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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:

Loan Sales and Securitizations

        Our subsidiary, NC Capital Corporation, performs secondary marketing functions. 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 either securitizations or whole loan sales. 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

        As of December 31, 2002, whole loan sales accounted for $12.4 billion, or 93.6% of our total loan sales. The weighted average premiums received on whole loan sales during 2002 was equal to 4.37% of the original principal balance of the loans sold, including premiums received for servicing rights.

        We seek to maximize our premiums on whole loan sales by closely monitoring requirements of institutional purchasers 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, 2002, we sold $7.0 billion of loans to Morgan Stanley Dean Witter Mortgage Capital Inc., $1.5 billion of loans to Credit Suisse First Boston Mortgage Capital LLC, and $1.4 billion of loans to Deutsche Bank, which represented 52.2%, 11.4% and 10.1%, respectively, of total loans sold. While over two-thirds of our loans were sold to these three investors, the competitive bid process for our whole loan sales generally includes many more potential buyers.

        We sell whole loans on a non-recourse basis pursuant to a purchase agreement in which we give customary representations and warranties regarding the loan characteristics and the origination process. Therefore, we may be required to repurchase or substitute loans in the event of a breach of these representations and warranties. In addition, we generally commit to repurchase or substitute a loan if a payment default occurs within the first month or two following the date the loan is funded, unless we make other arrangements with the purchaser.

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Securitization

        In a securitization, we sell a pool of loans to a trust for a cash purchase price and a certificate evidencing our 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. We receive the cash flows from the residual interests after payment of servicing fees, guarantor fees and other trust expenses if the specified over-collateralization requirements are met. Over-collateralization requirements are generally based on a percentage of the original or current unpaid principal balance of the loans and may be increased during the life of the transaction depending upon actual delinquency or loss experience. A net interest margin ("NIM") transaction, through which certificates are sold that represent a portion of the spread between the coupon rate on the loans and the investor pass-through rate, may also occur concurrently with or shortly after a securitization. A NIM transaction allows us to receive a substantial portion of the gain in cash at the closing of the NIM transaction, rather than over the actual life of the loans.

        During 2002, we completed two securitizations totaling $845.5 million of mortgage loans (New Century Home Equity Loan Trust, Series 2002-A and New Century Home Equity Loan Trust, Series 2002-1). Following both securitizations, we issued a net interest margin security. The initial cash proceeds from these transactions were comparable to cash proceeds we received through whole loan sales. Credit enhancement for these securitizations was provided through a fully-funded over-collateralization account of 2.1%.

        The following are the material assumptions we use to record the gain on sale for the New Century Home Equity Loan Trust, Series 2002-A and New Century Home Equity Loan Trust, Series 2002-1:

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        A summary of gain on sale and cash flow from the 2002 securitization transactions is presented below:

Loan Servicing and Delinquencies

Servicing

        Loan servicing 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 un-remedied defaults.

        We conducted servicing operations from July 1998 through the middle of 2001 on an in-house platform. For various cash-flow and operating reasons, in March 2001 we sold our portfolio of mortgage loan servicing rights to Ocwen Federal Bank FSB. We also entered into an agreement with Ocwen to service our loans receivable held for sale.

        From March 2001 to September 2002, we contracted with Ocwen to perform sub-servicing functions for our loans receivable held for sale. During that period, all of our loan sales were on a servicing-released basis, or we separately sold the servicing rights to third parties.

        In February 2002, we announced our decision to re-establish a servicing platform. We hired our former Senior Vice President of Servicing and many other key managers who were part of our servicing operation prior to the March 2001 sale. In October 2002, we re-established mortgage servicing operations. We began boarding loans on our platform in October 2002, and we sold $525 million in loans on a servicing-retained basis during the fourth quarter of 2002. We intend to continue to add servicing rights on a substantial percentage of the loans we sell in future periods.

        During 2003, we will seek approval for our servicing platform from one or more ratings agencies. If we receive such approval, we expect we will be able to grow the platform more quickly.

Delinquencies and Foreclosures

        The loans we originate or purchase 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

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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 attorneys' fees, which may be recovered by a lender. After the reinstatement period has expired without the default having been cured, the borrower or junior lienholder 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. When a loan has not yet been sold or securitized, we will generally allow a borrower to reinstate the loan up to the date of foreclosure sale.

        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.

Delinquency Reporting

        In February 1996, we began receiving applications for mortgage loans under our regular lending program. During 1996, we sold all of our loans on a whole loan, servicing-released basis. We began selling loans through securitizations in 1997. In connection with these securitizations, we established reporting systems to track historical delinquency, bankruptcy, foreclosure and default experience for the loans included in our securitizations as well as our total portfolio of loans.

        JP Morgan Chase performs a monthly review of asset-backed securities in our industry, including those issued by New Century. The following table, summarized from the JP Morgan Chase report, shows the actual experience of our securitized pools in comparison to others in our industry for the month of December 2002:

(a)

For 2001 and 2002 there is no fixed-rate performance data available.



(b)

This data does not reflect delinquencies and losses on loans that securitizers may have elected to repurchase out of the securitized pools.

Peer Group includes: Advanta, Novastar, Conseco, Aames, Saxon, WMC, Countrywide, Ameriquest, First Franklin, Delta Funding, RFC, Long Beach, Indymac and Option One—data not independently verified by New Century.

        As indicated in the table above, their report for December 2002 shows that our loan pools generally have lower delinquency rates and cumulative pool losses (total losses incurred over the life of a pool, divided by the original securitized balance) than the industry peer group average.

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        The pooling and servicing agreements for our securitizations typically provide us or the master servicer the right to initiate a call of all outstanding bonds once the current balance of loans in the pool falls below five or ten percent of the original principal balance. To date, we have exercised our clean-up call on four of our 1997 securities, resulting in the repurchase and subsequent resale of the remaining loans in these securities.

Interest Rate Risk Management Strategies

        We try to mitigate interest rate risks through a variety of strategies. For instance, the interest rate that will be charged to our borrowers is locked on the day the loan funds. This generally allows us to generally price our pipeline of approved loans with current market rates. In addition, we may elect to use various financial instruments such as swaps, forwards, options, futures contracts, and other derivative instruments to mitigate interest rate risk. We sometimes use forward loan sale commitments with a predetermined price and delivery date to sell our unsold loan inventory which protects us from interest rate increases. In order to mitigate the adverse effects resulting from interest rate increases on our residual interests, we first forecast future interest rates using the Forward LIBOR Curve. We then use Euro Dollar Futures contracts timed to match the fixed period of the loans in our securitizations. If interest rates increase, the cash flow received from the Euro Dollar Futures contracts offsets the reduction in future cash flow projected on our residual interests.

Competition

        We continue to face intense competition in the business of originating, purchasing and selling mortgage loans. Our 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 the past two or three years, some large, diversified financial corporations have purchased several of our competitors. Other large financial institutions have gradually expanded their "non-prime" or "sub-prime" lending capabilities. Many of these companies have greater access to capital at a cost lower than our cost of capital under our warehouse, aggregation and residual financing facilities. Federally chartered banks and thrifts can preempt some of the state and local lending laws to which we are subject, thereby giving them a competitive advantage. In addition, many of these competitors have considerably greater technical and marketing resources than we have.

        At the same time, the two large government-sponsored secondary market purchasers of loans, Fannie Mae and Freddie Mac, have begun purchasing some non-prime loans. This has the potential of increasing competition as lenders without prior non-prime origination expertise begin originating non-prime loans to Fannie Mae's and Freddie Mac's guidelines using their automated tools.

        We also face competition from smaller, recently established wholesale mortgage banking companies that try to attract our key managers and account executives as well as our key brokers.

        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 we can charge borrowers, thereby potentially lowering gain on future loan sales and securitizations. Our results of operations, financial condition and business prospects could be materially adversely affected to the extent any of our competitors significantly expands its activities in our markets. Fluctuations in interest rates and general economic conditions may also affect our 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 our customers to refinance their loans.

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        We believe that one of our key competitive strengths is our employees, with their strong commitment to customer service and their team-oriented approach. In addition to the strength of our work force, we believe that our competitive strengths include:

•

providing a high level of service to brokers and their customers;



•

offering competitive loan programs for borrowers whose needs are not met by conventional mortgage lenders;



•

our high-volume targeted direct mail marketing program; and



•

our performance-based compensation structure which allows us to attract, retain and motivate qualified personnel.

Key Marketing Advantages

        We also face competition through our marketing initiatives from the Internet, direct mail and e-mail. We believe that our technology is also one of our key competitive strengths, including:

•

our Wholesale Division's web-based loan underwriting engine, FastQual^SM, generally providing our brokers and their customers with a response in less than 12 seconds; and



•

our Retail Division's diversified approach, combining direct mail, Internet, inbound and outbound telemarketing, providing a steady, reliable source of interested borrowers.

Regulation

        Our business is regulated by federal, state, and local government authorities and is subject to extensive federal, state and local laws, rules and regulations. We are also subject to judicial and administrative decisions that impose requirements and restrictions on our business. At the federal level, these laws and regulations include:

•

the Equal Credit Opportunity Act;



•

the Federal Truth and Lending Act and Regulation Z;



•

the Home Ownership and Equity Protection Act;



•

the Real Estate Settlement Procedures Act;



•

the Fair Credit Reporting Act;



•

the Fair Debt Collection Practices Act;



•

the Home Mortgage Disclosure Act;



•

the Fair Housing Act;



•

the Telephone Consumer Protection Act; and



•

the Gramm-Leach-Bliley Act.

        These laws, rules and regulations, among other things:

•

impose licensing obligations and financial requirements on us;



•

limit the interest rates, finance charges, and other fees that we may charge;



•

prohibit discrimination;



•

impose underwriting requirements;



•

mandate disclosures and notices to consumers;

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•

mandate the collection and reporting of statistical data regarding our customers;



•

regulate our marketing techniques and practices; and



•

require us to safeguard non-public information about our customers.

        Our failure to comply with these laws can lead to:

•

civil and criminal liability;



•

loss of approved status;



•

demands for indemnification or loan repurchases from buyers of our loans;



•

class action lawsuits; and



•

administrative enforcement actions.

Compliance, Quality Control and Quality Assurance

        We regularly monitor the laws, rules and regulations that apply to our business and analyze any changes to them. We integrate many legal and regulatory requirements into our computerized loan origination system so as to reduce the prospect of inadvertent non-compliance due to human error. We also maintain policies and procedures, summaries and checklists to help our origination personnel comply with these laws.

        Our training programs are designed to teach our personnel about the significant laws, rules and regulations that affect their job responsibilities. We also maintain a variety of pre-funding quality control procedures designed to detect compliance errors prior to funding.

        In addition, we also subject a statistically valid sampling of our loans to post-funding quality assurance reviews and analysis. We track the results of the quality assurance reviews and report them back to the responsible origination units. To the extent refunds or other corrective actions are appropriate, we deduct those amounts from the internal profit and loss calculation for that origination unit. Many of our managers also have their compensation tied partly to the quality assurance results of their units.

        Our loans and practices are also reviewed regularly in connection with the due diligence that our loan buyers and lenders perform. Our state regulators also review our practices and loan files regularly and report the results back to us. Since our inception, we have undergone over 70 state examinations. To date, the state examinations have never resulted in findings of material violations or imposition of penalties.

Licensing

        As of December 31, 2002, we were licensed or exempt from licensing requirements by the relevant state banking or consumer credit agencies to originate first mortgages in all 50 states and the District of Columbia and second mortgages in 48 states and the District of Columbia.

Regulatory Developments

        During 2002, federal and state legislators and regulators adopted a variety of new or expanded regulations, particularly in the areas of privacy and consumer protection.

Privacy

        The federal Gramm-Leach-Bliley financial reform legislation imposes additional privacy obligations on us with respect to our applicants and borrowers. Regulations adopted in 2002 impose additional

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obligations on us to safeguard the information we maintain on our borrowers. In addition, several states are considering even more stringent privacy legislation. If passed, a variety of inconsistent state privacy legislation could substantially increase our compliance costs.

Fair Credit Reporting Act

        The Fair Credit Reporting Act provides federal preemption for lenders to share information with affiliates and certain third parties and to provide pre-approved offers of credit to consumers. Absent Congressional action, this federal preemption expires at the end of 2003. Without the preemption, states could impose more stringent and inconsistent regulations regarding the use of pre-approved offers of credit and other information sharing. This could impose additional regulatory and compliance costs on us and reduce the effectiveness of our marketing programs.

Home Mortgage Disclosure Act

        In 2002, the Federal Reserve Board adopted changes to Regulation C promulgated under the Home Mortgage Disclosure Act ("HMDA"). Among other things, the new regulations require lenders to report pricing data on loans with annual percentage rates that exceed the yield on treasury bills with comparable maturities by 3%. The expanded reporting takes effect in 2004. We anticipate that a majority of our loans would be subject to the expanded reporting requirements.

        The expanded reporting does not provide for additional loan information such as credit risk, debt-to-income ratio, loan-to-value ratio, documentation level or other salient loan features. As a result, lenders like us are concerned that the reported information may lead to increased litigation as the information could be misinterpreted by third parties.

Predatory Lending Legislation

        The Home Ownership and Equity Protection Act of 1994 ("HOEPA") identifies a category of mortgage loans and subjects such loans to more stringent restrictions and disclosure requirements. In addition, liability for violations of applicable law for loans covered by HOEPA extends not only to the originator, but also to the purchaser of the loans. In the past, HOEPA generally covered loans with either (i) total points and fees upon origination in excess of the greater of eight percent of the loan amount or $480, or (ii) an annual percentage rate ("APR") of more than ten percentage points higher than United States Treasury securities of comparable maturity. On October 1, 2002, the APR threshold for first mortgages was reduced to eight percent above the comparable treasury security.

        We do not originate loans covered by HOEPA because of the higher legal risks as well as the potential negative perception of originating loans that are considered to be "high cost" under federal law. The recently imposed lower APR may prevent us from making a small number of loans that we would otherwise have made under the prior thresholds.

        Several federal, state and local laws and regulations have been adopted or are under consideration that are intended to eliminate so-called "predatory" lending practices. Many of these laws and regulations go beyond targeting abusive practices and impose broad restrictions on certain commonly accepted lending practices, including some of our practices. In addition, some of these laws impose liability on assignees of mortgage loans such as loan buyers, lenders and securitization trusts. Such provisions deter loan buyers from purchasing loans covered by the applicable law. For example, the Georgia Fair Lending Act that took effect in October 2002 resulted in our withdrawal from the Georgia market because our lenders and loan buyers refused to finance or purchase loans covered by that law.

        There can be no assurance that these proposed laws, rules and regulations, or other similar laws, rules or regulations, will not be adopted in the future. Adoption of these laws and regulations could

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have a material adverse impact on our business by substantially increasing the costs of compliance with a variety of inconsistent federal, state and local rules, or by restricting our ability to charge rates and fees adequate to compensate us for the risk associated with certain loans. Adoption of these laws could also have a material adverse effect on our loan origination volume, especially if our lenders and secondary market buyers elect not to finance or purchase loans covered by the new laws.

Efforts to Avoid Abusive Lending Practices

        In an effort to prevent the origination of loans containing unfair terms or involving predatory practices, we have adopted several policies and procedures, including the following:

Product Policies

•

We do not fund or purchase "high cost loans" as defined by HOEPA.



•

We do not make or purchase loans containing single premium credit life, disability or accident insurance.



•

We do not make or purchase loans containing balloon payments, negative amortization, mandatory arbitration clauses or interest rate increases triggered by borrower default.



•

We offer loans with and without prepayment penalties.



•

Our prepayment penalties do not extend beyond 5 years from the origination date.



•

We do not originate loans that pay off zero interest rate mortgages provided by charitable organizations or the government without borrower third-party counseling.

Loan Processing Policies

•

We only approve loan applications that evidence a borrower's ability to repay the loan.



•

We consider whether the loan terms are in the borrower's best interests and document our belief that the loan represents a tangible benefit to the borrower.



•

We do not solicit our loan portfolio within twelve months of loan origination.



•

We price loans commensurate with risk.



•

We use an electronic credit grading system to help ensure consistency.



•

We do not ask appraisers to report a predetermined value or withhold disclosure of adverse features.



•

We employ electronic and manual systems to protect against adverse practices like "property flipping."

Customer Interaction and Education

•

We market our loans with a view to encouraging a wide range of applicants strongly representative of racial, ethnic and economic diversity of the markets we serve throughout the nation.



•

We provide a helpful, easy-to-follow brochure to all our loan applicants to educate them on the loan origination process, explain basic loan terms, help them obtain a loan that suits their needs and advise them on how to find a HUD-approved loan counselor.



•

We distribute our Fair Lending Policy to all newly hired employees and hold them accountable for treating borrowers fairly and equally.

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•

We provide fair lending training to employees having direct contact with borrowers or loan decision-making authority.



•

We require brokers to sign an agreement indicating that they are knowledgeable about and will abide by fair lending laws and our Broker Code of Conduct.



•

We monitor broker performance and strive to hold brokers accountable for fair and equal treatment of borrowers.



•

Our Retail Division conducts regular customer satisfaction surveys of all newly funded loans.



•

We also conduct periodic randomly selected satisfaction surveys of customers who receive loans through a mortgage broker.



•

A network of well-trained consumer relations staff is dedicated to resolving consumer complaints in a timely and fair manner.



•

Our Loan Servicing Department contacts each borrower prior to the first payment to confirm that the borrower understands loan terms.



•

When appropriate, we also offer loss mitigation counseling to borrowers in default and provide opportunities to enter into mutually acceptable reasonable repayment plans.



•

We report borrower monthly payment performance to major credit repositories.

Evaluation and Compliance

•

We subject a significant statistical sampling of our loans to a rigorous quality assurance of borrower qualification, validity of information, and verified property value determination.



•

Our Fair Lending Officer provides an independent means of reporting or discussing fair lending concerns through consumer and employee hotlines.



•

The Fair Lending Officer monitors production fair lending performance, including loan file analysis and reporting, and coordinates community outreach programs.



•

We engage independent firms to review internal controls and operations to help ensure compliance with accepted federal and state lending regulations and practices.



•

We adhere to high origination standards in order to sell our loan products in the secondary mortgage market.



•

We believe that our commitment to responsible lending is good business.



•

We put our commitment into action and will continue to look for ways to promote highly ethical standards thoughout our industry.

        We plan to continue to review, revise and improve our practices to enhance our fair lending efforts and support the goal of eliminating predatory lending practices.

Environmental

        In the course of our business, we may acquire properties securing loans that are in default. There is a risk that hazardous or toxic waste could be found on such properties. If this occurs, we could be held responsible under applicable law for the cost of cleaning up or removing the hazardous waste. This cost could exceed the value of the underlying properties.

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Sarbanes-Oxley Act of 2002

        On July 30, 2002, President Bush signed the Sarbanes-Oxley Act of 2002 ("Sarbanes-Oxley"), a corporate governance and accounting reform law. While some of the provisions of Sarbanes-Oxley were effective immediately upon enactment, other provisions require the SEC to adopt relevant rules. The SEC issued some of the implementing rules in 2002 and will continue to issue additional rules in 2003. Our management has spent and will continue to spend significant time monitoring the rules issued by the SEC, reviewing existing procedures and putting new procedures in place as necessary or appropriate to comply with the new requirements of Sarbanes-Oxley and the rules issued by the SEC thereunder.

Employees

        At December 31, 2002, we employed 2,468 full-time employees and 19 part-time employees. None of our employees is subject to a collective bargaining agreement. We believe that our relations with our employees are satisfactory.

Available Information

        We make available, free of charge, on our website (www.ncen.com) our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to those reports as soon as reasonably practicable after such reports or amendments are electronically filed with or furnished to the SEC.

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EXECUTIVE OFFICERS OF THE REGISTRANT

        The following table sets forth information about our executive officers:

(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.

(3)

The Anyloan Company is a wholly-owned subsidiary of Anyloan Financial Corporation, which is a wholly-owned subsidiary of the Company.

        Robert K. Cole, one of our co-founders, has been our Chairman of the Board and Chief Executive Officer since December 1995 and one of our directors since November 1995. Mr. Cole also serves as a director of New Century Mortgage. From February 1994 to March 1995, he was the President and Chief Operating Officer-Finance of Plaza Home Mortgage Corporation, 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, a subsidiary of Plaza Home Mortgage specializing in the origination, sale and servicing of subprime mortgage loans. 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.

        Brad A. Morrice, one of our co-founders, has been our Vice Chairman since December 1996, our President and one of our directors since November 1995 and our Chief Operating Officer since January 2001. Mr. Morrice also served as our General Counsel from December 1995 to December 1997 and our Secretary from December 1995 to May 1999. In addition, Mr. Morrice serves as Chairman and Chief Executive Officer of New Century Mortgage, Chairman of NC Capital Corporation and Chairman of The Anyloan Company. 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

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California, Berkeley (Boalt Hall) and a Masters of Business Administration degree from Stanford University.

        Edward F. Gotschall, one of our co-founders, has been our Vice Chairman since December 1996, our Chief Financial Officer since August 1998, our Chief Operating Officer Finance/Administration from December 1995 to August 1998 and one of our directors since November 1995. Mr. Gotschall also serves as Executive Vice President and a director of New Century Mortgage and was its Chief Financial Officer until February 2002. Mr. Gotschall is also a director of NC Capital. 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 of 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/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.

        Patrick J. Flanagan has been our President of New Century Mortgage since February 2002 and has been a director of New Century Mortgage since May 1997. He has also served as Executive Vice President of the Company since August 1998. He is Chief Executive Officer and a director of NC Capital. From January 1997 to February 2002, Mr. Flanagan served as 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.

        Patrick H. Rank has been our President of Retail Operations and a director of New Century Mortgage since August 2001, overseeing all aspects of the Company's Retail operations. He has also been President and Chief Executive Officer of The Anyloan Company since August 2001. He has also served as Executive Vice President of the Company since May 2002. Prior to joining New Century, Mr. Rank was the President of H&R Block Mortgage, a subsidiary of Option One Mortgage, and H&R Block Financial Services. Mr. Rank was one of the original co-founders of Option One Mortgage and was its original Chief Executive Officer. Prior to Option One, Mr. Rank was the Chief Administrative Officer at Long Beach Mortgage. Mr. Rank has over 36 years of financial services industry experience.

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RISK FACTORS

        Stockholders and prospective purchasers of our common stock should carefully consider the risks described below before making a decision to buy our common stock. If any of the following risks actually occurs, our business could be harmed. In that case, the trading price of our common stock could decline, and you may lose all or part of your investment. When determining whether to buy our common stock, stockholders and prospective purchasers should also refer to the other information in this Form 10-K, including our financial statements and the related notes.

A material difference between the assumptions used in the determination of the value of our residual interests and our actual experience could negatively affect our financial position.

        As of December 31, 2002, the value of our residual interests from securitization transactions on our balance sheet was $247.0 million. The value of these residuals is a function of the delinquency, loss, prepayment and discount rate assumptions we use.

        It is extremely difficult to validate the assumptions we use in valuing our residual interests. In the future, if our actual experience differs materially from the assumptions, future cash flows and earnings could be negatively affected.

A prolonged economic slowdown or a lengthy or severe recession could hurt our operations, particularly if it results in a decline in the real estate market.

        The risks associated with our 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 because they negatively affect loan-to-value ratios of the home equity collateral. In addition, because we make a substantial number of loans to credit-impaired borrowers, the actual rates of delinquencies, foreclosures and losses on these loans could be higher during economic slowdowns. Any sustained period of increased delinquencies, foreclosures or losses could adversely affect our ability to sell loans, the prices we receive for our loans, or the value of our residual interests in securitizations, which could have a material adverse effect on our results of operations, financial condition and business prospects.

Our earnings may decrease because of increases or decreases in interest rates.

        Our profitability may be directly affected by changes in interest rates. First, these changes may reduce the spread we earn between the interest we receive on our loans and our funding costs. Second, a substantial and sustained increase in interest rates could adversely affect borrower demand for our products. Third, during periods of rising interest rates, the value and profitability of our loans may be negatively affected from the date of origination or purchase until the date we sell or securitize the loan. Fourth, our adjustable-rate mortgage loans have periodic and lifetime interest rate caps above which the interest rate on the loans 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 these loans are sold may be uncapped. This would reduce the amount of cash we receive over the life of our residual interests, and require us to reduce the carrying value of our residual interests. Fifth, a significant decrease in interest rates could increase the rate at which loans are prepaid, which also could require us to reduce the carrying value of our residual interests. If prepayments are greater than expected, the cash we receive over the life of our residual interests would be reduced. Higher-than-expected prepayments could also have a negative effect on the value of our servicing portfolio. Any such change in interest rates could have a material adverse effect on our results of operations, financial condition and business prospects.

An interruption or reduction in the securitization and whole loan markets would hurt our financial position.

        We are dependent on the securitization market for the sale of our loans because we securitize loans directly and many of our whole loan buyers purchase our loans with the intention to securitize.

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The securitization market is dependent upon a number of factors, including general economic conditions, conditions in the securities market generally and conditions in the asset-backed securities market specifically. In addition, poor performance of our previously securitized loans could harm our access to the securitization market. Accordingly, a decline in the securitization market or a change in the market's demand for our loans could have a material adverse effect on our results of operations, financial condition and business prospects.

If we are unable to maintain adequate financing sources, our earnings and financial position will suffer and jeopardize our ability to continue operations.

        We require substantial cash to support our operating activities and growth plans. Our primary sources of cash are our warehouse and aggregation credit facilities and the proceeds from the sales and securitizations of our loans. As of December 31, 2002, we had seven short-term warehouse and aggregation credit facilities providing us with approximately $3.5 billion to fund loan originations and purchases pending the pooling and sale of such loans. If we cannot maintain or replace these facilities on comparable terms and conditions, we may incur substantially higher interest expense that would reduce our profitability.

        During volatile times in the capital markets, access to warehouse, aggregation and residual financing has been severely constricted. If we are unable to maintain adequate financing or other sources of capital are not available, we would be forced to suspend or curtail our operations, which would have a material adverse effect on our results of operations, financial condition and business prospects.

New legislation could restrict our ability to make mortgage loans, which could adversely impact our earnings.

        Several states and cities are considering or have passed laws, regulations or ordinances aimed at curbing predatory lending practices. The federal government is also considering legislative and regulatory proposals in this regard. In general, these proposals involve lowering the existing federal Homeownership and Equity Protection Act thresholds for defining a "high-cost" loan, and establishing enhanced protections and remedies for borrowers who receive such loans. However, many of these laws and rules extend beyond curbing predatory lending practices to restrict commonly accepted lending activities, including some of our activities. For example, some of these laws and rules prohibit any form of prepayment charge or severely restrict a borrower's ability to finance the points and fees charged in connection with his or her loan. In addition, some of these laws and regulations provide for extensive assignee liability for warehouse lenders, whole loan buyers and securitization trusts. Because of enhanced risk and for reputational reasons, many whole loan buyers elect not to purchase any loan labeled as a "high cost" loan under any local, state or federal law or regulation. Accordingly, these laws and rules could severely constrict the secondary market for a significant portion of our loan production. This would effectively preclude us from continuing to originate loans that fit within the newly defined thresholds. For example, after the October 1, 2002 effective date of the Georgia Fair Lending Act, our lenders and secondary market buyers refused to finance or purchase our Georgia loans. As a result, we were forced to cease providing mortgages in Georgia. Passage of such laws could increase compliance costs, lower fee income and lower origination volume, all of which would have a material adverse effect on our results of operations, financial condition and business prospects.

In July 2003 we will no longer be able to rely on the Alternative Mortgage Transactions Parity Act to preempt certain state law restrictions on prepayment penalties, which could adversely impact our earnings.

        The value of a mortgage loan depends, in part, upon the expected period of time that the mortgage loan will be outstanding. If a borrower pays off a mortgage loan in advance of this expected period, the holder of the mortgage loan does not realize the full value expected to be received from the loan. A prepayment penalty payable by a borrower who repays a loan earlier than expected helps

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offset the reduction in value resulting from the early payoff. Consequently, the value of a mortgage loan is enhanced to the extent the loan includes a prepayment penalty, and a mortgage lender can offer a lower interest rate and/or lower loan fees on a loan which has a prepayment penalty. Prepayment penalties are an important feature to obtain value on the loans we originate.

        Certain state laws restrict or prohibit prepayment penalties on mortgage loans, and we have relied on the federal Alternative Mortgage Transactions Parity Act (the "Parity Act") and related rules issued in the past by the Office of Thrift Supervision (the "OTS") to preempt state limitations on prepayment penalties. The Parity Act was enacted to extend to financial institutions, other than federally chartered depository institutions, the federal preemption that federally chartered depository institutions enjoy. However, on September 25, 2002, the OTS released a new rule that will reduce the scope of the Parity Act preemption and, as a result, we will no longer be able to rely on the Parity Act to preempt state restrictions on prepayment penalties. The effective date of the new rule, originally January 1, 2003, was subsequently extended by the OTS until July 1, 2003 in response to concerns from interested parties about the burdens associated with compliance. The elimination of this federal preemption will require us to comply with state restrictions on prepayment penalties. We expect that these restrictions will prohibit us from charging any prepayment penalty in 8 states and will restrict the amount or duration of prepayment penalties that we may impose in an additional 14 states. This may place us at a competitive disadvantage relative to financial institutions that will continue to enjoy federal preemption of such state restrictions. Such institutions will be able to charge prepayment penalties without regard to state restrictions and, as a result, may be able to offer loans with interest rate and loan fee structures that are more attractive than the interest rate and loan fee structures that we are able to offer.

The scope of our operations exposes us to risks of noncompliance with an increasing and inconsistent body of complex laws and regulations at the federal, state and local levels.

        Because we are licensed to originate mortgage loans in 50 states, we must comply with the laws and regulations, as well as judicial and administrative decisions, for all of these jurisdictions, as well as an extensive body of federal law and regulations. The volume of new or modified laws and regulations has increased in recent years, and, in addition, individual cities and counties have begun to enact laws that restrict subprime loan origination activities in those cities and counties. The laws and regulations of each of these jurisdictions are different, complex and, in some cases, in direct conflict with each other. As our operations continue to grow, it may be more difficult to comprehensively identify, to accurately interpret and to properly program our technology systems and effectively train our personnel with respect to all of these laws and regulations, thereby potentially increasing our exposure to the risks of noncompliance with these laws and regulations.

        Our failure to comply with these laws can lead to:

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civil and criminal liability;

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loss of approved status;

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demands for indemnification or loan repurchases from purchasers of our loans;

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class action lawsuits; or

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administrative enforcement actions.

        Any of these results could have a material adverse effect on our results of operations, financial condition and business prospects.

High delinquencies or losses on the mortgage loans in our securitizations may decrease our cash flows or impair our ability to sell or securitize loans in the future.

        Loans we make to lower credit grade borrowers, including credit-impaired borrowers, entail a higher risk of delinquency and higher losses than loans we make to borrowers with better credit. Virtually all of our loans are made to borrowers who do not qualify for loans from conventional mortgage lenders. No assurance can be given that our underwriting criteria or methods will afford

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adequate protection against the higher risks associated with loans made to lower credit grade borrowers. We continue to be subject to risks of default and foreclosure following the sale of loans through securitization. To the extent such losses are greater than expected, the cash flows we receive through residual interests would be reduced. Increased delinquencies or losses may also reduce our ability to sell or securitize loans in the future. Any such reduction in our cash flows or impairment in our performance could have a material adverse effect on our results of operations, financial condition and business prospects.

Our inability to realize cash proceeds from loan sales and securitizations in excess of the loan acquisition cost could adversely affect our financial position.

        The net cash proceeds received from loan sales consist of the premiums we receive on sales of loans in excess of the outstanding principal balance, plus the cash proceeds we receive from securitizations, minus the discounts on loans that we have to sell for less than the outstanding principal balance. If we are unable to originate loans at a cost lower than the cash proceeds realized from loan sales, our results of operations, financial condition and business prospects could be materially adversely affected.

Our warehouse and aggregation financing is subject to margin calls based on the lender's opinion of the value of our loan collateral. An unanticipated large margin call could adversely affect our liquidity.

        The amount of financing we receive under our warehouse and aggregation financing agreements depends in large part on the lender's valuation of the mortgage loans that secure the financings. Each such credit facility provides the lender the right, under certain circumstances, to reevaluate the loan collateral that secures our outstanding borrowings at any time. In the event the lender determines that the value of the loan collateral has decreased, it has the right to initiate a margin call. A margin call would require us to provide the lender with additional collateral or to repay a portion of the outstanding borrowings. Any such margin call could have a material adverse effect on our results of operations, financial condition and business prospects.

We face intense competition that could adversely affect our market share and our revenues.

        We face intense competition from finance and mortgage banking companies and from Internet-based lending companies. In addition, certain government-sponsored entities, such as Fannie Mae and Freddie Mac, are also expanding their participation in the non-prime mortgage industry. These government-sponsored entities have a size and cost-of-funds advantage that allows them to purchase loans with lower rates or fees than we are willing to offer. While the government-sponsored entities presently do not have the legal authority to originate mortgage loans, including non-prime loans, they do have the authority to buy loans. A material expansion of their involvement in the market to purchase non-prime loans could change the dynamics of the industry by virtue of their sheer size, pricing power and the inherent advantages of a government charter. In addition, if as a result of their purchasing practices, these government-sponsored entities experience significantly higher-than-expected losses, such experience could adversely affect the overall investor perception of the non-prime mortgage industry.

        Certain large finance companies and conforming mortgage originators also originate non-prime mortgage loans to customers similar to the borrowers we serve. Competitors with lower costs of capital have a competitive advantage over us. In addition, establishing a wholesale lending operation such as ours requires a relatively small commitment of capital and human resources. This low barrier to entry permits new competitors to enter our markets quickly and compete with our wholesale lending business. Several new wholesale originators have been formed in recent years and have recruited former senior managers from our wholesale division. If these competitors are able to attract some of our key employees and disrupt our broker relationships, it could have a material adverse effect on our results of operations, financial condition and business prospects.

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        The intense competition in the non-prime mortgage industry has also led to rapid technological developments, evolving industry standards and frequent releases of new products and enhancements. As mortgage products are offered more widely through alternative distribution channels, such as the Internet, we may be required to make significant changes to our current wholesale and retail structures and information systems to compete effectively. Our inability to continue enhancing our current Internet capabilities, or to adapt to other technological changes in the industry, could have a material adverse effect on our results of operations, financial condition and business prospects.

Our hedging strategies may not be successful in mitigating our risks associated with interest rates.

        We use various derivative financial instruments to provide a level of protection against interest rate risks, but no hedging strategy can protect us completely. When rates change we expect to record a gain or loss on derivatives which would be offset by an inverse change in the value of loans held for sale and mortgage-related securities. We cannot assure you, however, that our use of derivatives will offset the risks related to changes in interest rates. There have been periods, and it is likely that there will be periods in the future, during which we will incur losses after accounting for our derivative financial instruments. The derivative financial instruments we select may not have the effect of reducing our interest rate risk. In addition, the nature and timing of hedging transactions may influence the effectiveness of these strategies. Poorly designed strategies or improperly executed transactions could actually increase our risk and losses. In addition, hedging strategies involve transaction and other costs. We cannot assure you that our hedging strategy and the derivatives that we use will adequately offset the risk of interest rate volatility or that our hedging transactions will not result in losses. See "Management's Discussion and Analysis of Financial Condition and Results of Operations—Quantitative and Qualitative Disclosures About Market Risk."

A decline in the quality of servicing could lower the value of our residual interests and our ability to sell or securitize loans.

        In March 2001, we sold to Ocwen Federal Bank FSB the servicing rights on $4.8 billion of our servicing portfolio, which was comprised of 25 separate asset-backed securities. In August 2001, Ocwen began servicing all of our newly originated loans pending their sale or securitization. However, in February 2002, we announced the intent to re-establish our in-house loan servicing platform. By October 1, 2002, we began boarding loans on our in-house servicing platform and at December 31, 2002, our total loan servicing balance was approximately $4.0 billion. Ocwen will continue to service the mortgage loans in our existing securities. See "Part I, Item 1. Business—Loan Servicing and Delinquencies." Poor servicing and collections could adversely affect the value of our residual interests and our ability to sell or securitize loans, which could have a material adverse effect on our results of operations, financial condition and business prospects.

The subprime loans we originate generally have higher delinquency and default rates, which could result in losses on loans that we are required to repurchase.

        Subprime mortgage loans generally have higher delinquency and default rates than prime mortgage loans. Delinquency interrupts the flow of projected interest income from a mortgage loan, and default can ultimately lead to a loss if the net realizable value of the real property securing the mortgage loan is insufficient to cover the principal and interest due on the loan. Also, our cost of financing and servicing a delinquent or defaulted loan is generally higher than for a performing loan. We bear the risk of delinquency and default on loans beginning when we originate them. In whole loan sales our risk of delinquency typically only extends to the first payment, but when we securitize we continue to bear some exposure to delinquencies and losses through our residual interests. In addition, if we elect to engage in "on-balance-sheet" securitization transactions, we will need to establish reserves based on our anticipated delinquencies and losses. We also re-acquire the risks of delinquency and default for loans that we are obligated to repurchase. We attempt to manage these risks with risk-based loan pricing and appropriate underwriting policies and loan collection methods. However, if such policies and methods are insufficient to control our delinquency and default risks and do not result in

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appropriate loan pricing and appropriate loss reserves, our business, financial condition, liquidity and results of operations could be harmed.

We are subject to losses due to fraudulent and negligent acts on the part of loan applicants, mortgage brokers, other vendors and our employees.

        When we originate mortgage loans, we rely heavily upon information supplied by third parties including the information contained in the loan application, property appraisal, title information and employment and income documentation. If any of this information is intentionally or negligently misrepresented and such misrepresentation is not detected prior to loan funding, the value of the loan may be significantly lower than expected. Whether a misrepresentation is made by the loan applicant, the mortgage broker, another third party or one of our employees, we generally bear the risk of loss associated with the misrepresentation. A loan subject to a material misrepresentation is typically unsaleable or subject to repurchase if it is sold prior to detection of the misrepresentation, such persons and entities are often difficult to locate and it is often difficult to collect any monetary losses we have suffered from them.

        We have controls and processes designed to help us identify misrepresented information in our loan origination operations. We cannot assure you, however, that we have detected or will detect all misrepresented information in our loan originations.

We may be subject to fines or other penalties based upon the conduct of our independent brokers.

        The mortgage brokers from which we obtain loans have parallel and separate legal obligations to which they are subject. While these laws may not explicitly hold the originating lenders responsible for the legal violations of mortgage brokers, increasingly federal and state agencies have sought to impose such assignee liability. Recently, for example, the United States Federal Trade Commission ("FTC") entered into a settlement agreement with a mortgage lender where the FTC characterized a broker that had placed all of its loan production with a single lender as the "agent" of the lender; the FTC imposed a fine on the lender in part because, as "principal," the lender was legally responsible for the mortgage broker's unfair and deceptive acts and practices. The United States Justice Department in the past has sought to hold a subprime mortgage lender responsible for the pricing practices of its mortgage brokers, alleging that the mortgage lender was directly responsible for the total fees and charges paid by the borrower under the Fair Housing Act even if the lender neither dictated what the mortgage broker could charge nor kept the money for its own account. Accordingly, we may be subject to fines or other penalties based upon the conduct of our independent mortgage brokers.

Our business is dependent upon conditions in California where we conduct a significant amount of our business.

        In 2002, approximately 40.5% of the mortgage loans we originated or purchased were secured by property in California. An overall decline in the economy or the residential real estate market, or the occurrence of a natural disaster, such as an earthquake, or a major terrorist attack in California could adversely affect the value of the mortgaged properties in California and increase the risk of delinquency, foreclosure, bankruptcy, or loss on mortgage loans in our portfolio. This would negatively affect our ability to purchase, originate and securitize mortgage loans, which could have a material adverse effect on our business, financial condition and results of operations.

Changes in the volume and cost of loans originated by our Wholesale Division may decrease our loan production and decrease our earnings.

        We depend primarily on independent mortgage brokers and, to a lesser extent, on correspondent lenders for the origination and purchase of our wholesale mortgage loans, which constitute the majority of our loan production. These independent mortgage brokers have relationships with multiple lenders and are not obligated by contract or otherwise to do business with us. We compete with these lenders for the independent brokers' business on pricing, service, loan fees, costs and other factors.

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Competition from other lenders and purchasers of mortgage loans could negatively affect the volume and pricing of our wholesale loans, which could have a material adverse effect on our results of operations, financial condition and business prospects.

If many of our borrowers become subject to the Soldiers' and Sailors' Civil Relief Act of 1940, our cash flows from our residual securities may be adversely affected.

        Under the Soldiers' and Sailors' Civil Relief Act of 1940, a borrower who enters military service after the origination of his or her mortgage loan generally may not be charged interest above an annual rate of 6% during the period of the borrower's active duty status. The Act also applies to a borrower who was on reserve status and is called to active duty after origination of the mortgage loan. A significant military mobilization as part of the war on terrorism or a threat of war in the middle east could increase the number of the borrowers in our securitized pools who are subject to this Act and thereby reduce the interest payments collected from those borrowers. To the extent the number of borrowers who are subject to this Act is significant, the cash flows we receive through residual interests would be reduced, which would cause us to reduce the carrying value of our residual interests. In addition, the Soldiers' and Sailors' Civil Relief Act of 1940, as amended, imposes limitations that would impair the ability of the servicer to foreclose on an affected mortgage loan during the borrower's period of active duty status, and, under certain circumstances, during an additional three month period thereafter. Any such reduction in our cash flows or impairment in our performance could have a material adverse effect on our results of operations, financial condition and business prospects.

The inability to attract and retain qualified employees could significantly harm our business.

        We depend on our wholesale account executives and retail loan officers to attract borrowers by, among other things, developing relationships with financial institutions, other mortgage companies and brokers, real estate agents, borrowers and others. We believe that these relationships lead to repeat and referral business. The market for skilled executive officers, account executives and loan officers is highly competitive and historically has experienced a high rate of turnover. In addition, if a manager leaves our company, there is an increased likelihood that other members of his or her team will follow. Competition for qualified account executives and loan officers may lead to increased hiring and retention costs. If we are unable to attract or retain a sufficient number of skilled account executives at manageable costs, we will be unable to continue to originate quality mortgage loans that we are able to sell for a profit, which would have a material adverse effect on our results of operations, financial condition and business prospects.

An interruption in or breach of our information systems may result in lost business.

        We rely heavily upon communications and information systems to conduct our business. Any failure or interruption or breach in security of our information systems or the third-party information systems on which we rely could cause underwriting or other delays and could result in fewer loan applications being received, slower processing of applications and reduced efficiency in loan servicing. We cannot assure you that such failures or interruptions will not occur or if they do occur that they will be adequately addressed by us or the third parties on which we rely. The occurrence of any failures or interruptions could have a material adverse effect on our results of operations, financial condition and business prospects.

The success and growth of our business will depend upon our ability to adapt to and implement technological changes.

        Our mortgage loan origination business is currently dependent upon our ability to effectively interface with our brokers, borrowers and other third parties and to efficiently process loan applications and closings. The origination process is becoming more dependent upon technological advancement, such as the ability to process applications over the Internet, accept electronic signatures, provide process status updates instantly and other customer-expected conveniences that are cost-efficient to our

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process. Implementing this new technology and becoming proficient with it may also require significant capital expenditures. As these requirements increase in the future, we will have to fully develop these technological capabilities to remain competitive and any failure to do so could have a material adverse effect on our results of operations, financial condition and business prospects.

We may be required to repurchase mortgage loans or indemnify investors if we breach representations and warranties, which could adversely impact our earnings.

        When we sell loans, we are required to make customary representations and warranties about such loans to the loan purchaser. Our whole loan sale agreements require us to repurchase or substitute loans in the event we breach a representation or warranty given to the loan purchaser or make a misrepresentation during the mortgage loan origination process. In addition, we may be required to repurchase loans as a result of borrower fraud or in the event of early payment default on a mortgage loan. Likewise, we are required to repurchase or substitute loans if we breach a representation or warranty in connection with our securitizations. The remedies available to a purchaser of mortgage loans are generally broader than those available to us against the originating broker or correspondent. Further, if a purchaser enforces its remedies against us, we may not be able to enforce the remedies we have against the sellers. The repurchased loans typically can only be financed at a steep discount to their repurchase price, if at all. They are also typically sold at a significant discount to the unpaid principal balance. Significant repurchase activity could negatively affect our cash flow and results of operations.

We are exposed to risk of environmental liabilities with respect to properties to which we take title.

        In the course of our business, we may foreclose and take title to residential properties, and could be subject to environmental liabilities with respect to these properties. We may be held liable to a governmental entity or to third parties for property damage, personal injury, investigation, and clean-up costs incurred by these parties in connection with environmental contamination, or may be required to investigate or clean up hazardous or toxic substances, or chemical releases at a property. The costs associated with investigation or remediation activities could be substantial. In addition, as the owner or former owner of a contaminated site, we may be subject to common law claims by third parties based on damages and costs resulting from environmental contamination emanating from the property. If we ever become subject to significant environmental liabilities, our business, financial condition and results of operations could be materially and adversely affected.

Our charter and bylaws and Delaware law contain provisions that could discourage a takeover.

        Our amended and restated certificate of incorporation and our amended and restated bylaws include various provisions that could delay, defer or prevent a takeover attempt that may be in the best interest of our stockholders. These provisions include the existence of a classified board of directors, the ability of our board of directors to issue shares of our preferred stock without any further stockholder approval and requirements that (i) our stockholders give advance notice with respect to certain proposals they may wish to present for a stockholder vote, (ii) our stockholders act only at annual or special meetings and (iii) two-thirds of all directors approve a change in the number of directors on our board of directors. Issuance of our preferred stock could discourage bids for the common stock at a premium as well as create a depressive effect on the market price of our common stock.

        We are also subject to Section 203 of the Delaware General Corporation Law which, subject to certain exceptions, prohibits a Delaware corporation from engaging in any business combination with any interested stockholder for a period of three years following the date that the stockholder became an interested stockholder. The preceding provisions of our charter and bylaws, as well as Section 203 of the Delaware General Corporation Law, could discourage potential acquisition proposals, delay or prevent a change of control and prevent changes in our management.

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If we do not manage our growth effectively, our financial performance could be harmed.

        In recent years, we have experienced rapid growth that has placed, and will continue to place, certain pressures on our management, administrative, operational and financial infrastructure. As of December 31, 1998, we had approximately 1,417 employees and by December 31, 2002, we had approximately 2,487 employees. Many of these employees have very limited experience with us and a limited understanding of our systems and controls. The increase in the size of our operations may make it more difficult for us to ensure that we originate quality loans and that we service them effectively. We will need to attract and hire additional sales and management personnel in an intensely competitive hiring environment in order to preserve and increase our market share. At the same time, we will need to continue to upgrade and expand our financial, operational and managerial systems and controls.

Various factors may cause the market price of our common stock to become volatile, which could adversely affect our ability to access the capital markets in the future.

        The market price of our common stock may experience fluctuations that are unrelated to our operating performance. In particular, the price of our 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. These could include, among other things, interest rate movements, quarterly variations or changes in financial estimates by securities analysts, or a significant reduction in the price of the stock of another participant in the consumer finance industry. This volatility may make it difficult for us to access the capital markets through additional secondary offerings of our common stock, regardless of our financial performance.

Item 2.    Properties

        Our executive, administrative and some of our lending offices are located in Irvine, California and consist of approximately 319,386 square feet. The three leases covering the executive, administrative and lending offices expire in August 2008, June 2003 and November 2007, respectively, and the combined monthly rent is $430,678. We lease space for our regional operating centers in Bellevue, Washington; Foxborough and Woburn, Massachusetts; Greenwood Village, Colorado; Hurst and Plano, Texas; Itasca and Schaumburg, Illinois; Pearl River, New York; Rancho Bernardo and San Ramon, California; and Tampa, Florida. As of December 31, 2002, these facilities had a monthly aggregate base rental of approximately $126,052. We also lease space for our sales offices, which range in size from 140 to 3,473 square feet with lease terms typically ranging from one to five years. As of December 31, 2002, annual base rents for the sales offices ranged from approximately $19,200 to $85,000. In general, the terms of these leases expire between March 2003 and August 2008. We are currently in negotiations to renew sixteen office leases expiring between March 2003 and December 2003.

Item 3.    Legal Proceedings

        FTC Inquiry.    In August 2000, the Federal Trade Commission informed us that it was conducting an inquiry to determine whether we had violated the Fair Credit Reporting Act, Federal Trade Commission Act or other statutes administered by the Commission. The Commission subsequently focused its inquiry on whether the pre-approved credit solicitations our retail units generated comply with applicable law. We cooperated by providing the requested information to the Commission for its review. We have received no further requests for information since our last submission in September 2001.

        Matthews, et al.    In October 2000, Hazel Jean Matthews, Ruth D. Morgan and Marie I. Summerall filed an amended class action suit against New Century Mortgage Corporation, Central Mortgage, Equibanc Mortgage Corporation, Century 21 Home Improvements, and Incredible Exteriors on behalf of themselves and other consumers located in the State of Ohio whose credit transaction was brokered by Equibanc and Central Mortgage. The suit was filed in the Ohio state court and later removed by New Century Mortgage Corporation to the U.S. District Court for the Southern District of Ohio. The

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complaint alleges breaches of the Federal Fair Housing Act, Equal Credit Opportunity Act, Truth in Lending Act, gender discrimination, fraud, unconscionability, civil conspiracy, RICO, as well as other claims against the other defendants. The plaintiffs sought injunctive relief, compensatory and punitive damages, attorneys' fees and costs. We filed motions to dismiss in response to the First and Second Amended Complaint; the judge granted the motions in part, and denied in part; dismissing the claims brought under the Fair Housing Act, 42 U.S.C. § 3604(b). Plaintiffs filed a motion to strike the class allegations on October 2, 2001; the judge granted the motion. The case was settled at mediation on January 8, 2003, and we are finalizing the settlement documentation. The amount of the settlement did not have a material adverse effect on our results of operations or financial position.

        Grimes.    In June 2001, we were served with a class action complaint filed by Richard L. Grimes and Rosa L. Grimes against New Century Mortgage Corporation. The action was filed in the U.S. District Court for the Northern District of California, and seeks rescission, restitution and damages on behalf of the two plaintiffs, others similarly situated and on behalf of the general public. The complaint alleges a violation of the Federal Truth in Lending Act (TILA) and Business & Professions Code § 17200. Specifically, the complaint alleges that we gave the borrowers the required three-day notice of their right to rescind before the loan transaction had technically been consummated. We filed our answer in July 2001. We filed a Motion for Summary Judgment that was granted on January 25, 2002. The judge held that New Century Mortgage Corporation had not violated TILA and dismissed the 17200 claim without prejudice. Plaintiffs filed their notice of appeal in February 2002. Oral argument is scheduled for April 2003.

        Perry.    In July 2001, Charles Perry Jr. filed a class action complaint against New Century Mortgage Corporation and Noreast Mortgage Company, Inc. in the U.S. District Court for the District of Massachusetts. The complaint alleges that certain payments we make to mortgage brokers, sometimes referred to as yield spread premiums, violate the federal Real Estate Settlement Procedures Act. The complaint also alleges that New Century Mortgage Corporation induced mortgage brokers to breach their fiduciary duties to borrowers. We filed our answer in September 2001. We believe the allegations lack merit; especially in light of HUD's 2001 Policy Statement upholding the use of yield spread premiums. Discovery is proceeding.

        Ngo.    In November 2001, Shirley H. Ngo filed a class action complaint against New Century Mortgage Corporation in the U.S. District Court for the Northern District of Georgia. The complaint alleges that payments we make to mortgage brokers, referred to as yield spread premiums, violate the federal Real Estate Settlement Procedures Act. We filed our answer in January 2002 and thereafter filed a Motion to Stay the case, which was granted in April 2002. In light of recent favorable case law, plaintiffs have agreed to dismiss the class claims and settle the matter on an individual basis. A stipulation of dismissal and settlement agreement are being finalized. The nominal payment to plaintiff did not have a material adverse effect on our results of operations or financial position.

        Barney.    In December 2001, Sandra Barney filed a class action complaint against New Century Mortgage Corporation in the Circuit Court in Cook County, Illinois. The complaint alleges the unauthorized practice of law and violation of the Illinois Consumer Fraud Act for performing document preparation services for a fee by non-lawyers, and seeks to recover the fees charged for the document preparation, compensatory and punitive damages, attorneys' fees and costs. We filed a Motion to Dismiss in February 2002. The court thereafter consolidated our case with other similar cases filed against other lenders. In August 2002, the court ordered plaintiffs in all the consolidated cases to dismiss their cases with prejudice. Our individual plaintiff filed her Notice of Appeal in September 2002. The appeal was consolidated and our Consolidated Respondents' Brief is due to be filed in June 2003.

        Bernstein.    Paul Bernstein filed a class action complaint against New Century Mortgage Corporation in the Circuit Court of Cook County, Illinois. The complaint seeks damages for receiving unsolicited advertisements to telephone facsimile machines in violation of the Telephone Consumer

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Protection Act, 47 U.S.C. § 227, and the Illinois Consumer Fraud Act. We timely removed the case to federal court on May 9, 2002. Plaintiff's motion to remand the case to state court was granted. We then filed a motion to consolidate our case with other similar pending cases. We await a ruling.

        Overman.    In September 2002, Robert E. Overman & Martin Lemp filed a class action complaint in the Superior Court for Alameda County, California against New Century Financial Corporation, New Century Mortgage Corporation, U.S. Bancorp, Loan Management Services, Inc., and certain individuals affiliated with Loan Management Services. The complaint alleges violations of California Consumers Legal Remedies Act, Unfair, Unlawful and Deceptive Business and Advertising Practices in violation of Business & Professions Code Sections 17200 and 17500, Fraud-Misrepresentation and Concealment and Constructive Trust/Breach of Fiduciary Duty and damages including restitution, compensatory and punitive damages, and attorneys' fees and costs. Defendant Loan Management Services, Inc. filed a Motion to Transfer Venue that is scheduled to be heard on March 28, 2003. Our response is due after the court issues its ruling on that motion.

        Encore Credit Corporation.    New Century Mortgage Corporation initiated a lawsuit against Encore Credit Corporation, an entity formed by some former employees, in March 2002 in the Superior Court of Orange County, California. The complaint alleges intentional inducement of breach of contract, intentional interference with prospective economic advantage, trade secret misappropriation, unfair competition, conversion, breach of fiduciary duties and seeks specific perfomance of contractual allegations. Defendants filed their Third Amended Cross-Complaint in October 2002, alleging intentional interference with prospective economic advantage, unfair competition, unfair business practice, trade libel, defamation and breach of contract. New Century Financial Corporation joined New Century Mortgage in filing a Cross-Cross-Complaint in late December 2002 seeking breach of written agreements, fraud and unjust enrichment against Steven Holder, and allegations of cyberfraud, trespass to chattels and unfair competition against both Holder and Encore. Discovery is continuing.

        We are also a party to various legal proceedings arising in the ordinary course of our business. Management believes that any liability with respect to these legal actions, individually or in the aggregate, will not have a material adverse effect on our business, results of operations or financial position.

Item 4.    Submission of Matters to a Vote of Security Holders

        No matters were submitted to a vote of our stockholders during the fourth quarter of 2002.

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PART II

Item 5.    Market for the Registrant's Common Equity and Related Stockholder Matters

        Our common stock trades on the Nasdaq National Market under the symbol "NCEN." The high and low bid prices of our common stock during each quarter for the fiscal years 2002 and 2001 were as follows:

        As of March 21, 2003, the closing sales price of our common stock, as reported on the Nasdaq National Market, was $30.65.

        We did not pay dividends on our common stock in fiscal 2001. We paid a quarterly cash dividend of $0.05 per share on our common stock for all four quarters of fiscal 2002. We increased our quarterly cash dividend payment for fiscal 2003 to $0.10 per share. During the first quarter of 2003, we paid a cash dividend on our common stock of $0.10 per share on January 31, 2003, to common stockholders of record as of January 15, 2003. The declaration of any future dividends will be subject to our earnings, financial position, capital requirements, contractual restrictions and other relevant factors.

        As of March 21, 2003, the number of holders of record of our common stock was approximately 79.

Equity Compensation Plan Information

        Information regarding our equity compensation plans, including both stockholder approved plans and non-stockholder approved plans, is included in Item 12 under the captions "Summary of our Stock Option Plan," and "Equity Compensation Plans".

Recent Sales of Unregistered Stock

        On March 1, 2002, we issued 5,665 shares of restricted stock to each of Messrs. Cole, Morrice and Gotschall. The shares represent a portion of their bonus earned for the year ended December 31, 2001. Their bonus program for 2001, adopted under our 1999 Incentive Compensation Plan, required that any bonus earned in excess of 200% of their base salary be paid in restricted stock of New Century. The issuance of the shares was exempt from the registration requirements of the Securities Act by virtue of Section 4(2) of the Securities Act and Regulation D promulgated thereunder.

        On January 21, 2003, we issued 41,980 shares of restricted stock to each of Messrs. Cole, Morrice, Gotschall and Flanagan. The shares represent a portion of their bonus earned for the year ended December 31, 2002. Their bonus program for 2002, adopted under our 1999 Incentive Compensation Plan, required that any bonus earned in excess of 150% of their base salary be paid in restricted stock of New Century Financial Corporation. The issuance of the shares was exempt from the registration requirements of the Securities Act by virtue of Section 4(2) of the Securities Act and Regulation D promulgated thereunder.

Item 6.    Selected Financial Data (dollars in thousands, except per share data)

        The following selected consolidated statements of operations and balance sheet data for the years ending December 31, 2002, 2001, 2000, 1999 and 1998 have been derived from our financial statements

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audited by KPMG LLP, independent auditors, whose report with respect thereto appears elsewhere herein. Such selected financial data should be read in conjunction with those financial statements and the notes thereto and with "Management's Discussion and Analysis of Financial Condition and Results of Operations" also included elsewhere herein.

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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

        The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes contained elsewhere herein.

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. Our borrowers generally have considerable equity in the property securing the loan, 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, as well as individuals who prefer the prompt and personalized service we provide. We originate and purchase loans through our wholesale and retail divisions. Wholesale loans are either originated through or purchased by independent mortgage brokers by the Wholesale Division of our wholly-owned subsidiary, New Century Mortgage Corporation. We do not purchase bulk pools of loans from third parties, although we do purchase closed loans on a flow basis from our correspondent lenders. Retail originations are made through New Century Mortgage Corporation's three regional processing centers, our network of branch offices and centralized telemarketing unit and through our subsidiary, The Anyloan Company's alliances with financial institutions who broker their non-prime production through us. After originating or purchasing loans, we then sell those loans through whole loan sales or securitizations. We were incorporated in Delaware in November 1995 and commenced lending operations in February 1996.

Loan Originations and Purchases

        As of December 31, 2002, our Wholesale Division operated through 14 regional operating centers and 19 additional sales offices. The Wholesale Division originated or purchased $12.1 billion in loans during the year ended December 31, 2002. As of December 31, 2002, our Retail Division, operated through three regional processing centers and 65 sales offices, including our centralized telemarketing unit. The Anyloan Company which operated through two centralized regional processing centers. The Retail Division originated or purchased $2.1 billion in loans during the year ended December 31, 2002.

Loan Sales and Securitizations

        One of our primary sources of revenue is the recognition of gain on sale of our loans through whole loan sales and securitizations. In a whole loan sale, we recognize and receive a cash gain upon sale. In a securitization, we generally recognize a gain on sale at the time the loans are sold, and receive cash flows over the actual life of the loans. The use of a net interest margin security, or NIM, transaction concurrent with or shortly after a securitization allows us to receive a substantial portion of the gain in cash at the closing of the NIM transaction, rather than over the actual life of the loans.

        Market changes in 2001 allowed us to sell loans through securitization on a cash flow-positive basis through the concurrent use of a NIM transaction. A NIM transaction increases the amount of cash received at the closing of the transaction such that the net cash proceeds exceed the cost to originate the loans. During 2001, we completed two securitizations totaling $898.2 million in loans. Concurrent with or following each of these securitizations, we issued a NIM security. The net cash proceeds from the transactions yielded cash proceeds in amounts comparable to whole loan sales. In addition to the cash proceeds, we retained a relatively small residual interest that we recorded at its estimated fair value of less than 1.0% of the securitized collateral.

        During 2002, we completed two securitization transactions totaling $845.5 million in loans and issued a concurrent NIM security. The net cash proceeds from the transactions was comparable to the

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cash proceeds we receive in whole loan sales. In addition to the cash proceeds, we retained a relatively small residual interest that was recorded at its estimated fair value of less than 2.0% of the securitized collateral.

Securitization Transactions

        In a securitization transaction, we sell a portfolio of mortgage loans to a special purpose entity established for the limited purpose of buying and reselling mortgage loans. The special purpose entity transfers the mortgage loans to a trust that in turn issues interest-bearing asset-backed securities generally in an amount equal to the aggregate principal balance of the mortgage loans. One or more investors purchase these asset-backed securities for cash. The trust uses the cash proceeds to pay us for the mortgage loans. The trust also issues a certificate representing a residual interest in the payments on the securitized loans. In addition, we provide credit enhancement for the benefit of the investors in the form of additional collateral, referred to as the over-collateralization account, or OC Account.

        To date, we have elected to fund the required OC Account at the closing of most of our securitizations. The over-collateralization requirement ranges from 0.75% to 4.75% of the initial securitization bond debt principal balance, or 1.5% to 9.5% of the remaining principal balance after 30 to 36 months of principal amortization. The actual amount of the OC Account is determined by the rating agencies based upon their assessment of the loan pool characteristics. When we fund all of the OC Account up front, we begin to receive cash flow from our residual interests immediately. When we do not fund the OC Account up front, we do not receive cash flow until the OC Account requirement is satisfied. Cash flows from our residual interests are subject to certain delinquency or credit loss tests, as defined by the rating agencies or the bond insurance companies. Over time, we receive distributions from the OC Account subject to the performance of the mortgage loans in each securitization.

        Depending on what structure we elect to employ, securitizations may either be accounted for as a sale or as a financing transaction.

Residual Interests from Securitizations Accounted for as Sales

        At the closing of each securitization that is accounted for as a sale, we add to our balance sheet the residual interest retained based on our calculation of the present value of estimated future cash flows to be received by us. The residual interest we record consists of the OC Account and the net interest receivable, or NIR, and combined, these are referred to as the residual interests.

        We review quarterly the underlying assumptions we use to value each residual interest and adjust the carrying value of the securities based on actual experience and industry trends. To determine the residual asset value, we project cash flow for each security. To project cash flow, we use base assumptions for the constant prepayment rate, or CPR, and losses for each product type based on historical performance. We update each security to reflect actual performance to date, and we base assumption for CPR and loss to project performance of the security from that date forward. If the actual performance of the security differs materially from the base assumptions with respect to CPR or loss, we make adjustments. We then use the London Interbank Offer Rate, or LIBOR, forward curve to project future interest rates and finalize cash flow projections for each security. We then discount the projected cash flows at a range of 12% to 14%, depending on the risk profile of the retained interest, to establish the net book value of our residual interests.

        During the second quarter of 2000, we recorded a $21.2 million write-down to our residual interests issued prior to 2000. This write-down resulted primarily from our decision to increase the discount rates used to value the residual interests. During the fourth quarter of 2000, we recorded a write-down of $45.8 million. Approximately $26.9 million of this write-down stemmed from Salomon Smith Barney's exercise of its call option in connection with our 1998-NC5 securitization transaction with Salomon. None of our other securitization transactions contains such a call feature. The remainder

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of the fourth quarter write-downs resulted from (i) a continuing increase in prepayment speeds, which occurred despite the increase in interest rates, and (ii) an increase in overall loss assumptions.

        During 2001, while we changed some of these assumptions in our residual valuation, the positive impact of the decreasing interest rate environment offset the negative impact of increasing loss and prepayment assumptions. Therefore, no valuation adjustment was recorded in 2001.

        During the year ended December 31, 2002, we increased the loss assumptions used to determine the value of our residual interests. However, the favorable interest rate environment, the current LIBOR forward curve and the repurchase of some delinquent loans from the trusts resulted in an increase in the value of the residual interests that offset the loss in value related to the higher loss assumptions. In the second quarter of 2002, we significantly increased prepayment assumptions on our fixed-rate product. In the same quarter, we decreased the discount rate by 1%, to better reflect the current interest rate environment. The net impact of these assumption changes was a positive adjustment of $12.1 million to the carrying value of the residuals during the year ended December 31, 2002.

Securitizations Structured as an On-Balance-Sheet Securitization

        While we continue to generate the majority of our earnings and cash flows from whole loan sales, we intend to continue to complete some securitizations and other transactions in which we retain an interest in the mortgage loans that we have sold. These transactions will continue to be legally structured as sales, but may be structured as a financing for accounting purposes under SFAS No. 140. This "portfolio-based" accounting treatment more closely matches the recognition of income with the actual receipt of cash payments. Also, such securitization structures are consistent with our strategy to generate primarily cash-based earnings rather than non-cash gain-on-sale revenue. Because we do not record gain on sale revenue in the period in which the securitization occurs, the use of such portfolio-based accounting structures will result in differences in expected future results of operations as compared to historical results.

        During the first quarter of 2003, we completed a securitization totaling $496 million in loans that, for the first time, we structured to receive this financing accounting treatment.

        We intend to employ the same interest rate risk management techniques whether or not we structure a securitization as a financing.

        The following table sets forth loan sales and securitizations for the periods indicated:

Discounted Loan Sales

        During the year ended December 31, 2002, we sold approximately $259.4 million in loans at a discount to their outstanding principal balance. These loans consisted of repurchased loans, loans with documentation defects or loans that were rejected by whole loan buyers because of certain characteristics. They also included $93.9 million in loans that we elected to repurchase from securitization pools in late 2001 and 2002. For the year ended December 31, 2001, discounted sales totaled $236.7 million, including $82.8 million in loans that were repurchased from securitization pools due to clean-up calls. After adjusting for securitization pool repurchases, discounted sales grew from

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$154.0 million in 2001 to $164.5 million in 2002, but decreased as a percentage of premium whole loan sales, from 3.4% to 1.3% reflecting our efforts to decrease the number of loans sold at a discount.

Critical Accounting Policies

        We have established various accounting policies which govern the application of accounting principles generally accepted in the United States of America in the preparation of our financial statements. Our significant accounting policies are described in Footnote 1 to the Consolidated Financial Statements, beginning on page F-7. Certain accounting policies require us to make significant estimates and assumptions which may have a material impact on certain assets and liabilities, and we consider these to be critical accounting policies. The estimates and assumptions we use are based on historical experience and other factors which we believe to be reasonable under the circumstances. Actual results could differ materially from these estimates and assumptions, which could have a material impact on the carrying value of assets and liabilities and our results of operations.

        We believe the following are critical accounting policies that require the most significant estimates and assumptions that are subject to significant change in the preparation of our consolidated financial statements:

•

Residual interests in securitizations. For further information, see Footnotes 1 and 3 on pages F-7 and F-10.

•

Allowance for repurchase losses. For further information, see Footnotes 1 and 10(d) on pages F-7 and F-27.

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Gain on sale of loans. For further information, see Footnotes 1 and 2(b) on pages F-7 and F-18.

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Mortgage servicing asset. For further information, see Footnotes 1 and 4 on pages F-7 and F-22.

•

Income taxes. For further information, see Footnotes 1 and 11 on pages F-7 and F-30.

Results of Operations

        The following table sets forth our results of operations as a percentage of total revenues for the periods indicated: