DBRS Assigns BB Issuer Rating to New Century Financial Corp.

Dominion Bond Rating Service (“DBRS”) has today assigned an Issuer Rating of BB to New Century Financial Corporation (“New Century” or the “Company”) as listed above. The trend is Stable. The rating is based on New Century’s solid business franchise and market position, experienced management team, improving earnings quality, and ample liquidity. New Century’s significant growth has positioned the company as the second-largest non-prime mortgage banker, and the ninth-largest mortgage banker in the U.S. (for the year 2005). The growth has given New Century significant market presence and franchise strength, providing the size and scale necessary for success in the highly competitive mortgage industry. Rating offsets include the reliance on wholesale and other market funding, the company’s fast growth, the REIT structure, which retards capital retention, and New Century’s participation in the highly competitive and volatile non-prime residential mortgage business.

DBRS believes that New Century’s growing loan origination volume exemplifies the Company’s strong franchise strength and sizable market reach. Total mortgage originations in 2005 were an impressive $56.1 billion, increasing 33% from 2004. The strong originations volume has given the company a stable 8% market share of non-prime originations. First quarter 2006 mortgage originations remained strong at $13.4 billion. However, growth has been swift. Accordingly, DBRS believes that New Century’s rating will benefit from a more established track record of managing a large balance sheet. The company’s strategic acquisitions of the retail operations of RBC Mortgage in late 2005 and more recently, Access Lending, have bolstered the mostly organic growth. More importantly, these acquisitions further round out the company’s business profile, as they should foster growth in retail originations, Alt-A and Jumbo loans and, lastly, warehouse lending. A more diversified product mix will be viewed positively by DBRS.

Despite the cyclical mortgage environment, New Century continues to perform well. Earnings on an absolute basis continue to trend positively; however, profitability measures were reduced with return on average assets declining slightly to 1.63% in the first quarter of 2006. The company’s income before taxes and provisions to assets has also trended downward to 2.2% (annualized) at March 31, 2006. In addition to the cyclical challenges, the reduced profitability also reflects the Company’s shift to an originate and hold strategy. Nonetheless, profitability measures are still considered tolerable on a risk-adjusted basis. As with the company’s peers, maintaining satisfactory profitability measures in the current interest rate environment and highly competitive atmosphere will continue to be a challenge for New Century. DBRS believes that the company’s size and scale bode well for continued profitability in this highly competitive market.

New Century’s large owned loan portfolio allows for a level of earnings diversity as it adds significant interest income into the revenue stream; consequently, earnings are somewhat less volatile. Additionally, the mortgage portfolio allows the company a competitive advantage over many of its smaller REIT peers, owing to significant recurring income produced by the assets. However, as a mortgage originator, New Century’s earnings are likely to remain closely related to the level of interest rates and to origination volumes.

DBRS believes New Century appropriately manages the risk inherent in its balance sheet, which largely consists of residential mortgage loans to borrowers with a non-prime credit profile. Given the nature of the portfolio, DBRS expects a moderate level of credit-quality pressure, attributed to seasoning of the portfolio as well as to New Century’s typical borrowers, who are likely to be impacted by higher interest rates, the slowing housing market, and increased fuel costs. Accordingly, DBRS considers New Century to have an above-average risk profile.

New Century’s liquidity position is solid; however, the lack of funding diversification, as illustrated by the company’s large reliance on securitizations and other forms of market and secured funding, is significantly negative in the rating. Additionally, this puts New Century at a competitive disadvantage to its peers with deposit-gathering abilities. With an equity base of $2.1 billion or 8.6% of assets at March 31, 2006, capitalization is adequate. DBRS believes the REIT structure retards capital retention, as the company must distribute at least 90% of income generated at the REIT to shareholders. Although the existence of the taxable REIT subsidiary affords some flexibility for equity retention, the company’s ability to raise new equity to grow its balance sheet is largely dependent on the equity markets and their appetite for the company’s stock and other forms of capital.

The Stable rating trend is based on the DBRS view that the company will continue to maintain a strong market position through its wide-reaching origination platform, while being challenged with compressed margins caused by the highly competitive market, although DBRS expects that the industry fundamentals will improve throughout 2006. DBRS expects a certain level of earnings volatility, which, however, is expected to be somewhat muted by the company’s substantial on-balance-sheet portfolio. Lastly, the Stable trend incorporates DBRS’s belief that New Century will continue to navigate through the more difficult operating environment and use its scale to seek opportunities to further gain market share while protecting profitability and the quality of its balance sheet.

With nearly $25 billion in total assets, Irvine, California–based New Century Financial Corporation operates as a REIT in the United States. The company originates and purchases residential mortgage loans to homeowners with largely non-prime credit histories. New Century trades on the New York Stock Exchange under the ticker NEW.

Notes:
Issuer Ratings apply to all general senior unsecured obligations of the issuer in question.
All funds in U.S. dollars.