Decision Making Process

The trip to Dromoland and other Irish haunts was booked in better days for winners of the firm's President's Club awards. New Century's money troubles led it to rescind sponsorship, but some workers apparently decided that if their employer was dying, an Irish wake was in order.

"Some people had already made personal plans and decided to go ahead on their own," company spokeswoman Laura Oberhelman said.

Sales incentives such as trips to Ireland were long a part of the culture at New Century and other lenders that specialize in making sub-prime mortgages to people with spotty credit, irregular income or other issues that stopped them from getting lower-cost prime loans.

The business boomed as housing prices soared. Orange County, one of the world's hottest real estate markets, was a center of the action. New Century and other lenders, including Ameriquest Mortgage Co. in Orange and Irvine-based Option One Mortgage Corp., recruited huge sales forces to hustle business.

"The culture around all of these sub-prime lenders has been 'Hey, bring it to us. We'll make it happen,' " said Philip X. Tirone, a Los Angeles mortgage broker and author. " 'If you have a client with a [low] credit score who only wants to put 5% down and had a bankruptcy not too long ago, that's OK. Bring us that loan.' "

Then it all came crashing down, and few fell harder than New Century.

In little over a decade, New Century had become the nation's largest independent sub-prime lender. It wrote nearly $52 billion in loans last year and employed 7,500 people. It's top executives became rich, then richer, as its stock price soared to more than $65 a share.

But last week, the company stood on the verge of extinction. New Century was forced to stop making loans because the Wall Street firms that provided its funding cut off the flow of fresh money. Federal investigators were conducting a criminal probe into its accounting, and the New York Stock Exchange delisted the company after its shares fell below $1.

What went wrong? The company's rise and fall is in many ways the story of the rise and fall of the sub-prime lending industry.

While housing prices were going up, these lenders flourished. They specialized in serving borrowers with marginal credit -- charging them more for the privilege -- but the robust real estate market took out much of the lenders' risk. If the payments got too hard to handle, the borrowers could simply refinance into new loans with low initial "teaser" rates, or perhaps even sell their properties for a profit.

But when home prices leveled off or declined, this escape route was blocked. Making matters worse, many companies loosened their lending standards in the last year in an attempt to keep loan volumes up, industry experts say.

The result has been a rising tide of defaults and a decision by Wall Street banks such as Merrill Lynch & Co. to cut off funds to sub-prime specialists.

"I am a little bit shocked that this meltdown didn't happen sooner," said Jeff Lazerson, president of Mortgage Grader, a Web-based brokerage in Laguna Niguel. "In the past, we used to say that if you could fog a mirror you could get a loan. For the last five years, you could be dead and get a loan. That's why we're in this mess today."

New Century was founded in 1995 by a trio of mortgage industry veterans -- Robert K. Cole, Brad A. Morrice and Edward F. Gotschall -- who had worked together at Plaza Home Mortgage Corp. in Santa Ana and later helped launch Option One.

They took New Century public in 1997, just as housing prices began picking up after a long slump. Fueled by the housing boom and low interest rates, New Century expanded to 216 sales offices in 35 states -- commanding its empire from an 11-story office tower in Irvine, next to a building once occupied by Charles H. Keating's Lincoln Savings & Loan, an infamous player in the savings and loan crisis of the 1980s.

Cole, Morrice and Gotschall grew wealthy as the stock price rose, and have been hammered -- on paper, anyhow -- by its sharp decline, each having lost well over $50 million on their holdings since May, when the stock hit a recent high, according to regulatory filings.

Yet they already have realized huge actual profits from the company. In 2003 through 2005, each took home nearly $8.4 million in salary and bonuses. And they earned even more from stock sales: In 2005, for example, Cole cashed in stock options for $12.7 million, Morrice for $13.3 million and Gotschall for $13.9 million, filings with the Securities and Exchange Commission show.

All three landed in homes in the pricey Orange County neighborhoods seen in reality television shows: Gotschall in a sprawling Coto de Caza estate, and Cole and Morrice high in the hills above Laguna Beach.

The growing company sought to burnish its reputation