull financing for subprime lenders including New
Century, said Bose George, an analyst at Keefe Bruyette & Woods in New York. ``If things get better, it's
possible they survive. If things get worse, the possibility that warehouse lines get pulled is real.''

To contact the reporter on this story: Bradley Keoun in New York at bkeoun@bloomberg.net; Christine
Harper in New York at charper@bloomberg.net.

To contact the editor responsible for this story: Erik Schatzker at eschatzker@bloomberg.net.