New Century Case Analysis
1. What appeared to be New Century’s strategic objectives? Describe and evaluate the business model the company had adopted to achieve these objectives.
New Century Financial Corporation was founded in 1995 went public in 1996 and was also listed on NASDAQ. New Century’s primary goal was to originate and sell subprime mortgages. The main activities of the company included generating, retaining, selling, and servicing home mortgage loans for subprime borrowers who couldn’t get finance from other sources. By 2006 New Century expanded its product range to include fixed-rate mortgages, adjustable rate mortgages (ARMs), hybrid mortgages, and interest-only (IO) mortgages. The products were from the two Company’s
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The rough explanation of the effect is the current free rate for New Century’s assets increased sharply from 1.5 % to 5.5 %. There was an estimate that due to the hike in interest rate and, thus, in current risk-free rate, the value of the NCF’s assets dropped by approximately 11.3 %.Since short-term debt was little affected, the direct effect of monetary policy was reduced equity and increased debt-to-equity ratio of New Century Financial by roughly 30 percent from 6.5 to 8.5.The hikes in the interest rate and negative sensitivity of income to them were explicitly acknowledged by New Century Financial Corporation in their 10K-Form filing in2004. The company acknowledged that interest income to interest expense ration had dropped dramatically from 3.02 in 2003 to 2.45 in 2004, and 1.78 in 2005. Despite that New Century Financial attempted to hedge some of its interest rate exposure by the use of derivative contracts like interest rate caps contracts and Euro-Dollar futures, theses were very limited in size to respond to the hike of interest rate. Although New Century Financial Corporation’s adjustable rate mortgages were somewhat immune to the threats imposed by interest rate risk, these mortgages became more exposed to the risk of borrower default on mortgage. It