NEW CENTURY FINANCIAL CORP - 10-K Annual Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K

(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999

OR

/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM_____________ TO____________

COMMISSION FILE NUMBER 000-22633

NEW CENTURY FINANCIAL CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

DELAWARE 33-0683629
(STATE OR OTHER JURISDICTION (I. R. S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)

18400 VON KARMAN, SUITE 1000, IRVINE, CALIFORNIA 92612
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (949) 440-7030

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $0.01 PAR VALUE

Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the Registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes /X/ No / /

Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K.

The aggregate market value of Common Stock held by non-affiliates of
the Registrant on March 24, 2000 was approximately $36.8 million based on the
closing sales price for the Common Stock on such date of $9.25 as reported on
the Nasdaq National Market.

As of March 24, 2000, the Registrant had 14,737,894 shares of Common
Stock outstanding.

PART III INCORPORATES INFORMATION BY REFERENCE FROM THE REGISTRANT'S
DEFINITIVE PROXY STATEMENT FOR ITS 2000 ANNUAL MEETING OF STOCKHOLDERS TO BE
FILED WITH THE COMMISSION WITHIN 120 DAYS OF DECEMBER 31, 1999.

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PART I

ITEM 1. BUSINESS

GENERAL

New Century Financial Corporation ("New Century" or the "Company")
is a specialty finance company that originates, purchases, sells and services
sub-prime mortgage loans secured primarily by first mortgages on single
family residences. The Company was incorporated in Delaware in November 1995
and commenced lending operations in February 1996.

ORIGINATIONS AND PURCHASES. The Company originates and purchases
loans through both wholesale and retail channels. Wholesale originations and
purchases are through independent mortgage brokers, and represented 70.9% of
the Company's total originations and purchases in 1999. Retail originations
are made through the Company's network of retail offices, through its
Primewest subsidiary and through the Internet, and represented 29.1% of the
Company's total originations and purchases in 1999.

THE TYPICAL BORROWER. The Company's borrowers generally have
substantial equity in the property securing their loan, but have impaired or
limited credit profiles or higher debt-to-income ratios than traditional
mortgage lenders allow. The Company's borrowers also include individuals who,
due to self-employment or other circumstances, have difficulty verifying
their income through conventional methods, and who prefer the prompt and
personalized service provided by the Company. These types of borrowers are
generally willing to pay higher loan origination fees and interest rates than
those charged by conventional lending sources.

UNDERWRITING. Although the Company's underwriting guidelines include
five levels of credit risk classification, approximately 68.5% of the
principal balance of the loans originated and purchased by the Company in
1999 were to borrowers within the Company's two highest credit grades.
Approximately, 93.6% of its loans originated or purchased during 1999 were
secured by borrowers' primary residences. The average loan-to-value ratio on
loans originated and purchased by the Company in 1999 was approximately
78.8%. Approximately 96.7% of the loans originated and purchased by the
Company during 1999 were secured by first mortgages, and the remainder of the
loans the Company originated and purchased for such period was secured by
second mortgages. Approximately 81.4% of the loans originated and purchased
by the Company in 1999 were refinances of existing loans, while the remaining
18.6% represented loans for a borrower's purchase of a residential property.

LOAN SALES AND SECURITIZATIONS. The Company sells virtually all of
its loan production through a combination of securitizations and bulk sales
of whole loans to institutional purchasers. In 1999, whole loan sales
accounted for 25.5% of total loan sales, and securitizations accounted for
the balance.

SERVICING. The Company also receives revenue from servicing its
loans on behalf of the loan purchasers. At the end of 1999, the Company's
servicing portfolio, including loans held for sale, totaled $5.9 billion.
Servicing income also includes interest earned on the Company's residual
interests in securitizations, which grew to $364.7 million as of December 31,
1999. In 1999, servicing revenues totaled $50.8 million, and accounted for
21.7% of the Company's total revenues.

NET INTEREST INCOME. In 1999 the Company earned $8.3 million in net
interest income, which represented approximately 12.4% of the Company's
pre-tax earnings. Net interest income is earned on loans held in inventory
for sale.

2

GROWTH AND OPERATING STRATEGIES

"FOCUS 2000" BUSINESS PLAN. In February 2000, the Company announced
its "Focus 2000" initiative that articulated the Company's principal
operating strategies for the coming year. The "Focus 2000" Plan emphasizes
greater efficiencies and improved operating disciplines. Among the most
significant goals are the following:

- - Decreasing all-in acquisition costs to 2.50% by year-end

- - Improving cash flow by selling a greater percentage of whole loans and
securitizing a smaller percentage of total originations

- - Concentrating on originating loans with characteristics for which whole
loan buyers will pay a higher premium

- - Transitioning from a monoline, sub-prime mortgage company to a company
which can offer customers a broader menu of financing products and
services

- - Transitioning from utilizing solely "traditional" delivery channels to
a company that is a leading provider of financial products and services
over the Internet

REDUCING ALL-IN ACQUISITION COSTS PER LOAN. The Company defines the
"all-in acquisition cost" per loan as the fees paid to wholesale brokers and
correspondents, direct loan origination costs (including commissions and
corporate overhead costs), less the sum of points and fees received from
retail borrowers, divided by total production volume. Comparing 1998 to 1999,
the Company's all-in acquisition costs decreased from 3.62% to 2.99% of the
average original principal balance of the Company's loans. During 2000, the
Company intends to emphasize reducing all-in acquisition costs to 2.50% by
year-end and to 2.25% in 2001. The principal strategies to achieve this goal
are (i) improving the fee structure (ii) decreasing corporate overhead and
commission expenses (iii) increasing staff efficiency, and (iv) reducing
marketing costs--all while preserving loan production volume. This strategy
will require the implementation of both improved processes and enhanced
technology, including the Company's automated underwriting system which is in
the final testing stage. During the first quarter of 2000, the Company has
restructured its wholesale and retail commission programs, and has reduced
the total number of employees by approximately 12% from its fourth quarter
1999 high of 1,770 employees. The staff reductions have to date been
accomplished by closing unprofitable branches and by streamlining corporate
operations.

IMPROVING CASH FLOW. During 2000, the Company intends to improve its
cash flow, so as to achieve and then maintain cash neutral operations. The
principal strategy for improving cash flow will be to sell a higher
percentage of loans in whole loan sales, and to securitize a smaller portion
of loan production. In addition, the Company will focus on further improving
cash flow by (i) reducing the all-in-acquisition cost of the Company's loans,
(ii) increasing the cash generated by the Company's servicing operations, and
(iii) improving the ratio of loans funded over total loans submitted.

INCREASE VALUE OF LOAN PRODUCTION. The Company has strengthened its
efforts to develop a system of communicating secondary market conditions to
its retail and wholesale production units so that loan officers and account
executives will have the incentive to produce loans with a strong secondary
market value and a disincentive to produce loans that are less profitable.
Because the demands in the secondary market evolve continually, New Century
believes it will have a competitive advantage if it can effectively
communicate the changing secondary market conditions to its production units.
The Company also continues to focus on ways to reduce the number of loans
that must be sold at a loss because of documentation errors, borrower fraud
and other reasons.

PRODUCT DIVERSIFICATION. During 2000, the Company intends to
continue the process of developing a broader range of loan and other
financial product offerings. The Company has been approved as a
seller/servicer by Freddie Mac, and intends to begin offering conforming loan
products by the end of the second quarter of 2000. Likewise, the Company's
anyloan.com web-site currently offers customers links through which they can
apply for auto loans, credit cards, student loans and other non-mortgage
financial products. The licensing effort is currently in process to allow the
Company to offer more of those products directly. Finally, the Company is
establishing an insurance agency through which it will be able to offer
customers various insurance products tailored to their needs.

3

INTERNET INITIATIVES. Another key element of the Focus 2000 Plan is
continued expansion of the Company's Internet operations. Development of a
revamped wholesale web-site, which the Company believes is one of the most
advanced business-to-business mortgage web-sites in the industry, was
completed during the fourth quarter and is currently in pilot testing with a
limited number of brokers. The Company's anyloan.com division also unveiled
its second generation web-site which offers consumers a wide variety of loan
products including auto financing and credit cards with on-line applications
and response capabilities. The Company's focus for 2000 is to attract
business through various marketing efforts together with providing the best
financial services to its customers.

IMPROVING PROFITABILITY OF LOAN PRODUCTION WHILE PRESERVING VOLUME.
In 2000, the Company's production units will focus on improving the overall
profitability of loan production by concentrating on originating higher-value
loans and reducing low-margin production. The Retail and Wholesale Divisions
intend to close unprofitable branches and be increasingly selective about new
branch openings. The Company will also evaluate adding profitable loan
production through targeted acquisitions of smaller originators.

MAINTAINING MULTIPLE FINANCING SOURCES AND SECURITIZATION CHANNELS.
During 1999, the Company established aggregation and residual financing
facilities totaling over $600 million with Greenwich Capital and PaineWebber.
In addition, the Company renewed its financing arrangements with Salomon
Smith Barney, Inc. As a result, the Company effected five of its eight
securitizations through Salomon Smith Barney, Inc., with the remaining three
being underwritten by Greenwich and PaineWebber. The Company also established
its own $2 billion shelf registration statement with the Securities and
Exchange Commission to allow it greater flexibility in selecting the
underwriter for future securitizations. During 2000, the Company intends to
continue to maintain at least two active investment-banking relationships for
securitizations and residual financing.

U.S. BANCORP STRATEGIC ALLIANCE. A key element of the Company's
strategy for the Year 2000 is to expand its strategic alliance with U.S. Bank.
To this end, in February 2000 the Company received an additional $10 million
in subordinated debt financing from U.S. Bank. In March 2000, the Company also
received a commitment from U.S. Bank to (i) provide an additional $10 million
in financing to help fund the Company's Year 2000 capital plan, and (ii)
extend the maturity of the subordinated debt to June 2002.

ACQUISITIONS AND STRATEGIC ALLIANCES. In 2000, the Company will
continue to evaluate potential acquisitions and strategic alliances with
mortgage originators. In March 2000, the Company acquired a small Southern
California-based wholesale loan originator called Worth Funding Incorporated.

MARKETING

RETAIL MARKETING. The Company's Retail Division relies primarily on
targeted direct mail and outbound telemarketing to attract borrowers. The
Company's direct mail programs are managed by a centralized staff who create
a targeted mailing list for each branch market and oversee the completion of
mailings by a third party mailing vendor. All calls or written inquiries from
potential borrowers which result from the mailings are tracked centrally and
then forwarded to each branch location and handled by branch loan officers.
Under the Central Telemarketing Program, the telemarketing staff solicits
prospective borrowers, makes a preliminary evaluation of the borrower's
credit and the value of the collateral property and refers qualified leads to
loan officers in the retail branch closest to the customer. The Direct
Origination Center sends direct mail to areas not serviced by retail
branches, which generates calls and inquiries to a centralized staff of loan
officers. In addition, the telemarketing staff refers qualified leads to
those central loan officers who work with the borrower using telephone, fax
and mail and who utilize document and signing services to close the loan.

The Company's Primewest and anyloan.com operations also rely on
internet-based advertising such as banner ads, search engines and links to
related web-sites in order to direct potential borrowers to the Company's
web-sites.

In 1999 the Company also completed initial testing of broader
marketing efforts designed to build recognition of the New Century brand. The
Company tested radio and television advertisements in selected markets in the
third and fourth quarters of 1999. In 2000, the Company does not intend to
continue to pursue the television channel for the "New Century" brand.
However, the Company is considering a variety of strategies, including
television and radio, to improve familiarity with its "anyloan.com" brand.

4

WHOLESALE MARKETING. The Company's wholesale marketing strategy is
focused on the sales efforts of its account executives, supported by the
Company's commitment to providing prompt, consistent service to brokers and
their customers. These efforts are supplemented with direct mail to brokers,
advertisements in trade publications and periodic sales contests.

LOAN ORIGINATIONS AND PURCHASES

The Company originates and purchases loans through its Wholesale and
Retail Divisions, through its Primewest subsidiary and through its
anyloan.com division. The Wholesale Division originates and purchases loans
through a network of independent mortgage brokers and correspondents. The
Retail Division, Primewest and anyloan.com solicit loans directly from
prospective borrowers. All of the Company's loans are secured by first or
second mortgages on one-to-four family residences.

WHOLESALE DIVISION. The Wholesale Division funded $2.9 billion in
loans, or 70.9% of the Company's total loan production, during 1999. As of
December 31, 1999, the Wholesale Division was operating through five regional
operating centers located in Southern California, Northern California,
Chicago, Atlanta, and Tampa and through 41 additional sales offices located
in Arizona, Arkansas, California (2), Colorado, Florida (3), Idaho, Indiana,
Louisiana, Massachusetts, Michigan, Minnesota, Missouri (2), Nevada, New
Mexico, North Carolina (3), Ohio (2), Oregon (3), Pennsylvania, South
Carolina (3), Tennessee, Texas (4), Utah, Virginia, Washington (2), and
Wisconsin (2), employing a total of 176 account executives. As of December
31, 1999, the Company had relationships with approximately 9,000 approved
mortgage brokers and during 1999 originated loans through approximately 4,580
brokers. During 1999, New Century's ten largest producing brokers originated
approximately 6.3% of the Company's loans, with the largest broker, Qualified
Financial Services, accounting for approximately 1.6% of the Division's
production.

In wholesale originations, the broker's role is to identify the
applicant, assist in completing the loan application form, gather necessary
information and documents and serve as the Company's liaison with the
borrower through the lending process. The Company reviews and underwrites the
application submitted by the broker, approves or denies the application, sets
the interest rate and other terms of the loan and, upon acceptance by the
borrower and satisfaction of all conditions imposed by the Company, funds the
loan. Because brokers conduct their own marketing and employ their own
personnel to complete loan applications and maintain contact with borrowers,
originating loans through the Wholesale Division allows the Company to
increase its loan volume without incurring the higher marketing, labor and
other overhead costs associated with increased retail originations.

Loan applications generally are submitted by mortgage brokers to an
account executive in one of the Company's sales offices. The application is
then forwarded to the closest regional operating center where the loan is
logged-in for RESPA and other regulatory compliance purposes, underwritten
and, in most cases, conditionally approved or denied within 24 hours of
receipt. Because mortgage brokers generally submit individual loan files to
several prospective lenders simultaneously, the Company attempts to respond
to each application as quickly as possible. If approved, the Company issues a
"conditional approval" to the broker with a list of specific conditions to be
met (for example, credit verifications and independent third-party
appraisals) and additional documents to be supplied prior to the funding of
the loan. An account manager and the originating New Century account
executive will work directly with the submitting mortgage broker to collect
the requested information and to meet the underwriting conditions and other
requirements. In most cases, the Company funds loans within 30 days after
approval of the loan application.

The Wholesale Division also purchases closed loans on an individual
or "flow" basis from independent mortgage brokers and financial institutions.
The Company reviews an application for approval from each lender seeking to
sell the Company a closed loan. The Company analyzes the mortgage broker's
underwriting guidelines and financial condition, including its licenses and
financial statements. The Company requires each mortgage broker to enter into
a purchase and sale agreement with customary representations and warranties
regarding the loans such mortgage broker will sell to the Company, thereby
providing the Company with representations and warranties that are comparable
to those given by the Company to its loan purchasers.

5

The following table sets forth selected information relating to
wholesale loan originations during the periods shown:

For the Quarters Ended
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March 31, June 30, September 30, December 31,
1999 1999 1999 1999
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Principal balance (in
thousands)..................... $ 646,137 $ 668,560 $ 823,551 $ 756,269
Average principal balance per
loan (in thousands)............ $ 103 $ 111 $ 109 $ 109
Combined weighted average
initial loan-to-value ratio.... 79.2% 79.1% 78.8% 78.3%
Percent of first mortgage loans 96.4 95.8 95.1 93.8
Property securing loans:
Owner occupied............... 86.4 87.5 88.7 90.0
Non-owner occupied........... 13.6 12.5 11.3 10.0
Weighted average interest rate:
Fixed-rate................... 10.4 10.2 10.0 10.5
ARMs......................... 9.8 9.8 9.8 10.1
Margin--ARMs................. 6.1 6.1 6.1 6.1

RETAIL DIVISION, PRIMEWEST AND ANYLOAN.COM. During 1999, the Company
originated $1.2 billion in loans, or 29.1% of the Company's total loan
production through its Retail Operations, including $163.1 million, or 4.0%,
originated through its Primewest subsidiary and $21.7 million, or .05%,
originated through anyloan.com, which commenced operations in August, 1999.
As of December 31, 1999, the Retail Division employed 298 retail loan
officers, located in 83 sales offices in Arizona (4), California (21),
Colorado (2), Delaware, Florida (6), Georgia, Hawaii (2), Illinois (3),
Indiana, Kentucky, Louisiana, Maryland, Massachusetts, Michigan, Minnesota
(3), Missouri (2), Montana, Nevada (2), New Jersey, New Mexico, North
Carolina (2), Ohio (4), Oklahoma, Oregon, Pennsylvania (2), Tennessee (2),
Texas (8), Utah, Virginia (2), and Washington (4). As of December 31, 1999,
Primewest employed 44 loan officers and anyloan.com employed 10 loan officers
at their headquarters in Irvine, California.

By creating a direct relationship with the borrower, retail lending
provides a more sustainable loan origination franchise and greater control
over the lending process while generating loan origination fees to offset the
higher costs of retail lending, which may contribute to profitability and
cash flow.

For the year ended December 31, 1999, the retail loan originations
and purchases included $39 million in loans funded through the Company's
Service Provider Program. Under that program, the Company establishes
relationships with banks and other financial institutions across the country.
The goal is to encourage participating financial institutions to identify
potential borrowers who do not qualify for a loan from the respective
financial institution but do meet the Company's target borrower profile.
Participating financial institutions are compensated by the Company based on
the level of services performed by the institution. As of December 31, 1999,
the Company had service provider relationships with 172 banks and other
financial institutions, 98 of which were producing loan volume for the
Company.

6

The following table sets forth selected information relating to
retail loan originations, including Primewest and anyloan.com, during the
periods shown:

For the Quarters Ended
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March 31, June 30, September 30, December 31,
1999 1999 1999 1999
--------------- --------------- -------------- ---------------

Principal balance (in thousands). $ 245,780 $ 290,426 $ 333,952 $ 315,589
Average principal balance per
loan (in thousands).............. $ 89 $ 90 $ 94 $ 88
Combined weighted average
initial loan-to-value ratio...... 77.6% 78.5% 79.6% 78.9%
Percent of first mortgage loans.. 88.7 84.4 84.8 80.8
Property securing loans:
Owner occupied................. 88.5 90.8 91.4 92.4
Non-owner occupied............. 11.5 9.2 8.6 7.6
Weighted average interest rate:
Fixed-rate..................... 10.1 10.1 10.0 10.4
ARMs........................... 9.6 9.5 8.7 9.5
Margins--ARMs.................. 6.4 6.4 6.4 5.9

FINANCING LOAN ORIGINATIONS AND LOANS HELD FOR SALE

The Company requires access to credit facilities in order to
originate or purchase mortgage loans, and to hold them pending their sale or
securitization. The Company relies on a $290 million short-term warehouse
credit facility led by U.S. Bank National Association to fund its
originations and purchases. The Company also relies on three aggregation and
residual financing facilities totaling $1.4 billion with Salomon Brothers
Realty Corp., Greenwich Capital and PaineWebber to finance the loans pending
their sale or securitization. See "--Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital
Resources."

PRODUCT TYPES

The Company offers both fixed-rate and adjustable-rate loans
("ARMs"), as well as loans with an interest rate that is initially fixed for
a period of time and subsequently converts to an adjustable rate. Most of the
ARMs originated by the Company are offered at a low initial interest rate,
sometimes referred to as a "start rate." At each interest rate adjustment
date, the Company adjusts the rate, subject to certain limitations on the
amount of any single adjustment, until the rate charged equals the fully
indexed rate. There can be no assurance, however, that the interest rate on
these loans will reach the fully indexed rate if the loans are pre-paid or in
cases of foreclosure.

The Company's borrowers fall into five sub-prime risk
classifications. The Company's products are available at different interest
rates and with different origination and application points and fees
depending on the particular borrower's risk classification (see
"Business--Underwriting Standards"). Borrowers may choose to increase or
decrease their interest rate through the payment of different levels of
origination fees and many of the Company's fixed-rate borrowers, in
particular, choose to "buy down" their interest rate through the payment of
additional origination fees. The Company's maximum loan amounts are generally
$600,000 with a loan-to-value ratio of up to 90%. The Company does, however,
offer larger loans with lower loan-to-value ratios on a case-by-case basis,
and also offers products that permit a loan-to-value ratio of up to 95% for
selected borrowers with a Company risk classification of "AAA", "A+" or "A-."

7

Loans originated or purchased by the Company in 1999 had an average
loan amount of approximately $102,000 and an average loan-to-value ratio of
approximately 78.8%. Unless prohibited by state law or otherwise waived by
the Company, the Company's loans generally impose a prepayment charge on the
borrower for certain full or partial prepayments early in the loan's term.
Approximately 75.0% of the loans the Company originated or purchased during
1999 provided for the payment by the borrower of a prepayment charge under
some circumstances.

UNDERWRITING STANDARDS

New Century originates or purchases its mortgage loans in accordance
with the underwriting criteria (the "Underwriting Guidelines") described
below. The loans the Company originates or purchases generally do not satisfy
conventional underwriting standards, such as those utilized by the Federal
National Mortgage Association ("FNMA") and the Federal Home Loan Mortgage
Corporation ("FHLMC"); therefore, the Company's loans are likely to result in
rates of delinquencies and foreclosures that are higher, and may be
substantially higher, than those rates experienced by portfolios of mortgage
loans underwritten in a more traditional manner.

The Underwriting Guidelines are intended to evaluate the credit
history of the potential borrower, the capacity of the borrower to repay the
proposed loan, the value of the security property and the adequacy of such
property as collateral for the proposed loan. Based upon the underwriter's
review of the loan application and related data and application of the
Underwriting Guidelines, the loan terms, including interest rate and maximum
loan-to-value, are determined.

Each loan applicant completes an application that includes
information with respect to the applicant's liabilities, income, credit
history, employment history and personal information. The Underwriting
Guidelines require a credit report on each applicant from a credit reporting
company. The report typically contains information relating to such matters
as credit history with local and national merchants and lenders, installment
debt payments and any record of defaults, bankruptcies, repossessions or
judgments. All mortgaged properties are appraised by qualified independent
appraisers prior to funding of the loan. Such appraisers inspect and appraise
the subject property and verify that such property is in acceptable
condition. Following each appraisal, the appraiser prepares a report which
includes a market value analysis based on recent sales of comparable homes in
the area and, when deemed appropriate, replacement cost analysis based on the
current cost of constructing a similar home. All appraisals are required to
conform to the Uniform Standards of Professional Appraisal Practice adopted
by the Appraisal Standards Board of the Appraisal Foundation and are
generally on forms acceptable to FNMA and FHLMC. The Underwriting Guidelines
require a review of the appraisal by a qualified employee of the Company or
by a qualified appraiser retained by the Company.

The Underwriting Guidelines currently include two levels of
applicant documentation requirements, referred to as the "Full
Documentation", and "Stated Income Documentation" programs. Under each of the
programs, the Company reviews the applicant's source of income, calculates
the amount of income from sources indicated on the loan application or
similar documentation, reviews the credit history of the applicant,
calculates the debt service-to-income ratio to determine the applicant's
ability to repay the loan, reviews the type and use of the property being
financed, and reviews the property. In determining the ability of the
applicant to repay the loan, the Company's underwriters use a qualifying rate
that is equal to the initial interest rate on such loan (in the case of other
LIBOR-based loans). The Underwriting Guidelines require that mortgage loans
be underwritten in a standardized procedure which complies with applicable
federal and state laws and regulations and requires the Company's
underwriters to be satisfied that the value of the property being financed,
as indicated by an appraisal and a review of the appraisal, currently
supports the outstanding loan balance. In general, the maximum loan amount
for mortgage loans originated under the programs is $600,000. The
Underwriting Guidelines permit loans on one-to-four-family residential
properties to have (i) a loan-to-value ratio at origination of up to 95%,
with respect to non-conforming first liens, (ii) a combined loan-to-value
ratio at origination of up to 90% with respect to non-conforming second liens
and (iii) a combined loan-to-value ratio at origination of up to 100% with
respect to conforming second liens, in each case depending on, among other
things, the purpose of the mortgage loan, a borrower's credit history,
repayment ability and debt service-to-income ratio, as well as the type and
use of the property. With respect to mortgage loans secured by mortgaged
properties acquired by a borrower under a "lease option purchase," the
loan-to-value of the related mortgage loan is based on the lower of the
appraised value at the time of origination of such mortgage loan or the sale
price of the related mortgaged property if the "lease option purchase price"
was set less than twelve months prior to origination and is based on the
appraised value at the time of origination if the "lease option purchase
price" was set twelve months or more prior to origination.

8

The Underwriting Guidelines require that the income of each
applicant be verified. The specific income documentation required for the
Company's various programs is as follows: under the Full Documentation
program, applicants generally are required to submit two written forms of
verification of stable income for at least twelve months; under the Stated
Income Documentation program, an applicant may be qualified based upon
monthly income as stated on the mortgage loan application if the applicant
meets certain criteria. All the foregoing programs require that, with respect
to salaried employees, there be a telephone verification of the applicant's
employment. Verification of the source of funds (if any) required to be
deposited by the applicant into escrow in the case of a purchase money loan
is required when the loan-to-value ratio is greater than 70%.

In evaluating the credit quality of borrowers, the Company utilizes
credit bureau risk scores (a "FICO score"), a statistical ranking of likely
future credit performance developed by Fair, Isaac & Company and the three
national credit data repositories--Equifax, TransUnion and Experian.

9

The Company's Underwriting Guidelines for first lien mortgage loans
have the following categories and criteria for grading the potential
likelihood that an applicant will satisfy the repayment obligations of a
mortgage loan:

Summary of Principal
Underwriting Guidelines (1)

- ----------------------------------------------------------------------------------------------------------------------------------
A+ Risk A- Risk B Risk C Risk C- Risk
- ----------------------------------------------------------------------------------------------------------------------------------

Existing mortgage
History................ Maximum one Maximum three Maximum one Maximum one Maximum of two
30-day late 30-day late 60-day late 90-day late 90-day late
payment and no payments and no payment within payment within payments and one
60-day late 60-day late last 12 months; last 12 120-day late
payments w/in last payments w/in must be less months; must payment w/in
12 mos.; required last 12 mos.; than 60 days be less than last 12 months;
to be current at required to be late at funding. 90 days late less than 120
funding; current at at funding. days late at
must have an LTV funding. funding. No
of 90% or less. current Notice
of Default.

Other credit........... 4 accts w/30-day Past/Present Past/Present Significant Significant
late payments or 30-day late 30-day late prior Defaults
FICO score of 620 payments and 1 payments and 4 defaults acceptable;
or higher; no acct w/60 day accts w/60-day acceptable; collection
more than $500 in late payment or late payments generally, no accounts may
open collection FICO score of and 2 accts more than remain open
accounts or 590 or higher; w/90-day late $5,000 in open after funding.
charge-offs open no more than payments or FICO collection
after funding. $1,000 in open score of 570 or accounts or
collection higher; some charge-offs
accounts or prior defaults open after
charge-offs acceptable; no funding; on a
open after more than $2,500 case by case
funding. in open basis.
collection
accounts or
charge-offs open
after funding.

Bankruptcy filings..... Generally, no Generally, no Generally, no Generally, no Generally, no
Chapter 7 Bankruptcy Bankruptcy or Bankruptcy or Bankruptcy or
Bankruptcy filings in last Notice of Notice of Notice of
discharge or 2 years or Default filings Default Default filings
Notice of Default Notice of in last 2 years. filings in allowed in last
filings in last 3 Default filings last 12 12 months from
years or Chapter in last 3 years. months. discharge date.
13 Bankruptcy
discharge in last
2 years.

Debt service to income
Ratio.................. 45% to 55% 45% to 55% 55% to 59% 55% to 59% 50% to 59%

Maximum loan-to-value
ratio ("LTV"):(2)

Owner occupied:
single family........ 90% 90% 80% 75% 70%

Owner occupied:
condo/three-to-four
unit................. 85% 85% 75% 70% 65%

Non-owner occupied... 85% 80% 75% 70% 65%
- ----------------------------------------------------------------------------------------------------------------------------------

(1) The letter grades applied to each risk classification reflect the
Company's internal standards and do not necessarily correspond to the
classifications used by other mortgage lenders. "LTV" means
loan-to-value ratio.
(2) The maximum LTV set forth in the table is for borrowers providing full
documentation. The LTV is reduced 5% for stated income applications, if
applicable. Additionally, if the borrower's FICO score meets or exceeds
the risk category and debt ratio guidelines, consumer credit may be
disregarded.

10

MORTGAGE CREDIT ONLY PROGRAM. In addition to the five risk grade
categories described above, the Company also has a Mortgage Credit Only
program. The Mortgage Credit Only program allows no more than three 30-day
late payments and no 60-day late payments within the last 12 months on an
existing mortgage loan and must be current at funding. An existing mortgage
loan is not required to be current at the time the application is submitted.
Derogatory credit report items are allowed as to non-mortgage credit.
Mortgage Credit Only loans are not available under the Stated Income
Documentation program. No bankruptcy or notice of default filings may have
occurred during the preceding two years; provided, however, that if the
borrower's bankruptcy has been discharged during the past two years and the
borrower has re-established a credit history otherwise complying with the
credit parameters set forth in this paragraph, the borrower may then qualify
under the Mortgage Credit Only program. The mortgaged property must be in at
least average condition. A maximum loan-to-value of 75% is permitted for a
mortgage loan on a single-family owner-occupied property. A maximum
loan-to-value of 70% is permitted for a mortgage loan on a non-owner occupied
property, second home, owner-occupied condominium, or two-to four-family
residential property. The debt service-to-income ratio is generally limited
to a maximum of 55%.

HOME SAVER PROGRAM. The Company has established a sub-category of
its C- credit grade (the "Home Saver Program") for borrowers faced with at
least one of the following credit scenarios: (i) the borrower has an existing
mortgage currently in foreclosure, (ii) the borrower is subject to a notice
of default filing, (iii) the borrower has had a serious mortgage delinquency
for more than one 120 day period in the last 12 months or is more than 90
days late at the time of funding, or (iv) the borrower is in an open Chapter
13 or Chapter 11 bankruptcy. The Home Saver Program is available only to Full
Documentation borrowers and permits a maximum loan-to-value of 65% and a
maximum debt service-to-income ratio of 59%. The maximum loan is $300,000 and
all derogatory credit report items must either be brought current or paid
through the loan proceeds. A maximum of 3% of the loan proceeds may be paid
to the borrower in cash. If the borrower is in an open Chapter 13 or Chapter
11 bankruptcy, the bankruptcy must be discharged through the proceeds of the
loan.

EXCEPTIONS. The categories and criteria described in the above table
are guidelines only. On a case-by-case basis, the Company may determine that
an applicant warrants a loan-to-value exception, a debt service-to-income
ratio exception, or another exception to the Underwriting Guidelines. The
Company may allow such an exception if the application reflects certain
compensating factors such as low LTV, pride of ownership, a maximum of one
30-day late payment on all mortgage loans during the last 12 months, and
stable employment or ownership of current residence for five or more years.
The Company may also allow an exception if the applicant places a down
payment through escrow of at least 20% of the purchase price of the mortgage
property or if the new loan reduces the applicant's monthly aggregate
mortgage payment by 25% or more.

The Company evaluates its Underwriting Guidelines on an ongoing
basis and periodically modifies the Underwriting Guidelines to reflect the
Company's current assessment of various issues related to an underwriting
analysis. The Company also maintains separate underwriting guidelines
appropriate to its conforming and non-conforming second lien mortgage loans,
and adopts new underwriting guidelines appropriate to new loan products
offered by the Company.

11

LOAN PRODUCTION BY BORROWER RISK CLASSIFICATION

The following table sets forth information concerning the Company's
principal balance of fixed rate and adjustable rate loan production by
borrower risk classification for the periods shown:

- --------------------------------------------------------------------------------------------------------------
For the Quarters Ended
- --------------------------------------------------------------------------------------------------------------
March 31, June 30, September 30, December 31,
1999 1999 1999 1999
- --------------------------------------------------------------------------------------------------------------

A+ RISK GRADE:

Percent of total purchases and
originations........................ 39.3% 38.6% 39.4% 31.1%
Combined weighted average
initial loan-to-value ratio......... 81.5 81.7 81.8 81.7
Weighted average interest rate:
Fixed-rate...................... 9.8 9.6 9.5 10.1
ARMs............................ 9.4 9.3 9.2 9.6
Margin--ARMs.................... 5.8 5.8 5.9 5.8

A- RISK GRADE:

Percent of total purchases and
originations........................ 29.0% 30.2% 31.4% 34.7%
Combined weighted average initial
loan-to-value ratio................. 80.7 80.4 81.0 80.9
Weighted average interest rate:
Fixed-rate...................... 10.0 9.9 9.8 10.1
ARMs............................ 9.6 9.5 9.5 9.8
Margin--ARMs.................... 6.2 6.2 6.2 6.1

B RISK GRADE:

Percent of total purchases and
originations........................ 16.9% 16.5% 16.1% 18.7%
Combined weighted average initial
loan-to-value ratio................. 76.2 77.2 75.9 75.5

Weighted average interest rate:
Fixed-rate...................... 10.5 10.4 10.2 10.7
ARMs............................ 9.8 9.9 9.8 10.1
Margin--ARMs.................... 6.4 6.5 6.5 6.4

C RISK GRADE:

Percent of total purchases and
originations........................ 9.8% 9.7% 8.2% 8.7%
Combined weighted average initial
loan-to-value ratio................. 72.4 72.1 71.4 71.2

Weighted average interest rate:
Fixed-rate...................... 11.6 11.5 11.4 11.8
ARMs............................ 10.7 10.6 10.6 11.0
Margin--ARMs.................... 6.7 6.7 6.7 6.6

C- RISK GRADE:

Percent of total purchases and
originations........................ 5.0% 5.0% 4.9% 6.8%
Combined weighted average initial
loan-to-value ratio................. 67.2 67.2 66.7 69.1

Weighted average interest rate:
Fixed-rate...................... 12.1 11.8 11.5 11.5
ARMs............................ 11.5 11.6 11.6 11.4
Margin--ARMs.................... 6.7 6.7 6.6 6.4
- --------------------------------------------------------------------------------------------------------------

12

GEOGRAPHIC DISTRIBUTION

The following table sets forth aggregate dollar amounts (in thousands) and
the percentage of all loans originated or purchased by the Company by state for
the periods shown:

For the Quarters Ended
---------------------------------------------------------------------------------------------
March 31, 1999 June 30, 1999 September 30, 1999 December 31, 1999
------------------- ---------------------- ---------------------- ------------------------
$ % $ % $ % $ %
------------------- ----------- --------- ----------- ---------- ----------- -----------

California..... $ 239,020 26.8% $ 303,263 31.6% $ 375,262 32.4% $ 355,828 33.2%
Illinois....... 65,545 7.3% 66,982 7.0% 79,018 6.8% 81,962 7.6%
Florida........ 65,565 7.4% 64,140 6.7% 68,605 5.9% 57,739 5.4%
Texas.......... 47,114 5.3% 51,959 5.4% 66,649 5.8% 71,987 6.7%
Washington..... 37,827 4.2% 40,317 4.2% 44,709 3.9% 40,114 3.7%
Massachusetts.. 30,782 3.5% 31,896 3.3% 46,135 4.0% 41,171 3.8%
Colorado....... 23,707 2.7% 36,365 3.8% 37,085 3.2% 36,286 3.4%
Minnesota...... 28,221 3.2% 33,856 3.5% 35,133 3.0% 28,857 2.7%
Ohio........... 39,959 4.5% 28,529 3.0% 33,526 2.9% 28,377 2.6%
Michigan....... 25,969 2.9% 22,167 2.3% 31,543 2.7% 33,710 3.1%
Other.......... 288,209 32.2% 279,512 29.2% 339,838 29.4% 295,827 27.8%
------------------- ----------- --------- ----------- ---------- ----------- ----------
Total........ $ 891,917 100.0% $ 958,986 100.0% $1,157,503 100.0% $1,071,858 100.0%
========== ====== ========== ====== ========== ====== ========== ======

LOAN SALES AND SECURITIZATIONS

The secondary marketing functions of the Company are performed by a
separate subsidiary, NC Capital Corporation, which buys loans from the
Wholesale and Retail Divisions of New Century Mortgage Corporation and
Primewest within a week or two after origination. The purchase price paid for
the loans approximates the secondary market value of the loans based on
current market conditions. NC Capital then sells the loans through both
securitizations and bulk sales to institutional purchasers of whole loans. NC
Capital is responsible for determining when and through what channel to sell
the loans, and bears the risks of market fluctuations in the period between
purchase and sale.

WHOLE LOAN SALES. In a whole loan sale, the Company sells loans in
bulk to a purchaser for a cash price that represents a premium over the
principal balance of the loans sold. The sale may include releasing to the
purchaser the servicing rights to the loans (a "servicing-released" sale) or
the Company may retain the servicing rights (a "servicing-retained" sale).
Until February 1997, the Company sold all loans through servicing-released
whole loan sales. In February 1997, the Company began to sell loans through
securitization and retain the servicing rights, while it continued to sell
loans through whole loan sales on a servicing-released basis. In December
1997, the Company began selling loans through whole loan sales on a
servicing-retained basis.

In 1999, whole loan sales accounted for $1.0 billion, or 25.5% of
the Company's total loan sales. Of this amount, 28.6% were sold
servicing-retained and 71.4% were sold servicing-released. In the
servicing-retained sales, the purchaser retained the Company to service the
loans for a fee of 0.50% per year of the outstanding principal balance of the
loans. The weighted average sales price of the Company's 1999 whole loan
sales was equal to 103.2% of the original principal balance of the loans sold.

The Company seeks to maximize its premium on whole loan sale revenue
by closely monitoring institutional purchasers' requirements and focusing on
originating or purchasing the types of loans that meet those requirements and
for which institutional purchasers tend to pay higher premiums. During 1999,
the Company sold loans to many institutional purchasers. No whole loan buyer
accounted for more than 10% of the Company's total loan sales and
securitizations in 1999.

13

Whole loan sales are made on a non-recourse basis pursuant to a
purchase agreement containing customary representations and warranties by the
Company regarding the underwriting criteria applied by the Company and the
origination process. The Company, therefore, may be required to repurchase or
substitute loans in the event of a breach of its representations and
warranties. In addition, the Company sometimes commits to repurchase or
substitute a loan if a payment default occurs within the initial months
following the date the loan is funded, unless other arrangements are made
between the Company and the purchaser. The Company is also required in some
cases to repurchase or substitute a loan if the loan documentation is alleged
to contain fraudulent misrepresentations made by the borrower.

SECURITIZATIONS. During 1999, the Company completed the sale of
loans through eight securitization transactions, five securitizations through
Salomon Smith Barney, Inc., two co-underwritten by Greenwich Capital and
PaineWebber Inc., and one underwritten solely by Greenwich Capital.

In a securitization, the Company sells a pool of loans to a trust
for the following: (i) a cash purchase price and (ii) a certificate
evidencing its "residual interest" ownership in the trust. The trust raises
the cash portion of the purchase price by selling senior certificates
representing senior interests in the loans in the trust. Following the
securitization, purchasers of senior certificates receive the principal
collected, including prepayments, on the loans in the trust. In addition,
they receive a portion of the interest on the loans in the trust equal to the
specified "investor pass-through interest rate" on the principal balance. The
Company receives the cash flows from the residual interests, after payment of
servicing fees, guarantor fees and other trust expenses, and provided the
specified over-collateralization requirements are met.

The Company recognizes gain on sale of the loans, which represents
the excess of the estimated fair value of the residual interests, less
closing and underwriting costs, over the carrying value of the loans sold, in
the fiscal quarter in which such loans are sold. At the same time as the
Company recognizes the gain on sale, the Company records the residual
interests as assets on its balance sheet. The recorded values of these
residual interests are amortized as distributions are received from the trust
holding the respective loan pool.

Three of the 1999 securitizations were credit enhanced by an
insurance policy provided through a monoline insurance company. The other
five securitizations were credit enhanced through the use of subordinated
certificates instead of an insurance policy. The Company used credit
enhancements in each of its securitizations to allow the senior certificates
in the related trusts to receive ratings of "AAA" from Standard & Poor's
Rating Services and "Aaa" from Moody's Investors Service, Inc. and Duff and
Phelps rating agency. The Company also provides credit enhancement in the
form of an over-collateralization account.

There is no assurance that actual performance of any of the
Company's securitized loan portfolios will be consistent with the Company's
estimates and assumptions. To the extent that actual prepayment speeds,
losses or market discount rates materially differ from the Company's
estimates, the estimated value of its residuals may increase or decrease,
which may have a material impact on the Company's results of operations,
financial condition and liquidity.

During 1999, the Company repurchased $15 million in loans out of its
1997 securitizations. Such repurchases are permitted only when the loan
defaults and are undertaken by the Company in order to avoid disruption of
cash flow from certain securitization trusts and to provide the Company with
maximum flexibility in resolving problem loans. In addition, the Company
recorded a total of $28.5 million in write-downs to the carrying value of its
residual securities issued prior to 1999. These adjustments were the result
of a) a continuing increase in prepayment speeds which occurred despite the
increase in interest rates in the latter part of the year, and b) an increase
in overall static pool loss assumption in the fourth quarter to 2.50%. The
Company increased its prepayment speed assumptions to be consistent with its
valuation methodology. See "--Management's Discussion and Analysis of
Financial Condition and Results of Operations--Results of Operations."

14

NIM-EXCESS CASH FLOW PRIVATE PLACEMENTS. In February 1999, the
Company completed its third "net interest margin" or "excess cash flow"
private placement ("NIM" transaction) with respect to its residual interests
in ten of its prior securitizations. In a NIM transaction the Company
contributes and/or sells one or more residual interests from prior
securitizations to a special purpose subsidiary. The subsidiary in turn sells
the residual interests to a trust. The trust pays for the residual interest
partly in cash and partly with an Owner Trust Certificate representing an
ownership interest in the trust. The trust raises the cash by selling bonds
that represent senior interests in the residual securities that were
deposited into the trust.

While the Company is holding residual interests from
securitizations, it is able to pledge those interests to a lender in order to
borrow against them. The Company is able to pay down those borrowings with
the proceeds of a NIM transaction, thereby reducing its leverage ratios. The
Company believes these transactions to be an important part of its overall
loan sales strategy, and expects to continue to pursue them with its future
residual interests if market conditions permit, in order to improve liquidity
and decrease borrowings.

LOAN SERVICING AND DELINQUENCIES

SERVICING. Servicing of loans includes collecting and remitting loan
payments, making required advances, accounting for principal and interest,
holding escrow or impound funds for payment of taxes and insurance and, if
applicable, contacting delinquent borrowers and supervising foreclosures and
property dispositions in the event of unremedied defaults.

The Company retains the servicing rights on all loans it sells
through securitizations and a portion of the loans its sells in whole loan
sales. In addition, some purchasers of "servicing-released" whole loans
request the Company to continue to act as servicer for an interim period
following the sale. Finally, the Company services all of the loans its
originates and purchases during the 30 to 90-day period pending their sale or
securitization.

Prior to September 1997, the Company outsourced substantially all of
its servicing operations to Advanta Mortgage Corp. USA ("Advanta"), an
approved third party sub-servicer. The loans in the Company's first five
securitizations were subserviced by Advanta. In September 1997, the Company
began boarding loans on a joint servicing platform with Comerica in which
each party was responsible for part of the servicing process. In July 1998,
the Company terminated the Comerica agreement, and began performing all
servicing functions relating to the loans previously serviced on the joint
platform. Finally, during 1999, the Company assumed responsibility for
servicing all of the loans from the Company's first five securitizations that
had continued to be sub-serviced by Advanta.

As of December 31, 1999, the Company's servicing portfolio consisted
of 60,703 loans with an aggregate principal balance of approximately $5.9
billion, of which 4,543 loans with an aggregate principal balance of $442.7
million were held for sale and serviced on an interim basis, 56,104 loans
with an aggregate principal balance of $5.5 billion were serviced for
securitizations, and 56 loans with an aggregate principal balance of $5.4
million were serviced on behalf of the whole loan purchasers thereof.

DELINQUENCIES AND FORECLOSURES. Loans originated or purchased by the
Company are secured by mortgages, deeds of trust, security deeds or deeds to
secure debt, depending upon the prevailing practice in the state in which the
property securing the loan is located. Depending on local law, foreclosure is
effected by judicial action or non-judicial sale, and is subject to various
notice and filing requirements. In general, the borrower, or any person
having a junior encumbrance on the real estate, may cure a monetary default
by paying the entire amount in arrears plus other designated costs and
expenses incurred in enforcing the obligation during a statutorily prescribed
reinstatement period. Generally, state law controls the amount of foreclosure
expenses and costs, including attorney's fees, which may be recovered by a
lender. After the reinstatement period has expired without the default having
been cured, the borrower or junior lien-holder no longer has the right to
reinstate the loan and may be required to pay the loan in full to prevent the
scheduled foreclosure sale. Where a loan has not yet been sold or
securitized, the Company will generally allow a borrower to reinstate the
loan up to the date of foreclosure sale.

15

Although foreclosure sales are typically public sales, third-party
purchasers rarely bid in excess of the lender's lien because of the
difficulty of determining the exact status of title to the property, the
possible deterioration of the property during the foreclosure proceedings and
a requirement that the purchaser pay for the property in cash or by cashier's
check. Thus, the foreclosing lender often purchases the property from the
trustee or referee for an amount equal to the sum of the principal amount
outstanding under the loan, accrued and unpaid interest and the expenses of
foreclosure. Depending on market conditions, the ultimate proceeds of the
sale may not equal the lender's investment in the property.

New Century commenced receiving applications for mortgage loans
under its regular lending program in February 1996 and during 1996 sold all
of its loans on a whole loan, servicing-released basis. The Company began
selling loans through securitizations in 1997 and in connection with these
securitizations has established reporting systems to track historical
delinquency, bankruptcy, foreclosure and default experience for the loans
included in its securitizations as well as the Company's total portfolio of
loans. Because most of the Company's securitized loans have been outstanding
for a short period of time, current delinquency and loss information is not
necessarily representative of future delinquencies and losses.

The following tables set forth certain delinquency statistics as of
December 31, 1999 for the Company's 1997, 1998 and 1999 securitized loans
(DOLLARS IN THOUSANDS):

SECURITIES ISSUED IN 1997

DELINQUENCY (% OF CURRENT BALANCE BY RISK GRADE)
------------------------------------------------
RISK ORIGINAL CURRENT 60-89 90+ FORECL./
GRADE BALANCE WALTV* BALANCE DAYS DAYS REO TOTAL REPURCHASE %**
- ----- ------- ------ ------- ----- ---- --- ----- ---------- ---

A+ $ 299,582 73.52% $122,650 0.28% 1.75% 3.95% 5.98% $ 3,159 2.58%
A- 401,319 73.68 162,744 0.19 2.50 7.15 9.84 6,692 4.11
B 208,453 72.73 74,389 0.47 2.56 7.69 10.72 5,508 7.40
C 98,951 68.07 30,224 0.74 4.31 18.98 24.02 3,750 12.41
C- 116,311 68.24 39,877 0.90 5.31 10.26 16.47 5,517 13.84
---------- ----------- ---------
$1,124,616 72.19% $ 429,884 0.37% 2.69% 7.45% 10.50% $ 24,627 5.73%
========== =========== =========

SECURITIES ISSUED IN 1998

DELINQUENCY (% OF CURRENT BALANCE BY RISK GRADE)
------------------------------------------------
RISK ORIGINAL CURRENT 60-89 90+ FORECL./
GRADE BALANCE*** WALTV* BALANCE DAYS DAYS REO TOTAL REPURCHASE %**
- ----- ---------- ------ ------- ----- ---- --- ----- ---------- ---

A+ $1,004,736 78.04% $ 696,084 0.40% 1.20% 4.24% 5.84% $ ---- 0.00%
A- 895,272 77.09 641,581 0.41 1.35 6.00 7.76 ---- 0.00
B 441,736 74.29 314,846 0.80 3.37 6.89 11.06 ---- 0.00
C 282,537 70.24 192,305 1.18 4.19 12.28 17.64 ---- 0.00
C- 197,469 64.88 121,789 0.71 5.59 11.86 18.16 ---- 0.00
---------- ---------- ---------
$2,821,750 75.72% $1,966,605 0.56% 2.16% 6.49% 9.22% $ ---- 0.00%
========== ========== =========

SECURITIES ISSUED IN 1999

DELINQUENCY (% OF CURRENT BALANCE BY RISK GRADE)
------------------------------------------------
RISK ORIGINAL CURRENT 60-89 90+ FORECL./
GRADE BALANCE*** WALTV* BALANCE DAYS DAYS REO TOTAL REPURCHASE %**
- ----- ---------- ------ ------- ----- ---- --- ----- ---------- ---

A+ $1,194,119 78.09% $1,113,209 0.19% 0.34% 1.05% 1.57% $ ---- 0.00%
A- 1,037,148 78.34 989,697 0.31 0.40 1.41 2.12 ---- 0.00
B 574,516 74.29 542,435 0.79 0.54 2.62 3.94 ---- 0.00
C 320,019 70.05 295,857 0.97 1.27 4.56 6.80 ---- 0.00
C- 182,613 66.35 168,054 1.18 2.09 6.98 10.26 ---- 0.00
---------- ---------- ---------
$3,308,415 76.08% $3,109,253 0.46% 0.57% 2.09% 3.13% $ ---- 0.00%
========== ========== =========

16

COMBINED SECURITIES ISSUED

DELINQUENCY (% OF CURRENT BALANCE BY RISK GRADE)
------------------------------------------------
RISK ORIGINAL CURRENT 60-89 90+ FORECL./
GRADE BALANCE*** WALTV* BALANCE DAYS DAYS REO TOTAL REPURCHASE %**
- ----- ---------- ------ ------- ----- ---- --- ----- ---------- ---

A+ $2,498,437 77.73% $1,931,944 0.27% 0.74% 2.38% 3.39% $ 3,159 0.16%
A- 2,333,740 77.22 1,794,022 0.34 0.93 3.57 4.84 6,692 0.37
B 1,224,704 74.23 931,671 0.77 1.65 4.46 6.89 5,508 0.59
C 701,507 70.00 518,387 1.03 2.53 8.26 11.82 3,750 0.72
C- 496,393 66.53 329,719 0.98 3.77 9.18 13.93 5,517 1.67
---------- ---------- ---------
$7,254,781 75.46% $5,505,743 0.49% 1.31% 4.08% 5.88% $ 24,627 0.34%
========== ========== =========

- -----------
*Weighted Average Loan-to-Value Ratio at origination

**Repurchases as a % of Current Balance

***Includes loans sold in whole loan sale transactions that were securitized
by the purchasers.

The foregoing tables indicate that, as anticipated, the Company is
experiencing higher rates of delinquency on lower credit grade loans. In
addition, as indicated, the Company has repurchased loans from its first
three 1997 securitizations. The agreements governing the securitizations
permit such repurchases, but only to the extent the loans being repurchased
are more than 90 days delinquent. The Company elected to make the repurchases
in order to avoid disruption of cash flow from the 1997 NC-1, NC-2 and NC-3
trusts and to provide the Company with maximum flexibility in resolving
problem loans. The Company may make additional repurchases from those or
other securitizations in the future for the same or other reasons.

In order to provide the Company additional flexibility in trying to
maximize recovery on its delinquent loans and loans in foreclosure, the
Company amended its aggregation facility with Salomon Smith Barney to include
financing of a limited number of such loans at a reduced financing rate based
on the value of the underlying property. In addition, the Company entered
into a $3 million facility with a Salomon affiliate to finance real property
owned ("REO") by the Company upon foreclosure on delinquent loans. This
facility allows the Company additional flexibility in disposing of those
properties for the highest possible price. The Company is currently in the
process of renewing and restructuring the problem loan and REO financing
arrangements with Salomon.

U.S. BANCORP INVESTMENT AND STRATEGIC ALLIANCE

In November 1998 U.S. Bancorp, a bank holding company with total
assets in 1999 of approximately $82 billion, purchased 20,000 shares of the
Company's Series 1998A Convertible Preferred Stock for an aggregate purchase
price of $20 million. In December 1998 and April 1999, U.S. Bancorp purchased
an aggregate of 565,000 shares of the Company's Common Stock through third
party private transactions, increasing their equity position in New Century
from 16% to 18.75%. In July 1999, U.S. Bancorp purchased 20,000 shares of the
Company's Series 1999A Convertible Preferred Stock for an aggregate purchase
price of $20 million. Each share of U.S. Bancorp's Series 1998A Preferred
Stock is convertible into 136.24 shares of the Company's Common Stock and
each share of U.S. Bancorp's Series 1999A Preferred Stock is convertible into
46.795 shares of the Company's Common Stock that, upon conversion, will
represent approximately 23% of the Company's total outstanding Common Stock.
The Preferred Stock is also entitled to a liquidation preference as well as a
dividend payable quarterly at a rate of 7.5% per year for Series 1998A and
7.0% per year for Series 1999A Preferred Stock. In addition, as part of the
transactions, U.S. Bancorp has two designees appointed to the Company's Board
of Directors, which is roughly in proportion to its ownership interest in the
Company.

In October 1999 U.S. Bancorp invested an additional $20 million in
the Company and in February 2000 invested an additional $10 million. Each
transaction was structured as subordinated debt provided by U.S. Bancorp's
subsidiary, U.S. Bank National Association. The subordinated debt bears
interest at a rate of 12.0% per year and matures in June 2000.

17

In late March 2000, U.S. Bancorp committed (i) to provide an
additional $10 million in subordinated debt over the course of 2000 provided
that the Company achieves certain specified milestones, and (ii) to extend
the term of the subordinated debt to June 2002. In exchange for the
additional capital and subordinated debt extension, the Company will amend
the conversion ratio of the Company's Series 1999A Convertible Preferred
Stock from 46.8 to 69.98, and also provide U.S. Bank with warrants
exercisable for up to 725,000 shares of the Company's Common Stock at an
exercise price equal to the market value on the grant date. Approximately 70%
of the warrants vest immediately. Of the remainder, a portion vest in
quarterly increments if the Company has not prepaid the subordinated debt and
a portion are granted concurrently with funding of the additional $10 million
in subordinated debt. If all of the proposed warrants are ultimately granted,
U.S. Bank would own approximately 27.5% of the Company, assuming conversion
of all preferred stock and exercise of all warrants. The Company expects to
enter into definitive agreements documenting this investment by April 30,
2000.

In addition to these investments, the Company and U.S. Bancorp have
established a strategic alliance pursuant to which (i) the Company will
assist U.S. Bank in originating loans to bank customers who would not qualify
for the loans under U.S. Bank's traditional credit guidelines, (ii) the
Company will provide some servicing functions with respect to sub-prime
mortgage loans originated by U.S. Bank, (iii) the Company will receive
referrals from U.S. Bank of its customers who were turned down for mortgage
loans, but who qualify for a loan under New Century's underwriting
guidelines, and (iv) U.S. Bank may bid on the Company's whole loan sales.

INTEREST RATE RISK MANAGEMENT

The Company's profits depend, in part, on the difference, or
"spread," between the effective rate of interest received by the Company on
the loans it originates or purchases and the interest rates payable by the
Company under its warehouse and aggregation financing facilities. The spread
can be adversely affected because of interest rate increases during the
period from the date the loans are originated or purchased until the closing
of the sale or securitization of such loans.

The Company from time to time may use various hedging strategies to
provide a level of protection against interest rate risks on its fixed-rate
mortgage loans. These strategies may include forward sales of mortgage loans
or mortgage-backed securities, interest rate caps and floors and buying and
selling of futures and options on futures. The Company's management
determines the nature and quantity of hedging transactions based on various
factors, including market conditions and the expected volume of mortgage loan
originations and purchases.

As of December 31, 1999, the Company did not have any open hedge
positions. While the Company believes hedging strategies are cost-effective
and provide some protection against interest rate risk, no hedging strategy
can completely protect the Company from such risks.

COMPETITION

Although a number of the Company's competitors have either merged,
been acquired or gone out of business altogether, the Company continues to
face intense competition in the business of originating, purchasing and
selling mortgage loans. The Company's competitors include other consumer
finance companies, mortgage banking companies, commercial banks, credit
unions, thrift institutions, credit card issuers and insurance finance
companies. Most notably, in recent quarters, some large, diversified
financial corporations have purchased several of the Company's competitors.
As a result, some of these competitors may have access to capital at a cost
lower than the Company's cost of capital under its warehouse, aggregation and
residual financing facilities. In addition, many of these competitors have
considerably greater technical and marketing resources than the Company.

Competition among industry participants can take many forms,
including convenience in obtaining a loan, customer service, marketing and
distribution channels, amount and term of the loan, loan origination fees and
interest rates. Additional competition may lower the rates the Company can
charge borrowers, thereby potentially lowering gain on future loan sales and
securitizations. To the extent any of the Company's competitors significantly
expand their activities in the Company's markets, the Company could be
materially adversely affected. Fluctuations in interest rates and general
economic conditions may also affect the Company's competitive position.
During periods of rising rates, competitors that have locked in low borrowing
costs may have a competitive advantage. During periods of declining rates,
competitors may solicit the Company's customers to refinance their loans.

18

The Company believes that one of its key competitive strengths is
its employees, with their strong commitment to customer service and their
team-oriented approach. In addition to the strength of the Company's work
force, the Company believes that its competitive strengths include: (i)
providing a high level of service to brokers and their customers; (ii)
offering competitive loan programs for borrowers whose needs are not met by
conventional mortgage lenders; (iii) the Company's high-volume targeted
direct mail marketing program and database screening methodology; and (iv)
its performance-based compensation structure which allows the Company to
attract, retain and motivate qualified personnel.

REGULATION

The mortgage lending industry is a highly regulated industry. The
Company's business is subject to extensive and complex rules and regulations
of, and examinations by, various state and federal government authorities.
These regulations impose obligations and restrictions on the Company's loan
origination, loan purchase and servicing activities. In addition, these
regulations may limit the interest rates, finance charges and other fees the
Company may assess, mandate extensive disclosure to the Company's customers,
prohibit discrimination and impose multiple qualification and licensing
obligations on the Company. Failure to comply with these requirements may
result in, among other things, loss of approved licensing status, demands for
indemnification or mortgage loan repurchases, certain rights of rescission
for mortgage loans, class action lawsuits, administrative enforcement actions
and civil and criminal liability. Management of the Company believes that the
Company is in compliance with these rules and regulations in all material
respects.

The Company's loan origination and loan purchase activities are
subject to the laws and regulations in each of the states in which those
activities are conducted. For example, state usury laws limit the interest
rates the Company can charge on its loans. As of December 31, 1999, the
Company was licensed or exempt from licensing requirements by the relevant
state banking or consumer credit agencies to originate first mortgages in 50
states and the District of Columbia and second mortgages in 48 states and the
District of Columbia. The Company's lending activities are also subject to
various federal laws, including the Truth in Lending Act, Homeownership and
Equity Protection Act of 1994, the Equal Credit Opportunity Act, the Fair
Credit Reporting Act, the Real Estate Settlement Procedures Act and the Home
Mortgage Disclosure Act, and their implementing regulations.

The Company is subject to certain disclosure requirements under the
Truth in Lending Act ("TILA") and Regulation Z promulgated under TILA. TILA
is designed to provide consumers with uniform, understandable information
with respect to the terms and conditions of loan and credit transactions.
TILA gives consumers, among other things, a three business day right to
rescind certain refinance loan transactions originated by the Company.

The Company is also subject to the Homeownership and Equity
Protection Act of 1994 (the "High Cost Mortgage Act"), which amends TILA. The
High Cost Mortgage Act generally applies to consumer credit transactions
secured by the consumer's principal residence, other than residential
mortgage transactions, reverse mortgage transactions or transactions under an
open end credit plan, in which the loan has either (i) total points and fees
upon origination in excess of the greater of eight percent of the loan amount
or $441, or (ii) an annual percentage rate of more than ten percentage points
higher than United States Treasury securities of comparable maturity
("Covered Loans"). The High Cost Mortgage Act imposes additional disclosure
requirements on lenders originating Covered Loans. In addition, it prohibits
lenders from, among other things, originating Covered Loans that are
underwritten solely on the basis of the borrower's home equity without regard
to the borrower's ability to repay the loan and including prepayment fee
clauses in Covered Loans to borrowers with a debt-to-income ratio in excess
of 50% or Covered Loans used to refinance existing loans originated by the
same lender. The High Cost Mortgage Act also restricts, among other things,
certain balloon payments and negative amortization features. The Company did
not originate or purchase Covered Loans in 1996, but the Company commenced
originating and purchasing Covered Loans during 1997. In 1999, Covered Loans
accounted for approximately 6.8% of the Company's total loan originations and
purchases.

19

The Company is also required to comply with the Equal Credit
Opportunity Act of 1974, as amended ("ECOA") and Regulation B promulgated
thereunder, the Fair Credit Reporting Act, as amended, the Real Estate
Settlement Procedures Act of 1974, as amended, and Regulation X promulgated
thereunder and the Home Mortgage Disclosure Act of 1975, as amended. ECOA
prohibits creditors from discriminating against applicants on the basis of
race, color, sex, age, religion, national origin or marital status, because
all or part of the applicant's income is derived from a publicly assisted
program; or because the applicant has in good faith exercised any right under
the Consumer Credit Protection Act. Regulation B restricts creditors from
requesting certain types of information from loan applicants. The Fair Credit
Reporting Act, as amended, requires lenders, among other things, to supply an
applicant with certain information if the lender denied the applicant credit.
The Real Estate Settlement Procedures Act mandates certain disclosures
concerning settlement fees and charges and mortgage servicing transfer
practices. It also prohibits the payment or receipt of kickbacks or referral
fees in connection with the performance of settlement services. In addition,
beginning with loans originated in 1997, the Company must file an annual
report with the Department of Housing and Urban Development pursuant to the
Home Mortgage Disclosure Act, which requires the collection and reporting of
statistical data concerning mortgage loan transactions.

In the course of its business, the Company may acquire properties
securing loans that are in default. There is a risk that hazardous or toxic
waste could be found on such properties. In such event, the Company could be
held responsible for the cost of cleaning up or removing such waste, and such
cost could exceed the value of the underlying properties.

REGULATORY DEVELOPMENTS. In the past year, there have been a number
of significant federal and state legislative and regulatory developments that
could affect the Company. The federal Gramm-Leach-Bliley financial reform
legislation will impose additional privacy obligations on the Company with
respect to its applicants. At the state level, a number of states are
considering legislation targeting so-called "predatory" lending practices.
While well-meaning, these proposed laws impose overly broad restrictions on
legitimate lending activities including some of the Company's activities.
There can be no assurance that these proposed laws, rules and regulations, or
other such laws, rules or regulations, will not be adopted in the future
which could make compliance much more difficult or expensive, restrict the
Company's ability to originate, broker, purchase or sell loans, further limit
or restrict the amount of commissions, interest and other charges earned on
loans originated, brokered, purchased or sold by the Company, or otherwise
adversely affect the business or prospects of the Company.

EMPLOYEES

At December 31, 1999, the Company employed 1,740 full-time employees
and 30 part-time employees. None of the Company's employees is subject to a
collective bargaining agreement. The Company believes that its relations with
its employees are satisfactory.

20

EXECUTIVE OFFICERS OF THE REGISTRANT

The following table sets forth the name, age and position with the
Company of each person who is an executive officer or key employee of the
Company.

NAME AGE POSITION
---- --- --------

EXECUTIVE OFFICERS:

Robert K. Cole.................................. 53 Chairman of the Board, Chief Executive Officer, Director

Brad A. Morrice................................. 43 Vice Chairman, President, Director

Edward F. Gotschall............................. 45 Vice Chairman, Chief Financial Officer, Director

Steve Holder.................................... 42 Vice Chairman, Chief Operating Officer, Director

KEY EMPLOYEES:
Patrick J. Flanagan............................. 35 Executive Vice President of the Company; Director,
Executive Vice President and Chief Operating Officer,
New Century Mortgage (1), and President, NC Capital (2)

George Anderson................................. 61 Director, President Retail Operations, New Century
Mortgage (1)

Shabi S. Asghar................................. 37 Director, President Wholesale Operations, New
Century Mortgage (1)

Paul L. Rigdon.................................. 39 Executive Vice President Retail Operations, New Century
Mortgage (1), and Executive Vice President, anyloan.com

- -------------
(1) New Century Mortgage Corporation ("New Century Mortgage") is a
wholly-owned subsidiary of the Company.
(2) NC Capital Corporation ("NC Capital") is a wholly-owned
subsidiary of New Century Mortgage.

ROBERT K. COLE has been the Chairman of the Board and Chief
Executive Officer of the Company since December 1995 and a director of the
Company since November 1995. Mr. Cole also serves as a director on the Board
of Directors of New Century Mortgage. From February 1994 to March 1995, he
was the President and Chief Operating Officer-Finance of Plaza Home Mortgage
Corporation ("Plaza Home Mortgage"), a publicly-traded savings and loan
holding company specializing in the origination and servicing of residential
mortgage loans. In addition, Mr. Cole served as a director of Option One
Mortgage Corporation ("Option One"), a subsidiary of Plaza Home Mortgage
specializing in the origination, sale and servicing of sub-prime mortgage
loans. From June 1990 to January 1994, Mr. Cole was the President of Triple
Five, Inc., an international real estate development company. Previously, Mr.
Cole was the President of operating subsidiaries of NBD Bancorp and Public
Storage, Inc. Mr. Cole received a Masters of Business Administration degree
from Wayne State University.

21

BRAD A. MORRICE has been Vice Chairman of the Company since December
1996, President, and a director of the Company since November 1995. Mr.
Morrice also served as the Company's General Counsel from December 1995 to
December 1997 and the Company's Secretary from December 1995 to May 1999. In
addition, Mr. Morrice serves as Co-Chairman of the Board and Chief Executive
Officer of New Century Mortgage. From February 1994 to March 1995, he was the
President and Chief Operating Officer-Administration of Plaza Home Mortgage,
after serving as its Executive Vice President, Chief Administrative Officer
since February 1993. In addition, Mr. Morrice served as General Counsel and a
director of Option One. From August 1990 to January 1993, Mr. Morrice was a
partner in the law firm of King, Purtich & Morrice, where he specialized in
the legal representation of mortgage banking companies. Mr. Morrice
previously practiced law at the firms of Fried, King, Holmes & August and
Manatt, Phelps & Phillips. He received his law degree from the University of
California, Berkeley (Boalt Hall) and a Masters of Business Administration
degree from Stanford University.

EDWARD F. GOTSCHALL has been Vice Chairman of the Company since
December 1996, Chief Financial Officer since August 1998, Chief Operating
Officer Finance/Administration of the Company from December 1995 to August
1998 and a director of the Company since November 1995. Mr. Gotschall also
serves as Chief Financial Officer and a director of New Century Mortgage.
From April 1994 to July 1995, he was the Executive Vice President/Chief
Financial Officer of Plaza Home Mortgage and a director of Option One. In
December 1992, Mr. Gotschall was one of the co-founders and principal
architect of the initial business plan for Option One and served as its
Executive Vice President/Chief Financial Officer until April 1994. From
January 1991 to July 1992, he was the Executive Vice President and Chief
Financial Officer of The Mortgage Network, Inc., a retail mortgage banking
company. Mr. Gotschall received his Bachelors of Science Degree in Business
Administration from Arizona State University and received his CPA designation
during his employment term with Touche Ross (now Deloitte & Touche) in
Phoenix, Arizona.

STEVE HOLDER has been Vice Chairman of the Company since December
1996, Chief Operating Officer Loan Production/Operations of the Company since
December 1995 and a director of the Company since November 1995. Mr. Holder
also serves as Co-Chairman of the Board and Chief Executive Officer of New
Century Mortgage. From February 1993 to August 1995, he was the Executive
Vice President of Long Beach Mortgage Company ("Long Beach Mortgage"). From
July 1991 to February 1993, Mr. Holder was the Vice President for Business
Development of Transamerica Financial Services. From 1985 to 1990, he was a
Regional Vice President for Nova Financial Services, a startup consumer
finance subsidiary of First Interstate Bank. Mr. Holder has over 22 years
experience in the consumer finance and mortgage business.

PATRICK J. FLANAGAN has been Executive Vice President of the Company
since August 1998. He has been President of NC Capital Corporation since
December 1998 and a director of New Century Mortgage since May 1997. From
January 1997 to August 1998, Mr. Flanagan was Executive Vice President and
Chief Operating Officer of New Century Mortgage. Mr. Flanagan initially
joined New Century Mortgage in May 1996 as Regional Vice President of Midwest
Wholesale and Retail Operations. From August 1994 to April 1996, Mr. Flanagan
was a Regional Manager with Long Beach Mortgage. From July 1992 to July 1994,
he was an Assistant Vice President for First Chicago Bank, from February 1989
to February 1991, he was Assistant Vice President for Banc One in Chicago and
from February 1991 to July 1992, he was a Business Development Manager for
Transamerica Financial Services. Mr. Flanagan received his Bachelor of Arts
degree from Monmouth College.

GEORGE ANDERSON has been President-Retail Lending of New Century
Mortgage since August 1998. From 1994 to July 1998, Mr. Anderson was the
President and CEO of Advanta Finance Corporation. From 1990 to 1994, Mr.
Anderson served as Executive Vice President for Transamerica Financial
Services and from 1984 to 1990, Mr. Anderson served as President and CEO of
Nova Financial Services where he was responsible for the full spectrum of
start-up activities associated with building a multi-state consumer finance
company. In 1990, Nova was acquired by Transamerica Financial Services. From
1959 to 1984, Mr. Anderson served as Area Vice President for Transamerica
Financial Services and was responsible for the mid-west and east coast
operations of the company. Mr. Anderson has over 36 years experience in the
consumer finance and mortgage business.

22

SHABI S. ASGHAR has been President-Wholesale Lending of New Century
Mortgage since August 1998. He previously served as Senior Vice
President-Wholesale Lending from January 1996 to August 1998 and a director
of New Century Mortgage since May 1997. Mr. Asghar initially joined New
Century Mortgage as Vice President, Mortgage Banking Operations and served in
this position from December 1995 to January 1996. From June 1995 to November
1995, Mr. Asghar was the Southern California District Manager for Ford
Consumer Finance. From September 1992 to March 1995, he was an Area Sales
Manager for Long Beach Mortgage and from June 1988 to September 1992, he was
a Business Development Manager for Transamerica Financial Services. Mr.
Asghar received his Bachelor of Science degree from California State
University at Northridge.

PAUL L. RIGDON has been Executive Vice President of anyloan.com
since April 1999 and Executive President-Retail Lending of New Century
Mortgage since August 1998. Mr. Rigdon served previously as Senior Vice
President-Retail Lending from February 1997 to August 1998 and a director of
New Century Mortgage from May 1997 to November 1999. Mr. Rigdon initially
joined New Century Mortgage as the Regional Manager in charge of expansion in
the Northwest Retail Region and served in this position from September 1996
to February 1997. From May 1995 to September 1996, he was a District Manager
for Advanta Finance. From March 1990 to May 1995, he was an Area Manager for
Long Beach Mortgage. Mr. Rigdon received his Bachelor of Science degree in
Business Administration and Finance from San Jose State University.

23

RISK FACTORS

STOCKHOLDERS AND PROSPECTIVE PURCHASERS OF THE COMPANY'S COMMON STOCK
SHOULD CONSIDER CAREFULLY THE FOLLOWING FACTORS, AS WELL AS THE OTHER
INFORMATION APPEARING ELSEWHERE IN THIS FORM 10-K, IN EVALUATING AN
INVESTMENT IN THE COMPANY. THIS FORM 10-K MAY CONTAIN FORWARD-LOOKING
STATEMENTS WHICH INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL
RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE
FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS, INCLUDING THOSE
SET FORTH IN THE FOLLOWING RISK FACTORS AND ELSEWHERE IN THIS FORM 10-K.

LIQUIDITY; ACCESS TO FUNDING SOURCES

The Company's business requires substantial cash to support its
operating activities and growth plans. At present, the Company's operating
uses of cash continue to exceed its operating sources of cash.

The Company requires access to short-term warehouse and aggregation
credit facilities in order to fund loan originations and purchases pending
the pooling and sale of such loans. The Company also has residual financing
agreements with Salomon, Greenwich Capital and PaineWebber, pursuant to which
each will provide the Company with financing upon the Company's retention of
residual interests in securitizations and NIM transactions on which each is
the lead underwriter or placement agent. The amount of financing provided to
the Company under its aggregation credit facilities and its residual
financing agreements depends in large part on each company's valuation of the
mortgage loans, based on current market conditions, and residual interests,
respectively, securing the financings. Each company has the right to
reevaluate the collateral securing the Company's outstanding borrowings at
any time and, in the event the underwriting company determines that the value
of the collateral has decreased, it has the right to initiate a margin call.
A margin call would require the Company to provide the underwriting company
with additional collateral or to repay a portion of all of the outstanding
borrowings. Any such margin call could have a material adverse effect on the
Company's results of operations, financial condition and business prospects.

In addition to the financing secured by the Company's loans and
residual securities, the Company also has borrowed from U.S. Bank $30 million
in subordinated debt ($10 million subsequent to December 31, 1999) secured by
subordinate liens on the loans pledged under the U.S. Bank warehouse
agreement as well as certain rights to the Company's residuals. Unlike the
warehouse, aggregation and residual financing borrowings, which the Company
believes are secured by assets that would cover the borrowings in the event
of a default, the Company does not currently have a source of funds to repay
the subordinated debt in the event of a default, or upon its maturity. In
late March 2000, the Company received a commitment from U.S. Bank to (i)
provide an additional $10 million of subordinated debt during 2000 upon the
Company's achievement of certain milestones, and (ii) extend the maturity of
the subordinated debt to June 2002. The Company's inability to consummate the
transactions contemplated by the U.S. Bank commitment or its inability to
obtain capital or financing to repay the subordinated debt upon its maturity,
would have a material adverse impact on the Company's results of operations,
financial condition and business prospects.

Moreover, to the extent that the Company is unable to renew or
expand its access to credit facilities, the Company may have to undertake
larger and/or more frequent capital markets financings than anticipated.
Capital markets financings may result in greater than anticipated interest
expense and shares outstanding, which may have a dilutive impact on operating
earnings or have a negative effect on the Company's financial condition.

As a result of concerns about the ability of sub-prime mortgage lenders
to sell their loans in the secondary market on favorable terms or at all, as
well as concerns about the value of the residual interests retained in
securitizations, a number of institutions have curtailed their lending to the
sub-prime mortgage industry. Consequently, there can be no assurance that the
Company will be able to renew, replace or add to its existing credit
facilities, or that it will be able to undertake capital markets financings
on favorable terms, if at all. To the extent that the Company is unable to
access adequate capital to fund its loan production or to the extent that the
Company is unable to access adequate capital to complete the desired level of
securitizations, the Company may have to curtail its loan origination,
purchase and securitization activities, which would have a material adverse
impact on the Company's results of operations, financial condition and
business prospects.

24

DEPENDENCE ON SECURITIZATIONS FOR FUTURE EARNINGS

The Company plans to continue pooling and selling through
securitizations a significant percentage of the loans it originates or
purchases, although the Company expects that the gain on sale from such
securitizations will represent a smaller portion of the Company's future
revenues and net earnings. The Company's ability to complete securitizations
of its loans will depend on a number of factors, including conditions in the
securities markets generally, conditions in the asset-backed securities
market specifically, the performance of the Company's portfolio of
securitized loans and the Company's ability to obtain credit enhancement from
monoline insurance companies. In the third and fourth quarter of 1999
interest rates and interest spreads required by bond investors continued to
increase. In addition, overall demand for sub-prime mortgage loans decreased
as investors elected to follow a more conservative investment strategy during
the Y2K transition period. To maximize the overall value of these loans, the
Company elected to securitize a significant portion of its production during
both these periods. Although the Company has continued to sell its loans
through securitizations, there can be no assurance that it will continue to
be able to do so. If the Company were unable to securitize profitably a
sufficient number of its loans in a particular quarter, then the Company's
revenues for such quarter would decline, which could result in lower earnings
or a loss reported for such quarter.

DEPENDENCE ON WHOLE LOAN SALES FOR FUTURE EARNINGS AND CASH

The Company's current strategy is to rely more heavily on whole loan
sales for future earnings and cash flow. In 1999, the Company sold 25.5% of
its loan originations and purchases through whole loan sales to various
institutional purchasers. The weighted average price of the whole loan sales
was 103.2% of the outstanding principal balance of the loans. During the same
period, the Company's all-in cost of originating loans was 102.99%. In order
to generate sufficient earnings and cash from whole loan sales, the Company
will need to achieve one or a combination of (i) reducing its all-in
acquisition cost for loans, or (ii) increasing the price purchasers are
willing to pay for the Company's loans. There can be no assurance that the
Company will be able to achieve either of these objectives. To the extent the
Company is unable to originate loans at a price lower than what whole loan
purchasers will pay for them, the Company's results of operations, financial
condition and business prospects could be materially and adversely affected.

RESIDUAL INTERESTS IN SECURITIZATIONS

During 1999 a substantial portion of the Company's revenues and earnings
were derived by recognizing gain on sale of loans through securitizations. In
view of the Company's limited loan performance data, it is extremely
difficult to validate the Company's loss or prepayment assumptions used to
calculate its gain on sale in connection with its securitizations. If the
Company's actual experience differs materially from the assumptions used in
the determination of the present value of the residual interests it retains
in the securitizations, future cash flows and earnings could be negatively
impacted. The Company could also be required to reduce the fair value of its
residual interests on its balance sheet, which could decrease the residual
financing available to the Company under the Salomon, Greenwich and
PaineWebber residual financing facilities.

RISKS RELATED TO LOWER CREDIT GRADE BORROWERS

Loans made to lower credit grade borrowers, including credit-impaired
borrowers, may entail a higher risk of delinquency and higher losses than
loans made to borrowers with better credit. Virtually all of the Company's
loans are made to borrowers who do not qualify for loans from conventional
mortgage lenders. Approximately 68.5% of the loans originated or purchased by
the Company during 1999 were made to borrowers in the Company's two highest
credit grade classifications. No assurance can be given that the Company's
underwriting criteria or methods will afford adequate protection against the
higher risks associated with loans made to lower credit grade borrowers. The
Company continues to be subject to the risks of default and foreclosure
following the sale of loans through securitization to the extent such losses
reduce the residual interest distributions. Any such reduction in the
Company's cash flows could have a material adverse effect on the Company's
results of operations, financial condition and business prospects.

25

CHANGES IN INTEREST RATES

The Company's profitability may be directly affected by changes in
interest rates, which affect the Company's ability to earn a spread between
the interest received on its loans and its funding costs. The revenues of the
Company may be adversely affected during any period of unexpected or rapid
change in interest rates. For example, a substantial and sustained increase
in interest rates could adversely affect borrower demand for the Company's
products. During periods of rising interest rates, the value and
profitability of the Company's loans may also be negatively impacted from the
date of origination or purchase until the date the Company sells or
securitizes such loans. In addition, the Company's adjustable rate mortgage
loans have a life rate cap above which the interest rate on the loan may not
rise. In the event of general interest rate increases, the rate of interest
on these mortgage loans could be limited, while the rate payable on the
senior certificates representing interests in a securitization trust into
which such loans are sold may be uncapped, which would reduce the amount of
cash the Company receives over the life of its residual interests, thereby
requiring the Company to reduce the fair value of such residual interests.
Furthermore, a significant decrease in interest rates could increase the rate
at which loans are prepaid, which would also reduce the amount of cash the
Company receives over the life of its residual interests. Either of these
events could require the Company to reduce the fair value of its residual
interests, which would have a material adverse effect on the Company's
results of operations, financial condition and business prospects.

ECONOMIC SLOWDOWN OR RECESSION

The risks associated with the Company's business are more acute during
periods of economic slowdown or recession because these periods may be
accompanied by decreased demand for consumer credit and declining real estate
values. Declining real estate values reduce the ability of borrowers to use
home equity to support borrowings by negatively affecting loan-to-value
ratios of the home equity collateral. In addition, because the Company makes
a substantial number of loans to credit-impaired borrowers, the actual rates
of delinquencies, foreclosures and losses on such loans could be higher
during economic slowdowns. Any sustained period of increased delinquencies,
foreclosures or losses could adversely affect the Company's ability to sell
loans or the prices the Company receives for its loans, as well as the value
of its residual interests in securitizations.

COMPETITION

The Company faces intense competition in the business of originating,
purchasing and selling mortgage loans. Many of the Company's competitors are
substantially larger and have considerably greater financial, technical and
marketing resources than the Company. In the future, the Company may also
face competition from government-sponsored entities, such as the Federal
National Mortgage Association and the Federal Home Loan Mortgage Corporation,
which may target potential customers in the Company's highest credit grades,
who constitute a significant portion of the Company's customer base.

Certain large finance companies and conforming mortgage originators have
begun to originate non-conforming mortgage loans, and some of these large
mortgage companies, thrifts and commercial banks have begun offering
non-conforming loan products to customers similar to the borrowers targeted
by the Company. Competitors with lower costs of capital have a competitive
advantage over the Company. In addition, establishing a broker-sourced loan
business requires a substantially smaller commitment of capital and human
resources than a direct-sourced loan business. This relatively low barrier to
entry permits new competitors to enter this market quickly and compete with
the Company's wholesale lending business.

26

DEPENDENCE ON WHOLESALE BROKERS

The Company depends primarily on independent mortgage brokers and, to a
lesser extent, on correspondent lenders, for the origination and purchase of
its wholesale mortgage loans, which constitute a significant portion of the
Company's loan production. These independent mortgage brokers deal with
multiple lenders for each prospective borrower and are not obligated by
contract or otherwise to do business with the Company. The Company competes
with these lenders for the independent brokers' business on pricing, service,
loan fees, costs and other factors. The Company's future results of
operations and financial condition may be vulnerable to changes in the volume
and cost of its wholesale loans resulting from, among other things,
competition from other lenders and purchasers of such loans.

RISKS ASSOCIATED WITH SERVICING

In 1998, the Company established in-house servicing operations to
service the loans it originates and purchases, the loans in its
securitizations, and loans sold on a servicing-retained basis. There can be
no assurance that the Company will anticipate and respond effectively to all
of the demands that servicing its loans will have on the Company's
management, infrastructure and personnel. The failure of the Company to meet
the challenges of servicing its loans could have a material adverse effect on
the Company's results of operations, financial condition and business
prospects. For example, many of the Company's borrowers require notices and
reminders to keep their loans current and to prevent delinquencies and
foreclosures. Any failure of the Company to adequately service its loans
could cause a substantial increase in the Company's delinquency or
foreclosure rate, which could adversely impact the value of the residual
interests held by the Company and affect the Company's ability to access
equity or debt capital resources.

CONTINGENT RISKS

In connection with its securitizations, the Company is required to
repurchase or substitute loans in the event of a breach of a representation
or warranty made by the Company. Likewise, in connection with its whole loan
sales, the Company enters agreements which generally require the Company to
repurchase or substitute loans in the event of a breach of a representation
or warranty made by the Company to the loan purchaser, any misrepresentation
during the mortgage loan origination process or, in some cases, upon any
fraud or early default on such mortgage loans. The remedies available to a
purchaser of mortgage loans from the Company are generally broader than those
available to the Company against the sellers of such loans, and if a
purchaser enforces its remedies against the Company, the Company may not be
able to enforce whatever remedies the Company may have against such sellers.

RISKS RELATING TO NEW LEGISLATION

Several states, as well as the federal government, are considering
proposed legislation to curb predatory lending practices. As drafted,
however, many of these laws extend far beyond curbing predatory practices to
restrict legitimate lending activities including some of the Company's
activities. For example, some of these laws prohibit any form of prepayment
charge. Passage of these laws in their current form could reduce the
Company's loan origination volume, which would have a material adverse impact
on the Company's results of operation, financial condition and business
prospects.

27

ANTI-TAKEOVER PROVISIONS

The Company's Certificate of Incorporation (the "Certificate of
Incorporation") and its Bylaws (the "Bylaws") include provisions that could
delay, defer or prevent a takeover attempt that may be in the best interest
of stockholders. These provisions include the ability of the Board of
Directors to issue up to 7,500,000 shares of preferred stock (the "Preferred
Stock") without any further stockholder approval, a classified Board of
Directors and requirements that (i) stockholders give advance notice with
respect to certain proposals they may wish to present for a stockholder vote,
(ii) stockholders act only at annual or special meetings and (iii) two-thirds
of all directors approve a change in the number of directors of the Company.
Issuance of Preferred Stock could also discourage bids for the Common Stock
at a premium as well as create a depressive effect on the market price of the
Common Stock. In addition, under certain conditions, Section 203 of the
Delaware General Corporation Law (the "DGCL") would prohibit the Company from
engaging in a "business combination" with an "interested stockholder" (in
general, a stockholder owning 15% or more of the Company's outstanding voting
stock) for a period of three years unless the business combination is
approved in a prescribed manner. Finally, certain provisions in the Company's
transaction with U.S. Bancorp in 1998, including the stockholder agreements
entered into by the four founding managers, may discourage takeover attempts
by third parties.

POSSIBLE VOLATILITY OF STOCK PRICE; EFFECT OF FUTURE OFFERINGS ON MARKET
PRICE OF COMMON STOCK

The market price of the Common Stock may experience fluctuations that
are unrelated to the operating performance of the Company. In particular, the
price of the Common Stock may be affected by general market price movements
as well as developments specifically related to the consumer finance industry
and the financial services sector such as, among other things, interest rate
movements, quarterly variations or changes in financial estimates by
securities analysts and a significant reduction in the price of the stock of
another participant in the consumer finance industry. This volatility may
make it difficult for the Company to access the capital markets through a
secondary offering of Common Stock, regardless of the Company's financial
performance.

ITEM 2. PROPERTIES

The Company's executive, administrative and anyloan.com offices are
located in Irvine, California and consist of approximately 211,000 square
feet. The three leases covering the executive, administrative and anyloan.com
offices expire in June 2002, December 2002 and January 2005, and the combined
monthly rent is $331,201.

The Company leases space for its reg