Accounting
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As we all know by now, NCFs business are involving of making subprime loan in wholesale and retail area. The companyfaces three big type of risk in their business: Credit risk, Market risk and operational risk. Creidt risk has to do with the subprime mortage borrowers.Since prime loan is actually for borrowers who are unable to qualify under trainditonal, more strict criterias due to an imperfect and limited credit history, it has a higher default rate compare to prime loan. Subprime borrowers are usually person who have limited income ,stable job, or a FICO credit score between 500 and 620 on a scale (from 300 to 850). The subprime mortage loans are priced based on the risk assumed by the lender.
The market risk takes other factors into concsideratoin. Interest ratem housing prices, warehouse lenders willingness to finance New Centurys mortage lending oeprations and the borrowers overall view toward the loans all have impacts on the busienss of the NCF. The fluation of the interst rate highly affect the price of the loan and high interest rate led to explesive loan which in term affect the business negatively.
by not filtering customers abiality to pay back the loan. Moreover, their process of approving a loan also show a flaw. They have unclear guideline to approe or disapprove a loan and mangeer made frequent exception to underwriting guidelines. It makes the guielines lose the real meaning. The NCF aggressive attitude toward increasing the loan origanations is like a “ticking time bombs” because of the low quality loans that they made at the high quanity volume.they basically approve loans base on loose underwriting standard to the high risk borrower. It certainly contribute to the large repurchase of loan that NCF have to make in the later day. Futuremore, companys standard of quality of loan is not base on the number of requirement that borrowers meet but the fact that if the loan can be sold or not. This standard will definitely not work in the long time but bad loan will affect harm the business.
On the other hands, although the companys business was growing rapidly, they didnt take a correct step to expand their system and technology to support their large business and this lead to the lack of support of the business.