New Century Financial Bankruptcy Signals Start of Subprime Mortgage Crisis

New Century Financial Corporation, the nation’s second-largest subprime mortgage lender, files for bankruptcy protection after its stock loses 90 percent of its value in weeks, marking the beginning of the subprime mortgage crisis. The company had originated $60 billion in subprime loans in 2006 alone, and its collapse reveals the fraudulent lending practices that permeated the industry.

The bankruptcy examiner’s report later details systematic fraud and accounting manipulation. New Century executives maintained an “originate and sell” business model that prioritized loan volume over quality, with sales staff compensated based on production regardless of loan performance. The company’s auditor KPMG failed to detect or report violations of accounting rules that concealed the true scope of loan losses. Executives sold millions in stock while the company was collapsing, with CEO Brad Morrice selling $8.8 million worth in the months before bankruptcy.

New Century’s failure triggers a cascade of subprime lender collapses. Within months, American Home Mortgage, Fremont Investment, and dozens of smaller lenders file for bankruptcy or cease operations. Investment banks that funded subprime lending suddenly refuse to purchase loans, freezing the origination pipeline. The crisis exposes that Wall Street’s demand for mortgage-backed securities had created a lending system where borrowers’ ability to repay was irrelevant; all that mattered was producing enough loans to feed securitization. As defaults mount through 2007 and 2008, the losses spread from subprime lenders to investment banks to the global financial system, ultimately requiring trillion-dollar taxpayer bailouts while no senior executives face criminal prosecution.