New Century Financial Corporation

Why did the New Century Financial Corporation Fail?
The following are some of the reasons of the failure of the New Century Financial Corporation:
  1. New Century Financial Corporation paid little attention to the loan quality. As a mortgage banking company they were concerned more in originating and selling loans than in monitoring and selecting the less risky ones. They careless about the loan quality as long as they sell these loans to other financial institutions.
  2. The accounting practices were not adequate and not in conformity with GAAP accounting rules, mainly in the following areas: miscalculation of allowance for repurchase reserve, valuation of loans held for sale and residual interest valuation for 2005 and first 3 quarters of 2006. Also the company didn’t have a formal policy spelling out exactly how to calculate reserves for the repurchase loans.   Thus as results the company with or without (?) awareness overstated the earnings by $263 million over a period that span from 2005 to the last quarter of 2006. Important is the fact that without a strong bottom line the life of the New Century Financial Corporation could have been shorter. When the company announced the restatement of its financials corrections, the stock price dropped rapidly and it faced liquidity issues, leading to bankruptcy in 2007.
  3. The failure to support the rapid growth. New Century Financial Corporation grew at fast pace but the company didn’t invest in necessary technology and personnel to meet its growing business. As the company grows they should expands their audit department with more personnel with an appropriate experience in the field of mortgage banking industry.
  4. The New Century Financial Corporation business model depends on real estate values that would continue to grow up and certainly not go down.
  5.   US Housing Bubble. New Century Financial Corporation is one the victims of the US Housing Bubble that the economy experienced during that time....