Only when the tide goes out do you discover who's been swimming naked. -- Warren Buffett
The Washington Post today has a fairly straightforward version of the New Century debacle today on page A01. It's a welcome relief to get this out in the open, but it's too late to warn those individuals who are going to suffer financially. Perhaps some cautionary words thrown to home buyers in 2005 would have been helpful? Instead, we got John McClain, senior fellow at the George Mason Center for Regional Analysis, predicting 15-20% gains (PDF file) in 2006 for Prince William County. (See the new Prince William County update below for how far that advice would have taken one. There's been an 11-month supply of properties for sale in PW County for several months).
From the article:
For years, the volume strategy worked.
Shares in the Irvine, Calif., company rose from $5 in early 2001 to $66 at the end of 2004, cementing its status as a Wall Street favorite. Last year it issued $51.6 billion in loans, more than any other specialized subprime mortgage lender.
When times were good, the company showered lavish gifts on its salespeople, treating them to vacations in Europe and Caribbean cruises hosted by sports celebrities. As recently as March, a few weeks before it filed for bankruptcy, the company had a trip to Ireland scheduled, employees said.
The boom continued for New Century until 2006, when mortgage payment default rates spiked. That happened because homeowners who bought houses last year generally saw their values drop. And, in a declining housing market, many homeowners, especially those who are poor, choose to let their mortgages fall into delinquency rather than try to keep up with the payments, analysts said.
At first, it appeared the cumulative effect of these defaults would have only a moderate effect on New Century's earnings. Then, in February, the company said it would need to revise its financial results for the first three quarters of 2006. A few weeks later, it acknowledged that federal investigators had launched probes into the timing of the stock sales of some of its executives. The company declined to comment on the investigations.
. . .
The appraiser in the Pearl River branch said he considered himself a loyal employee and planned to stick by the company through its struggles. But he was fired the day after the bankruptcy filing, along with 3,200 employees, or half the firm's workforce. Most of those interviewed said they were offered two weeks of pay at rates lower than their salary. A few said they did not receive any severance.
New Century announced Thursday that it is laying off 2,000 more associates. The firm is left with about 750 employees, a company spokeswoman said.