New Century Financial Files Bankruptcy
On Monday, New Century Financial filed for Chapter 11 bankruptcy protection in Delaware. New Century, once the nation’s second largest subprime mortgage lender, also announced plans to fire 3,200 employees, about 54 percent of its work force. As part of the restructuring plan, New Century will sell its loan servicing business to Carrington Capital Management for $139 million.
New Century is the latest subprime lender to fall casualty to the dramatic increase in defaults and foreclosures nationwide. Many homeowners have seen their monthly mortgage payments increase as interest rates have risen. Due to the recent popularity of Adjustable Rate Mortgages and interest only loans, many homeowners are facing steep increases in mortgage payments as interest rates rise and fixed introductory payment periods end. Chapter 13 bankruptcy can stop a foreclosure, but you must have sufficient income to continue with the regular mortgage payments in addition to a court ordered payment to catch up on the mortgage arrears and pay off a percentage of any other debts.
The credit industry is responding to the recent collapse of the subprime market with a tightening of qualifications and some have stopped subprime loans altogether. Although it is still relatively easy to obtain a mortgage after a bankruptcy, consumers should expect to find fewer loans available immediately following a bankruptcy discharge.
Risky, or irresponsible, lending extends too many other areas of the credit industry, including pay-day loans, financing offers, credit cards, and auto loans. These industries have not received as much attention as the subprime mortgage industry, but there is clearly an over-extension of credit to consumers that simply cannot afford to carry the amount of credit given to them. These debts typically have high interest rates and unreasonable payment terms that often lead to default. The lender is harmed by the high amount of defaults, and the consumer is often forced to consider bankruptcy or other debt relief options.