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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

(Mark One)

For the fiscal year ended December 31, 2000

OR

Commission File Number 000-22633

NEW CENTURY FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)

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 23, 2001 was approximately $22.9 million based on the closing sales price for the Common Stock on such date of $10.31 as reported on the Nasdaq National Market.

    As of March 23, 2001, the Registrant had 14,893,198 shares of Common Stock outstanding.

    PART III incorporates information by reference from the Registrant's definitive Proxy Statement for its 2001 Annual Meeting of Stockholders to be filed with the Commission within 120 days of December 31, 2000.

PART I

ITEM 1. BUSINESS

GENERAL

    New Century Financial Corporation ("New Century" or the "Company") is a specialty finance company that, through its subsidiaries, 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 who provide loans through the Wholesale Division of the Company's New Century Mortgage Corporation subsidiary as well as through its subsidiary, Worth Funding Inc. Wholesale originations represented 73.3% of the Company's total originations and purchases in 2000. Retail originations are made through New Century Mortgage's network of branch offices, through its Central Retail Division and from applicants directed to New Century Mortgage through the Company's subsidiary, The Anyloan Company, including its anyloan.com website. Retail originations represented 26.7% of the Company's total originations and purchases in 2000. All of the Company's loans are secured by first or second mortgages on one-to-four family residences.

THE TYPICAL BORROWER.  The Company's borrowers generally have considerable 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.

UNDERWRITING.  Although the Company's underwriting guidelines include six levels of credit risk classification, approximately 68.3% of the principal balance of the loans originated and purchased by the Company in 2000 were to borrowers within the Company's three highest credit grades. Of the Company's loans originated or purchased during 2000, 94.6% were secured by borrowers' primary residences. The average loan-to-value ratio on loans originated and purchased by the Company in 2000 was approximately 78.6%. Approximately 95.3% of the loans originated and purchased by the Company during 2000 were secured by first mortgages, and the remainder were secured by second mortgages. Approximately 80.6% of the loans originated and purchased by the Company in 2000 were refinances of existing loans, while the remaining 19.4% represented loans for a borrower's purchase of a residential property.

LOAN SALES AND SECURITIZATIONS.  NC Capital Corporation ("NC Capital"), a subsidiary of New Century Mortgage, is the Company's secondary marketing channel. NC Capital has sold virtually all of the Company's loan production through a combination of securitizations and bulk sales of whole loans to institutional purchasers. In 2000, whole loan sales accounted for 75.3% of total loan sales, and securitizations accounted for the balance of loan sales.

SERVICING AND RESIDUAL INCOME.  The Company also receives revenue from servicing its loans on behalf of the loan purchasers. At the end of 2000, the Company's servicing portfolio, including loans held for sale, totaled $6.1 billion. Servicing and residual income also includes interest earned on the Company's residual interests in securitizations. The Company's residual interests averaged $385.5 million during

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2000. In 2000, servicing revenues totaled $80.0 million, and accounted for 48.8% of the Company's total revenues. Of the $80 million, $49.9 million represented interest on residual securities and $30.1 million was from servicing fees and related income.

    In March 2001, the Company sold the servicing rights on approximately $4.8 billion of its servicing portfolio to Ocwen Federal Bank FSB for $19.7 million. The transfer of the Company's servicing portfolio to Ocwen's Orlando, Florida servicing platform is scheduled to be completed by August 1, 2001. After the transfer, the Company will no longer recieve servicing fees and related income on this portion of the portfolio, but the Company will still continue to receive the interest on the residual securities.

NET INTEREST INCOME.  In 2000 the Company earned $11.3 million in net interest income (excluding interest expense on residual financing, $16.1 million), which represented approximately 6.9% of the Company's total revenues. Net interest income is earned on loans held in inventory for sale.

INSURANCE PREMIUMS.  The Company also receives commissions on collateral protection insurance that the Company purchases when its borrowers fail to maintain property and flood insurance themselves. In 2000, the Company received $1.7 million in these commissions.

GROWTH AND OPERATING STRATEGIES

    In 2000, the Company recorded a loss of $23.0 million on total revenues of $163.9 million. The loss was largely due to $67.0 million in adjustments to the carrying value of the Company's residual securities. Despite the financial results, the Company's business experienced a number of significant developments during 2000:

MANAGEMENT REORGANIZATION.  In the fourth quarter of 2000 and first quarter of 2001, the Company announced several senior management changes. Brad Morrice, Vice Chairman and President of the Company assumed the additional role of Chief Operating Officer and also became the sole Chairman and Chief Executive Officer of New Century Mortgage Corporation. In addition, the Company appointed a new Chief Credit Officer and Chief Administrative Officer, utilizing the management talent already existing within the Company.

CONSOLIDATION OF OPERATIONS.  During 2000, the Company merged its Primewest subsidiary into its New Century Mortgage subsidiary. The former Primewest operations have now been consolidated with the Company's other direct retail operations into a Central Retail Division. Likewise, The Anyloan Company's anyloan.com operation has eliminated its duplicative corporate and IT services, and instead receives those services from New Century Mortgage.

REDUCING ALL-IN ACQUISITION COSTS PER LOAN.  The Company reduced its "all-in acquisition cost" from 3.46% for the quarter ended December 31, 1999 to 2.72% for the quarter ended December 31, 2000. The Company defines the "all-in acquisition cost" 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. The Company achieved this reduction through a combination of (i) decreasing corporate overhead and commission expense, (ii) reducing marketing costs, (iii) consolidating operations, (iv) adjusting the fee structure, (v) closing unprofitable branches, and (vi) reducing staff from 1,770 at December 31, 1999 to 1,511 at December 31, 2000.

SECONDARY MARKETING TRANSITION.  During 2000, the Company transitioned from securitizing the majority of its loans to selling the vast majority of production for cash in whole loan sales. This transition assisted in increasing the Company's cash revenues and reducing the need for additional capital or

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borrowings in order to fund its operations. During 2001, the Company plans to continue to focus its secondary marketing on sales strategies that will optimize liquidity.

ADJUSTMENTS TO UNDERWRITING GUIDELINES.  During 2000, the Company adjusted its underwriting guidelines to concentrate on originating loans that command a higher secondary market value. The Company's gain on sale from whole loan sales increased from 2.61% for the quarter ended December 31, 1999 to 3.03% for the quarter ended December 31, 2000, partly as a result of these efforts. The Company has also devoted efforts to reducing the number of loans it sells at a discount due to document errors, borrower fraud or other reasons.

ESTABLISHMENT OF INSURANCE AGENCY.  During 2000, the Company established an insurance agency in order to be able to earn commissions on certain insurance products offered to the Company's borrowers.

STRATEGIES FOR 2001

    The Company's strategies for returning to profitability in 2001 include:

SALE OF SERVICING RIGHTS.  In March 2001, the Company sold the servicing rights on approximately $4.8 billion of its servicing portfolio, comprised of 25 separate asset-backed securities, to Ocwen Federal Bank FSB for $19.7 million. The Company will retain approximately $1 billion in mortgage servicing rights on loans that have not been securitized. These servicing rights may be sold to Ocwen in future periods. Ocwen also purchased the Company's outstanding servicing advance receivables and assumed responsibility for all future servicing advance obligations on those 25 asset-backed securities. As part of the transaction, the Company also agreed to sell Ocwen servicing rights with respect to up to $3 billion in mortgage loans between March 2001 and December 31, 2002 at a price to be determined based on the characteristics of those servicing rights. With the cash proceeds from the Ocwen transaction, the Company was able to (i) repay the portion of its warehouse line of credit secured by servicing advances, (ii) repay the outstanding balance on its $22.5 million working capital line of credit with US Bank, (iii) purchase interest rate "hedge" protection for the residual cash flows, and (iv) increase its liquidity.

    Ocwen is one of the country's highest-rated specialty servicers and has a strong capital position. The Company believes that it will provide bondholders and loan buyers with greater comfort that the servicer will be able to achieve consistent collateral performance throughout the life of the loans. The transfer of the Company's servicing portfolio to Ocwen's Orlando, Florida servicing platform is scheduled to be completed by August 1, 2001. There can be no assurance that the parties will be able to complete the transfer by that date.

IMPROVE BORROWING TERMS AND REDUCE DEBT.  Also in March 2001, the Company restructured approximately $130 million of existing residual financing. The restructuring reduces the Company's exposure to margin calls on the residual financing and provides for an orderly repayment schedule with full repayment by December 31, 2002. In addition, as part of the debt restructuring, US Bank extended the maturity of its $40 million of subordinated debt from June 2002 to December 31, 2003. As a result, the repayment schedule for the residual and subordinated debt more closely tracks the projected cash flows from the Company's residual securities. Based on projected cash flows used to value the Company's residual securities, residual financing will be reduced to below $100 million by year-end 2001.

CONTINUE REDUCING COSTS.  The Company continues to focus its efforts on reducing its all-in loan acquisition costs to its 2001 target of 2.50% through additional staff reductions, process consolidation and automation.

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CONTINUE CASH-ORIENTED SECONDARY MARKETING STRATEGY.  During 2001, the Company plans to continue to focus its secondary marketing on sales strategies that will optimize liquidity. The Company has adjusted its underwriting guidelines to match those of whole loan buyers, which should help to improve the net execution value. The Company is also executing forward loan sales strategies to expand relationships and manage its net margins. Finally, the Company is exploring securitization strategies that generate immediate cash in excess of origination costs and that do not require residual financing.

REDUCE LOANS SOLD AT DISCOUNT.  The Company plans to devote significant efforts to reducing the number of loans the Company sells at a discount to par value and also reduce the severity of the losses on the loans that are sold at less than par. Loans are typically sold at a discount when (i) there are technical deficiencies in the loan documentation, (ii) the loans have characteristics that are outside the guidelines of whole loan buyers, or (iii) the borrower defaults on the first payment. In order to accomplish these objectives, the Company has appointed a corporate level Chief Credit Officer, improved the analytics used in evaluating discount loans and eliminated products resulting in disproportionately high levels of discount loans.

IMPROVE CASH FLOW.  The Company's objective is to achieve cash flow positive operations in 2001. The Company's strategies for achieving this goal include: (i) selling a significant portion of the Company's loan production for cash through whole loan sales, (ii) improving the credit quality of the Company's loan production, (iii) continuing to reduce its all-in loan acquisition costs, (iv) concentrating on originating higher-value loans and reducing low-margin production, (v) improving the ratio of loans funded over total loans submitted, and (vi) evaluating securitization alternatives that could yield net cash proceeds to the Company equal to or greater than the proceeds received through whole loan sales, with no additional residual financing required.

LOAN ORIGINATIONS AND PURCHASES

    The Company originates and purchases loans through New Century Mortgage's traditional Wholesale Division, through its Worth Funding Inc. subsidiary, its traditional Retail Branch Operations Division and the Central Retail Division. These divisions originate and purchase loans as follows:

The Wholesale Division originates and purchases loans through a network of independent mortgage brokers and correspondents solicited by the Division's account executives. These account executives provide on-site customer service to the broker to facilitate the funding of the loan.

Worth Funding originates and purchases loans by soliciting and servicing brokers through its centralized telemarketing approach, operating from one central office where all decisions can be made promptly.

The Retail Branch Operations Division originates loans direct to the consumer through the Company's 69 retail branch offices located in 26 states.

The Central Retail Division originates, processes and underwrites home mortgage loans nationwide. Loan Officers fulfill customer requests, operating from one central office. Leads are generated through radio, direct mail, telemarketing and the Company's websites.

WHOLESALE AND WORTH FUNDING.  During 2000, the Company's wholesale originations and purchases totaled $3.0 billion, or 73.3% of the Company's total loan production, including $123.5 million, or 3.0%, originated through Worth Funding, which was acquired by the Company in March 2000. As of December 31, 2000, the Wholesale Division was operating through five regional operating centers located in Southern California, Northern California, Chicago, Illinois, Englewood, Colorado, and Tampa, Florida and through 21 additional sales offices located in Alabama, California, Idaho, Indiana, Massachusetts, Michigan, Minnesota, Missouri (2), Nevada, New Mexico, Ohio (2), Oregon, Tennessee, Texas (2), Virginia, Washington (2), and Wisconsin, employing a total of 126 account executives. As of December 31,

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2000, the Company had relationships with approximately 6,184 approved mortgage brokers and during 2000 originated loans through approximately 4,900 brokers. During 2000, New Century's ten largest producing brokers originated approximately 8.0% of the Company's loans, with the largest broker accounting for approximately 1.3% 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.

    Mortgage brokers generally submit loan applications to an account executive in one of the Company's sales offices. The sales office then forwards the application 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 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 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 NC Capital to its loan purchasers.

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    The following table sets forth selected information relating to loan originations through the Wholesale Division and Worth Funding during the periods shown:

Note. Worth Funding was acquired at the end of March. The quarter ending March 31, 2000 does include one Worth Funding loan.

RETAIL BRANCH OPERATIONS DIVISION AND CENTRAL RETAIL DIVISION.  During 2000, the Retail Branch Operations Division originated $797.5 million in loans, or 19.2% of the Company's total loan production. The Central Retail Division originated $313.0 million, or 7.5% of the Company's total loan production. As of December 31, 2000, the Retail Branch operations Division employed 279 retail loan officers, located in 69 sales offices in Arizona (3), California (19), Colorado, Florida (4), Georgia, Hawaii (2), Illinois (2), Kentucky, Louisiana, Massachusetts, Michigan, Minnesota (3), Missouri (2), Montana, Nevada (2), New Jersey, New Mexico, Ohio (3), Oklahoma, Oregon, Pennsylvania, Tennessee (2), Texas (8), Utah, Virginia (2), and Washington (4). As of December 31, 2000, the Central Retail Division employed 64 loan officers and The Anyloan Company employed 10 loan officers at their offices 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. Loan origination fees contribute to profitability and cash flow and offset the higher costs of retail lending.

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    The following table sets forth selected information relating to loan originations through the Retail Branch Operations Division and Central Retail Division during the periods shown:

MARKETING

RETAIL BRANCH MARKETING.  New Century Mortgage's Retail Branch Operations Division relies primarily on targeted direct mail and outbound telemarketing to attract borrowers. New Century Mortgage'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. The Division's website (www.newcenturymortgage.com) is used in the direct mail program to provide information to prospective borrowers and to allow them to complete an application online. Under the Central Telemarketing Program, the telemarketing staff solicits prospective borrowers, makes a preliminary evaluation of the applicant's credit and the value of the collateral property and refers qualified leads to loan officers in the retail branch closest to the customer.

CENTRAL RETAIL MARKETING.  New Century Mortgage's Central Retail Division engages in a variety of direct response advertising, such as purchased leads from aggregators, radio advertising, direct mail, search engine placement, banner ads, e-mail campaigns and links to related websites. Central Retail also markets to New Century Mortgage's current customer base through direct mail, "statement stuffers" and outbound telemarketing. In addition, Central Retail maintains a comprehensive database on all customers with whom it has had contact and markets to these potential customers in an effort to convert them to application.

WHOLESALE MARKETING.  New Century Mortgage's Wholesale Division's marketing strategy focuses on the sales efforts of its account executives, and on providing prompt, consistent service to brokers and their customers. These efforts are supplemented with the Division's e-commerce website, direct mail and fax programs to brokers, advertisements in trade publications, in-house production of collateral sales material, seminar sponsorships, tradeshow attendance and periodic sales contests.

WORTH FUNDING MARKETING.  Worth's Funding marketing strategy relies on direct broker solicitation, fax programs as well as convention and conference attendance.

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FINANCING LOAN ORIGINATIONS AND LOANS HELD FOR SALE

    The Company requires access to credit facilities in order to originate and purchase mortgage loans and to hold them pending their sale or securitization. The Company relies on a $265 million short-term warehouse credit facility led by U.S. Bank National Association to fund its originations and purchases. The Company also relies on aggregation financing facilities totaling $900 million with Salomon Brothers Realty Corp. and Morgan Stanley Dean Witter Mortgage Capital Inc. 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 and a cap on the aggregate of all adjustments.

    The Company's borrowers fall into six 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 $500,000 with a loan-to-value ratio of up to 80%. 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 90% for selected borrowers with a Company risk classification of "A+" or "A-."

    Loans originated or purchased by the Company in 2000 had an average loan amount of approximately $108,000 and an average loan-to-value ratio of approximately 78.6%. If permitted by applicable law and agreed to by the borrower, the Company's loans may also include a prepayment charge that is triggered by the loan's full or substantial prepayment early in the loan's term. Approximately 84% of the loans originated or purchased by the Company in 2000 included some form of prepayment provision.

UNDERWRITING STANDARDS

    The Company 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 Fannie Mae and Freddie Mac. Therefore, the Company's loans are likely to have higher delinquency and foreclosure rates than portfolios of mortgage loans underwritten to Fannie Mae and Freddie Mac standards.

    The Underwriting Guidelines take into account the applicant's credit history and capacity to repay the proposed loan as well as the secured property's value and adequacy as collateral for the loan. Each applicant completes an application that includes information on the applicant's liabilities, income, credit history, employment history and personal information. Based on review of the loan application and other applicant data against the Underwriting Guidelines, the Company determines the loan terms, including the interest rate and maximum loan-to-value ratio.

CREDIT HISTORY.  The Underwriting Guidelines require a credit report on each applicant from a credit reporting company. In evaluating the applicant's credit history, the Company utilizes credit bureau risk

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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.

COLLATERAL REVIEW.  All mortgaged properties are appraised by qualified independent appraisers prior to the loan's funding. The appraiser inspects and appraises the property and verifies that it 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 Fannie Mae and Freddie Mac. The Underwriting Guidelines require a review of the appraisal by a qualified employee of the Company or by a qualified review appraiser retained by the Company. The Underwriting Guidelines then require the Company's underwriters to be satisfied that the value of the property being financed, as indicated by the appraisal, currently supports the outstanding loan balance.

INCOME DOCUMENTATION.  The Underwriting Guidelines include three levels of applicant documentation requirements, referred to as the "Full Documentation," "Limited Documentation" and "Stated Income Documentation" programs. 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 Limited Documentation program, applicants are generally required to submit twelve consecutive monthly bank statements on their individual bank account. 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, the applicant's employment be verified by telephone. 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. 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 applicant's credit history, 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 applicant's ability 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).

UNDERWRITING REQUIREMENTS.  In general, the maximum loan amount for mortgage loans originated under the programs is $500,000. 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 90%, with respect to non-conforming first liens, (ii) a combined loan-to-value ratio at origination of up to 100% 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.

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    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)

(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.

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MORTGAGE CREDIT ONLY PROGRAM.  In addition to the five risk grade categories described above, New Century Mortgage also has a Mortgage Credit Only program. This program uses the applicant's mortgage payment history as the primary factor in qualifying the applicant's ability to repay the loan. 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 or Limited 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 85% is permitted for a mortgage loan on a single-family owner-occupied property. A maximum loan-to-value of 80% 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, or (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. 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 55%. 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.

FICO SCORE PROGRAM.  The Company has introduced a "FICO Score Program" which uses the credit bureau score of the primary borrower to evaluate their consumer credit profile. The Company uses the credit or FICO score, in conjunction with the applicant's mortgage repayment history and any instance of bankruptcy or mortgage default, to gauge creditworthiness. The risk grade categories are determined by a credit score range that aligns with the Company's letter grade categories for its core products. The FICO score program allows the same income documentation types, full documentation, limited documentation and stated income documentation on loans that are assigned a letter risk grade. Adjustments to loan-to-value, property type, occupancy type, debt-to-income ratios and income documentation type are similar to the Company's basic products. All stated income documentation on non-owner occupied properties is not allowed under this program.

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. 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 trend in loans containing at least one exception declined during the course of 2000 from 37.33% in the first quarter to 36.61% in the second quarter, 28.79% in the third quarter and 26.26% in the fourth quarter.

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    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 non-conforming second lien mortgage loans, and adopts new underwriting guidelines appropriate to new loan products it offers.

AUTOMATED CREDIT GRADING.  During the third quarter of 2000, the Company implemented an automated credit grading process to eliminate errors in reading and interpreting credit reports and assigning the correct grade to individual loans. This process was completely integrated into the Company's underwriting process during the fourth quarter of 2000 resulting in a marked improvement in the grading accuracy of the Company's loans.

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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:

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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:

    The Company's loan production in California increased noticeably from the first quarter of 2000 to the fourth quarter of 2000 due primarily to the consolidation of the Company's production units on the east coast, the curtailment of unprofitable products in several other states and an increase in the Company's presence on the west coast.

LOAN SALES AND SECURITIZATIONS

    The Company's subsidiary, NC Capital Corporation, performs its secondary marketing functions. First, NC Capital buys loans from New Century Mortgage within a week or two after origination, paying a price that approximates the loans' secondary market value. 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 which 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 2000, whole loan sales accounted for $3.1 billion, or 75.3% of the Company's total loan sales. Of this amount, 32.4% were sold servicing-retained and 67.6% were sold servicing-released. In the servicing-retained sales, the Company agreed 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 2000 whole loan sales was equal to 3.11% of the original principal balance of the loans sold, including premiums paid by investors for servicing rights.

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    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 the year ended December 31, 2000, the Company sold $1.3 billion in loans to CS First Boston and $483.4 million in loans to CIT, which represented 31.9% and 11.6%, respectively, of total loans sold.

    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 loan characteristics 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 generally 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 the first three quarters of 2000, the Company completed three securitization transactions, two through Salomon Smith Barney, Inc. and one through Greenwich Capital Markets, Inc.

    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 securitiza