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

FORM 10-K

Commission File Number 000-22633

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

        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 ý    No o

        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. o

        Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes ý    No o

        The aggregate market value of Common Stock held by non-affiliates of the Registrant on June 28, 2002 was approximately $769 million based on the closing sales price for the Common Stock on such date of $34.97 as reported on the Nasdaq National Market.

        As of March 21, 2003, the Registrant had 23,800,561 shares of Common Stock outstanding.

        PART III incorporates information by reference from the Registrant's definitive Proxy Statement for its 2003 Annual Meeting of Stockholders to be filed with the Commission within 120 days of December 31, 2002.

PART I

Item 1.    Business

General

        We are a leading nationwide specialty mortgage banking company that, through our subsidiaries, originates, purchases, sells and services residential mortgage loans secured primarily by first mortgages on single-family residences. We offer mortgage products to borrowers who generally do not satisfy the credit, documentation or other underwriting standards prescribed by conventional mortgage lenders and loan buyers, such as Fannie Mae and Freddie Mac. We originate and purchase loans on the basis of the borrower's ability to repay the mortgage loan, the borrower's historical pattern of debt repayment and the amount of equity in the borrower's property (as measured by the borrower's loan-to-value ratio, or LTV). We have been originating and purchasing these types of loans since 1996 and believe we have developed a comprehensive and sophisticated process of credit evaluation and risk-based pricing that allows us to manage effectively the potentially higher risks associated with this segment of the mortgage industry.

        Our borrowers generally have considerable equity in the properties securing their loans, but have impaired or limited credit profiles or higher debt-to-income ratios than traditional mortgage lenders allow. Our 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 we provide.

        We originate and purchase approximately 85.3% of our loans through our wholesale network of 13,800 independent mortgage brokers, 12.8% through our retail network of three regional processing centers and 66 branch offices located in 26 states including our central retail telemarketing unit, and 1.9% through our strategic alliance program with mortgage companies and other financial institutions. Although a significant percentage of our loans are originated in California, we are authorized to do business in all 50 states and regularly originate and purchase loans throughout the country. Wholesale loans are either originated through or purchased from independent mortgage brokers by the Wholesale Division of our subsidiary, New Century Mortgage Corporation. Retail loans are made directly through our network of branch offices, through our central retail telemarketing unit and through the strategic alliances of one of our subsidiaries, The Anyloan Company.

        In 2002, 82.1% of the loans that we originated were refinances of existing mortgages and 17.9% were for the purchase of residential property. Of the refinance transactions, 80.5% were cash-out refinances in which borrowers receive additional proceeds to pay off other debt or meet other financial needs. Also in 2002, 99.6% of our loan originations were first mortgages and 0.4% were second lien mortgages. 93.7% of our loans were secured by owner-occupied properties, 6.3% were secured by investment properties, and 58.6% were to borrowers within our two highest credit grades even though our underwriting guidelines include six levels of credit risk classifications.

        We sell all of our loans, relying on a combination of two strategies: whole loan sales and securitizations. Historically, when whole loan prices are higher, we generally elect to sell more loans for cash and when whole loan prices are lower, we generally rely more heavily on securitizations. In 2002, because of favorable whole loan prices, we elected to optimize cash flow and earnings by selling 93.6% of our loans in whole loan transactions for cash. We securitized the remainder.

        Whole loan sales enable us to generate current cash flow, protect against the potential volatility of the securitization market and reduce the risks inherent in retaining residual interests from securitizations. In recent years when we have securitized, we have employed a structure that allows us to receive initial cash proceeds similar to those we would have received in a whole loan sale during the same period.

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Recent Operational Highlights

        We have achieved several significant operational milestones and goals since January 1, 2002, including the following:

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Higher Production Volume.  We increased our loan origination volume significantly. We originated $14.2 billion in mortgage loans in 2002, a 129% increase over 2001.



•

Increased Market Share.  According to Inside B&C Lending, our share of the subprime mortgage market during the fourth quarter of 2002 increased to 7.4%, representing an increase of 3.2 percentage points over the same period of 2001.



•

Repaid Long-Term Financing.  We repaid in full the remaining $79.9 million of long-term debt that was secured by our residual interests in securitizations, as well as $40.0 million of subordinated debt to U.S. Bank.



•

Improved Cash Position.  Cash of $182.9 million at year-end 2002 represented a 71% increase over 2001 year-end cash of $106.7 million.



•

Servicing.  In October 2002, we re-established our servicing platform. Our total servicing portfolio as of December 31, 2002 consisted of $4.0 billion in loans, including $1.9 billion held for sale, $522 million sold servicing retained, and $1.58 billion in interim servicing. In addition, during the first quarter of 2003, we completed a securitization transaction totaling $496 million with Freddie Mac. This transaction was sold servicing retained with Freddie Mac approving our servicing platform.



•

Geographic Diversification.  We expanded our production on the East Coast significantly during 2002. The fourth quarter 2002 loan production in 12 eastern states totaled over $1.0 billion, representing a 251% increase over the same period in 2001.



•

On-Balance Sheet Securitization.  In January 2003, we completed a securitization of $496 million of loans that we structured to be accounted for as a financing. Under this structure, we will not recognize a gain on sale at the time of transaction, but rather will recognize net interest income as payments are received on the underlying loans.



•

Increased Web-based Originations.  We introduced our new Wholesale FastQual^SM website generally offering a 12-second response to brokers. Our Wholesale Division's fourth quarter 2002 Internet originations of $912 million represented a 415% increase over the same period in 2001. Likewise, our Retail Division's combined Internet originations of $195 million in the fourth quarter of 2002 represented a 282% increase over the same period in 2001.



•

Credit Scores in Originations.  During 2002, we originated a larger portion of our production in our top two credit grades and a smaller proportion in our bottom two credit grades. 61.3% of our fourth quarter 2002 production consisted of loans in our top two credit grades compared to 50.9% for the same period in 2001. During the same period, production in our bottom two credit grades decreased from 7.3% of total production to 4.4%. The weighted average Fair, Isaac & Company ("FICO") score of our loans originated increased to 600 in the fourth quarter of 2002 from 588 during the same period in 2001.



•

Initiated Stock Repurchase Program.  We initiated a stock repurchase program authorizing total repurchases of up to three million shares of our common stock. We announced the completion of the repurchase of the first two-million share allocations in February 2003. We plan to continue repurchasing shares under the remaining million share allocation subject to available cash, general business conditions and other factors, including alternative investment opportunities.



•

Repurchase and Conversion of U.S. Bank Preferred Stock to Common Stock.  In March 2002, we repurchased 7,144 shares of our preferred stock from U.S. Bank for $7.0 million. In April 2002, the remaining preferred shares were converted to our common stock.

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•

Increased Dividend.  In December 2002, we declared a quarterly cash dividend of $0.10 per share, increasing the dividend rate from a $0.05 per share level from the prior quarters in 2002.



•

Expanded Strategic Alliance Program.  In the fourth quarter of 2002, one of our subsidiaries, The Anyloan Company, originated $132.1 million in loans through alliances with banks, thrifts and other financial institutions and mortgage companies. This represented a 78% increase over The Anyloan Company's third quarter 2002 volume.



•

Expanded Credit Facilities.  During 2002, we expanded our warehouse and aggregation credit facilities from $1.7 billion to $3.5 billion. This growth in funding sources helped to accommodate our significant growth in production during the year.



•

Established REIT.  We established a real estate investment trust, or REIT, to hold our residual interests from our securitization transactions. We expect this structure to afford us some operating and tax efficiencies.

Growth and Operating Strategies

        We plan to pursue our 2003 initiative of "Maximizing Stockholder Value" through four key initiatives: (i) protecting the franchise, (ii) growing the franchise, (iii) optimizing the return to our stockholders and, (iv) pursuing business diversification strategies.

        The key tactics for pursuing these initiatives include:

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Protecting the Franchise.  We intend to maintain strong cash, liquidity and capital positions to protect our ability to respond to disruptions in the market or other adverse conditions. A strong cash position allows us to hold loans longer in the event that the secondary market for our loans weakens or becomes unstable due to a temporary disruption. We also intend to maintain and improve our underwriting, appraisal and compliance controls to preserve credit quality and mitigate the risk of litigation or regulatory actions for compliance errors.



•

Growing the Franchise.  We intend to continue to pursue our geographic expansion on the East Coast and in other metropolitan areas outside of California. We plan to continue to grow our production volume and market share. We also plan to use technology such as our new loan origination system and FastQual^SM website to maintain low loan origination costs and provide better service. We also plan to expand our credit facilities and funding sources so that we have access to adequately fund and grow our business.



•

Stockholder Value Initiatives.  We plan to maintain a cash dividend of at least $0.10 per share per quarter. We also intend to complete the repurchase of our third million-share repurchase allocation over the next 12 months, subject to available cash, general business conditions and other factors including alternative investment opportunities.



•

Earnings Forecast.  We have announced that we expect to earn $7.25 per share for 2003.



•

Business Diversification Initiatives.  We intend to work to diversify our earnings sources by:



•

Expanding our Loan Servicing Program. We plan to increase the size of our servicing portfolio and pursue ratings by at least one of the major credit rating agencies during 2003.



•

Employing Selective On-Balance-Sheet Securitizations. We plan to supplement our whole loan sales strategy with securitization transactions that are accounted for as financings instead of sales. This way we will not recognize a gain on sale at the time of transaction, but rather will recognize net interest income as payments are received on the underlying loans.



•

Pursuing Business Development Opportunities. We will evaluate strategic acquisitions and new business opportunities to diversify our earnings stream.

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Strengths and Competitive Advantages

        We believe that we have several strengths and competitive advantages that will allow us to compete effectively in our business, including:

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Management Experience and Depth.  The members of our senior management team have on average over 19 years of experience in the consumer finance sector.



•

High Quality Customer Service.  We strive to make the origination process easy for our borrowers and brokers by providing prompt responses, consistent and clear procedures and an emphasis on ease of use.



•

Strong Secondary Market Relationships.  We have developed relationships with a variety of large institutional loan buyers, including Salomon Smith Barney, CSFB, Morgan Stanley, CDC Mortgage Capital and Deutsche Bank, who consistently bid on and buy large loan pools from us.



•

Advanced Technology for Credit Evaluation.  The implementation of our proprietary credit grading and pricing engines has allowed us to produce a more consistent and predictable portfolio of loans.



•

Significant Cash Flows from Residuals.  We expect our residual interests to provide significant cash flows which will support operations in the future.



•

State-of-the-Art Technology.  We launched a new generation of technology to enhance user access to loan securitization information in December 2002 on our website www.ncen.com. The site provides data distilled from monthly statements to certificate holders, pre-packaged reports, user-definable data views, deal documents and dynamic data analytical tools to examine New Century's home equity loan performance supporting each of its securitized transactions.



•

Quality Control and Quality Assurance.  We have developed a variety of automated and manual pre- funding controls (Quality Control) and post-funding reviews (Quality Assurance) to increase the likelihood that we originate loans that comply with applicable law as well as with our own internal guidelines and secondary market requirements.

Product Types

        We offer both fixed-rate loans and adjustable-rate loans, or ARMs. We also offer loans with an interest rate that is initially fixed for a period of time and that subsequently converts to an adjustable-rate. At each interest rate adjustment date, we adjust the rate, subject to certain limitations on the amount of any single adjustment and a cap on the aggregate of all adjustments.

        In addition, our 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. Our maximum loan amount is generally $500,000 with a loan-to-value ratio of up to 90%. We do, however, offer larger loans with lower loan-to-value ratios through a special jumbo program. We also offer products that permit a loan-to-value ratio of up to 95% for selected borrowers with a risk classification of "A+" or of up to 90% for selected borrowers with a risk classification of "A-". We also offer our "Prime Alternative" product designed to appeal to borrowers of higher credit quality.

        Loans originated or purchased by us during 2002 had an average loan amount of approximately $151,000 and an average loan-to-value ratio of 79.6%. If permitted by applicable law and agreed to by the borrower, our loans may also include a prepayment charge that is triggered by the loan's full or substantial prepayment early in the loan term. Approximately 80.0% of the loans we originated or purchased during 2002 included some form of prepayment charge.

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Loan Originations and Purchases

        We originate and purchase loans through the New Century Mortgage Corporation Wholesale Division, Retail Division and through The Anyloan Company, another subsidiary of New Century Financial Corporation. These divisions originate and purchase loans as follows:

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The Wholesale Division originates and purchases loans through a network of independent mortgage brokers and correspondent lenders solicited by our account executives. Our account executives provide on-site customer service to the broker to facilitate the funding of the loan. In addition, the Wholesale Division originates mortgage loans through its website at www.newcentury.com, where a broker can submit a loan request and receive a response generally within 12 seconds.



•

The Retail Division originates loans directly to the consumer through 66 retail branch offices located in 26 states and the central retail telemarketing unit that originates loans nationwide through one central office. Leads are generated through radio, direct mail, telemarketing, and the Internet.



•

The Anyloan Company originates loans through two centralized processing centers and develops alliances with mortgage companies and other financial institutions that do not offer our products.

The Wholesale Division

        During 2002, our wholesale originations and purchases totaled $12.1 billion, or 85.3% of our total loan production. As of December 31, 2002, the Wholesale Division operated through fourteen regional operating centers located in Southern California (2), Northern California (2), Itasca, Illinois, Greenwood Village, Colorado, Florida (2), Woburn, Massachusetts, Pearl River, New York, Columbus, Ohio, Plano, Texas, Herndon, Virginia and Bellevue, Washington. As of December 31, 2002, the Wholesale Division employed 310 account executives.

        As of December 31, 2002, approximately 13,800 mortgage brokers were approved by us to submit loans. We originated loans through approximately 8,100 brokers during 2002. During this period, our ten largest producing brokers originated 4.9% of our wholesale production.

        New Century has designed and implemented a detailed procedure for qualifying, approving and monitoring our network of approved mortgage brokers. We require all brokers to complete an application which requests general business information and copies of all licenses. Upon receipt of the application and supporting documentation, our Broker Services Department scrutinizes the materials for completeness and accuracy. Our Broker Services Department then independently verifies the information contained in the application (i) through a public records website to verify the validity and status of licenses, and (ii) through the Mortgage Asset Research Institute, or MARI, which provides background information from both the public and private sectors.

        To be approved, a broker must enter into our standard broker agreement with New Century Mortgage Corporation pursuant to which the broker agrees to abide by the provisions of our policy on Fair Lending and our Brokers' Code of Conduct. Each broker also agrees to comply with applicable state and federal lending laws and agrees to submit true and accurate disclosures with regard to loan applications and loans. In addition, we employ a risk team that regularly reviews and monitors the loans submitted through our brokers.

        In wholesale loan 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 our liaison with the borrower through the lending process. We review and underwrite the application submitted by the broker, approve or deny the application, set the interest rate and other terms of the loan and, upon acceptance by the borrower and satisfaction of all conditions imposed by us, fund the loan. Because brokers conduct their own marketing and employ their own personnel to complete loan applications

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and maintain contact with borrowers, originating loans through the Wholesale Division allows us to increase loan volume without incurring the higher marketing, labor and other overhead costs associated with increased retail originations.

        Mortgage brokers can submit loan applications in two ways: to an account executive in one of our sales offices or through our web-based loan underwriting engine, FastQual^SM, at www.newcentury.com.

        In either case, the mortgage broker will forward the application to the closest regional operating center where the loan is logged in for 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, we attempt to respond to each application as quickly as possible. If approved, we issue a "conditional approval" to the broker with a list of specific conditions that have 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 account executive work directly with the submitting mortgage broker who originated the loan to collect the requested information and to meet the underwriting conditions and other requirements. In most cases, we fund loans within 30 days from approval of the application.

        Our web-based loan underwriting engine, FastQual^SM, generally provides the broker with a response in less than 12 seconds. Loan information from brokers' own loan origination systems is automatically uploaded from their computers to FastQual^SM with two clicks of their mouse. The system lists all loan products that the borrower qualifies for and thus enables brokers to offer their customers many options. Our broker web site enables mortgage brokers to pre-qualify borrowers, submit loan applications, order credit reports, automatically credit grade the loan, obtain pricing and track the progress of the loan through funding.

        The Wholesale Division also purchases closed loans on an individual or "flow" basis from independent mortgage bankers and financial institutions. We review an application for approval from each lender that seeks to sell us a closed loan. We analyze the mortgage banker's underwriting guidelines, to ensure conformance with our guidelines, and financial condition, including its licenses and financial statements. We require each mortgage banker to enter into a purchase and sale agreement with customary representations and warranties regarding the loans the mortgage banker will sell to us. These representations and warranties are comparable to those given by us, through one of our subsidiaries, NC Capital Corporation, to our loan purchasers. Once the correspondent is approved, we underwrite each loan they submit.

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

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The Retail Division

        During 2002, the Retail Division originated $1.8 billion in loans, or 12.8% of our total loan production. As of December 31, 2002, the Retail Division, including the central retail telemarketing unit, employed 494 retail loan officers. These employees were located in three regional processing centers and 66 sales offices in Arizona (3), California (18), Colorado, Florida (4), Georgia, Hawaii, Illinois (2), Indiana, Kentucky, Louisiana, Massachusetts, Michigan, Minnesota (2), Missouri (2), Nevada (2), New Jersey, New Mexico, Ohio (3), Oklahoma, Oregon (2), Pennsylvania (3), Tennessee, Texas (8), Utah, Virginia (2), and Washington (2).

        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.

The Anyloan Company

        During 2002, The Anyloan Company originated $274.7 million in loans, or 1.9% of our total loan production, through two centralized processing centers. As of December 31, 2002, The Anyloan Company employed 11 loan officers at its offices in Irvine, California and Foxborough, Massachusetts.

        The Anyloan Company develops alliances with mortgage companies and other financial institutions that do not offer our products.

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

Marketing

Wholesale Marketing

        The Wholesale Division's marketing strategy focuses on the sales efforts of its account executives, and on providing prompt, consistent service to brokers and customers. The Wholesale Division supplements with direct mail and fax programs to brokers, advertisements in trade publications, in-house production of collateral sales material, seminar sponsorships, tradeshow attendance, periodic sales contests and its e-commerce website, www.newcentury.com.

Retail Marketing

        The Retail Division's branch operations unit relies primarily on targeted direct mail and outbound telemarketing to attract borrowers. New Century Mortgage Corporation's direct mail programs are managed by a centralized staff who create a targeted mailing list for each branch market and oversee

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the completion of mailings by a third party mailing vendor. All calls or written inquiries from potential borrowers that result from the mailings are tracked centrally and then forwarded to each branch location and handled by branch loan officers.

        The direct mail program uses the Retail Division's website www.newcenturymortgage.com 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.

        The Retail Division's central retail telemarketing unit solicits prospective borrowers through a variety of direct response advertising methods, such as purchased leads from aggregators, radio advertising, direct mail, search engine placement, banner ads, e-mail campaigns and links to related websites. The central retail telemarketing unit also markets to the current customer base of New Century Mortgage through direct mail and outbound telemarketing, although such solicitations are not within the first twelve months after a loan's origination. In addition, this unit maintains a comprehensive database on all customers with whom it has had contact and markets to these potential customers as well.

The Anyloan Company Marketing

        The Anyloan Company's marketing strategy focuses on developing long-term strategic partnerships with nationwide mid- to large-cap mortgage companies, mortgage brokers and bankers and other financial institutions. The production managers perform regular office visits to clients and distribute marketing and promotional materials about our products and services. In addition to visiting clients, fax and e-mail campaigns assist the production managers in developing and maintaining these client relationships.

Financing Loan Originations and Loans Held for Sale

        We require access to credit facilities in order to originate and purchase mortgage loans and to hold them pending their sale or securitization.

        We use our $1.9 billion warehouse and aggregation lines of credit provided by Bank of America, N.A., UBS Warburg Real Estate Securities, Inc., CDC Mortgage Capital and Salomon Brothers Realty Corp. to finance the actual funding of our loan originations and purchases. After we fund loans on these lines and all loan documentation is complete, we generally transfer the loans to one of our aggregation facilities provided by Salomon Brothers Realty Corp. and Morgan Stanley Dean Witter Mortgage Capital, Inc. to finance the loans pending their sale or securitization. These aggregation facilities currently total $1.6 billion. We then sell the loans through securitizations or whole loan sales within two to three months and pay down the aggregation facilities with the proceeds. See "—Management's Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources."

Underwriting Standards

        We originate or purchase our mortgage loans in accordance with the underwriting guidelines described below. The loans we originate or purchase generally do not satisfy conventional underwriting standards, such as those of Fannie Mae or Freddie Mac. Therefore, our loans are likely to have higher delinquency and foreclosure rates than portfolios of mortgage loans underwritten to conventional Fannie Mae and Freddie Mac standards.

        Our 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 personal information on the applicant's liabilities, income, credit history and employment history. Based on review of the loan application and other data

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from the applicant against our underwriting guidelines, we determine the loan terms, including the interest rate and maximum loan-to-value ratio.

Credit History

        Our underwriting guidelines require a credit report on each applicant from a credit reporting company. In evaluating an applicant's credit history, we utilize credit bureau risk scores, or a FICO score, which is 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

        A qualified independent appraiser inspects and appraises each mortgage property and verifies that it is in acceptable condition. Following each appraisal, the appraiser prepares a report that includes a market value analysis based on recent sales of comparable homes in the area and, when appropriate, replacement cost analysis based on the current cost of constructing a similar home. All appraisals must conform to the Uniform Standards of Professional Appraisal Practice adopted by the Appraisal Foundation's Appraisal Standards Board and are generally on forms acceptable to Fannie Mae and Freddie Mac. Our underwriting guidelines require a review of the appraisal by one of our qualified employees or by a qualified review appraiser that we have retained. Our underwriting guidelines then require our 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

        Our underwriting guidelines include three levels of income documentation requirements, referred to as the "full documentation," "limited documentation" and "stated income documentation" programs. Under the full documentation program, we generally require applicants to submit two written forms of verification of stable income for at least twelve months. Under the limited documentation program, we generally require applicants to submit twelve consecutive monthly bank statements on their individual bank accounts. 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 of these documentation programs require that, with respect to salaried employees, the applicant's employment be verified by telephone. In the case of a purchase money loan, we require verification of the source of funds, if any, to be deposited by the applicant into escrow. Under each of these programs, we review the applicant's source of income, calculate the amount of income from sources indicated on the loan application or similar documentation, review the applicant's credit history, and calculate the debt service-to-income ratio to determine the applicant's ability to repay the loan. We also review the type, use and condition of the property being financed. Our underwriters use a qualifying rate that is equal to the initial interest rate on the loan to determine the applicant's ability to repay an adjustable-rate loan. We use three percent over the start rate for the interest-only product.

Underwriting Requirements

        In general, the maximum loan amount for our mortgage loans is $500,000. Our underwriting guidelines permit loans on owner-occupied one-to-four-family residential properties to have:

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a loan-to-value ratio at origination of up to 95% with respect to non-conforming first liens; and



•

a combined loan-to-value ratio at origination of up to 100% with respect to conforming and non-conforming second liens.

        The applicability of the above ratios depends on, among other things, the purpose of the mortgage loan, the borrower's credit history, the borrower's repayment ability and debt service-to-income ratio, and the type and use of the property. The loan-to-value ratio of a mortgage loan that is secured by mortgaged property acquired by a borrower under a "lease option purchase" is determined in one of

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two ways. If the "lease option price" was set less than twelve months prior to origination, the loan-to-value ratio of the related mortgage loan is based on the lower of the appraised value at the time of origination of the mortgage loan and the sale price of the related mortgaged property. If the "lease option price" was set at least twelve months or more prior to origination, the loan-to-value ratio of the related mortgage loan is based on the appraised value of the related mortgaged property at the time of origination.

        Our 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)

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(Continued)

(1)

The letter grades applied to each risk classification reflect our internal standards and do not necessarily correspond to the classifications used by other mortgage lenders.

(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.

Prime Alternative Program

        For our Prime Alternative Program, which attracts a higher credit quality "Alternative—A" borrower, we assess the borrower's mortgage repayment history, any incidents of bankruptcy, mortgage default or major derogatory credit, and we require a minimum FICO score of 625, which is substantially higher than our "core" product requirements. This program is restricted to owner-occupied properties and second home, single unit, two unit, condominiums or detached planned unit developments ("PUDs"), with no rural or unique properties allowed. We have limitations on loan amount, loan-to-value ratio, income documentation type, and the amount of "cash out" allowed on refinances. We assign a unique 4-level grade classification based on the FICO score range for the primary borrower.

Mortgage Credit Only Program

        In addition to the six 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. 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. In order to qualify for a Mortgage Credit Only loan:

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The borrower may not be a participant in our Stated Income Documentation program;



•

No bankruptcy or notice of default filings shall have occurred during the preceding two years, unless the borrower's bankruptcy has been discharged during the past two years and the borrower has re-established a credit history that otherwise complies with the credit parameters set forth above; and



•

The mortgaged property must be in at least average condition. A maximum loan-to-value ratio of 85% is permitted for a mortgage loan on a single-family owner-occupied property. A maximum loan-to-value ratio 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%.

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Home Saver Program

        We have established a sub-category of our C- credit grade 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. This sub-category is known as our Home Saver Program. The Home Saver Program is available only to Full Documentation borrowers and permits a maximum LTV ratio of 65% and a maximum debt service-to-income ratio of 55%. The maximum loan amount is $300,000 and all derogatory credit report items must either be brought current or paid with 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 bankruptcy, the bankruptcy must be discharged with the proceeds of the loan. For the year ended December 31, 2002, Home Saver loans accounted for less than one percent of total loan originations and purchases.

Exceptions

        The categories and criteria described in our underwriting guideline table above are guidelines only. On a case-by-case basis, we may determine that an applicant warrants a LTV ratio exception, a debt service-to-income ratio exception, or another exception. We may allow such an exception if the application reflects certain compensating factors such as low LTV, 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. We may also allow an exception if the applicant places in escrow 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. Our automated credit grading system aids in identifying and managing underwriting exceptions. Certain of our loan programs and risk grade classifications limit the approval of exceptions to higher loan approval authority levels. For 2002, our overall underwriting exception rate was 18.53% on total production of $14.2 billion. For 2001, our overall underwriting exception rate was approximately 24.23% on total production of $6.2 billion.

        We evaluate our underwriting guidelines on an ongoing basis and periodically modify them to reflect our current assessment of various underwriting issues. We also maintain separate underwriting guidelines appropriate to our non-conforming second lien mortgage loans, and adopt new underwriting guidelines appropriate to new loan products we may offer.

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Loan Production by Borrower Risk Classification

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