Reasons for New Century's Decrease in Capitaliztion

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To start with, in early this year, New Century was once the second largest subprime mortgage originator in the United States. However, once New York Stock Exchange delisted NCF in March this year, its market capitalization sharply decreased. I noticed NCF had flawed business model and strategies serving its business objectives. Supposedly, the business model of NCF is primary originating; bundling; servicing, and securitizing subprime mortgage loans and sells them to investors. In 2006, NCF claimed to its shareholders and public that the company’s strategic objectives include delivering strong operating performance, expanding more mortgage products and services, increasing market shares by lowering costs and improving productivity. Sadly, NCF did not keep its promises and applied wrong strategies to achieve its goals. In fact, in order to achieve its strategic objectives and improve sales, NCF ignored all the high level of risks involved in subprime loans, and ended up making as much as subprime loans to less responsible subprime borrowers, without valuating the loan quality. For example, in 2006, the loan originations were up to $60 billion without adequate consideration of related risks. Meanwhile, in order to attract more subprime borrowers, the company initiated risky mortgage products, such as interest only payments, deferred interest mortgages, etc. In short, NCF ignored the risks involved in its twisted business objectives, ignored the loan quality and it solely focused on achieving aggressive sales goals, and improving the volume of mortgage loan securitization as its primary business goals.

In NCF, the performance-based bonuses and benefits that management teams received were directly tied to the volume of the sales of ...

... middle of paper ... in 2006 was ridiculously high at 1,214%, with $25.06 billion total assets and $2.06 billion equity. Clearly, NCF was operating under an extremely high leverage. Eventually, the shareholders got nothing with the decreasing value of the company’s assets and innumerable debts.

Meaningless expenditures sped up the exhaustion of cash. About $800 million in losses were simply resulted from missing documents of the loans that were rejected by its investors.

The company’s Audit Committee is also responsible for the failure of the NCF, because Audit Committee did not focus on the key issues, such as the loans quality; as well as did not closely supervise and promote accounting and financial reports’ accuracy. Unsuccessful enterprise risk management process further exposes the company to various risks. All these factors above contribute to the demise of the company.
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