The Final Report in the federal bankruptcy proceedings involving subprime mortgage lender New Century Financial Corp. was made public today by the United States Bankruptcy Court for the District of Delaware.
You can read the Final Report here.
Following an investigation that began in June 2007, the 550-page report reviews the accounting and financial reporting practices, loan origination operations, audit committee and internal audit department, and system of internal controls of New Century, once the second-largest originator of subprime home loans in the U.S.
According to the report, the now bankrupt mortgage lender used improper accounting practices while making risky loans, creating “a ticking time bomb” that led to the company’s collapse.
The New York Times has called the report “the most comprehensive and damning document that has been released about the failings of a mortgage business.”
The report states:
“New Century had a brazen obsession with increasing loan originations, without due regard to the risks associated with that business strategy.”
“The increasingly risky nature of New Century’s loan originations created a ticking time bomb that detonated in 2007.”
“Senior management turned a blind eye to the increasing risks of New Century’s loan originations and did not take appropriate steps to manage those risks.”
In one example cited in the report, New Century understated by more than 1000 percent the amount of money it needed to have on reserve to buy back bad loans. As a result, it reported a profit of $63.5 million in the third quarter of 2006, when it should have reported a loss.
New Century also failed to include the interest that it was obligated to pay to investors whenever it was forced to buy back bad loans.
In addition, the report concluded that New Century’s accounting firm, KPMG LLC, one of the Big Four accounting firms, actively enabled New Century’s improper accounting practices.
Court-appointed examiner Michael J. Missal observed that “As an independent auditor [KPMG is] supposed to look very skeptically at any client, and here they became advocates for the client and in fact even suggested some improper accounting treatment that ultimately started New Century down the road it’s taken.”
The improper accounting also led to higher bonuses for New Century executives.
New Century once billed itself as “A New Shade of the Blue Chip.”
Creditors of New Century now say they are owed $35 billion.
The former subprime lending giant’s stock peaked at nearly $65.95 in late 2004 — on Wednesday it was trading at a penny.
You can read New Century’s Chapter 11 Bankruptcy filings here.
New Century is being sued by hundreds of investors and remains the target of a federal criminal investigation.