New Century immediately fired 3,200 workers - more than half its work force - and said it intends to sell off its major assets.
"The Chapter 11 process provides the best means for selling our servicing and loan origination operations to financially sound parties," president and chief executive Brad A. Morrice said in a statement.
"It is our hope that potential buyers will be in a stronger position than we are to employ many of our associates on an ongoing basis," he said.
The company made the move after exploring a variety of possible ways to stay in business, he said.
New Century was the latest so-called subprime lender to fall on hard times amid a spike in mortgage defaults caused by borrowers unable to make payments. More than two dozen subprime lenders have shut down in recent months and others are scrambling to stay in business.
Subprime loans target borrowers with low credit scores. The mortgages carry relatively high interest rates but can also offer low initial payments.
"New Century's failure raises the very real risk that the problems facing the subprime sector will spread into the broader mortgage market," said Octavio Marenzi, CEO of Celent, a Boston-based financial research and consulting firm.
"Relatively lax lending standards were by no means limited to subprime lenders, and problems could easily spread to the broader banking sector," he said
New Century said it had agreed to sell its loan servicing business to Carrington Capital Management LLC and its affiliate for about $139 million, subject to the approval of the bankruptcy court.
CIT Group and Greenwich Capital Financial Products Inc. have agreed to provide up to $150 million in working capital to facilitate the reorganization process, the company said.
New Century has also agreed to sell certain loans and residual interest in some trusts to Greenwich Capital for $50 million.
New Century, based in Irvine, filed for Chapter 11 protection in U.S. Bankruptcy Court for the District of Delaware. The move had been expected for several weeks.
"This was a very hard step for me personally and clearly not the outcome I would have preferred," Morrice said.
Like other subprime lenders, New Century profited during the real estate boom, when appreciation rates soared and equity protected most homebuyers from defaulting on their loans. Most could simply refinance or sell homes at a big enough profit to pay off mortgages and move on.
Investment banks also jumped in, eager to buy loans from subprime lenders then slice them up into bond products to sell on Wall Street. That helped New Century stock hit its historic high of $65.95 in December 2004. Its loan production for 2005 hit a record $56.1 billion. On Feb. 7, however, New Century informed the Securities and Exchange Commission that it would have to restate financial results for the first three quarters of 2006. The company said it had failed to accurately tally losses from loan repurchases. It also faces federal probes by the SEC and the U.S. Justice Department. And shareholders, angry over their losses and alleging mismanagement by the company's directors and officers, have fired off several lawsuits. Last week, New Century said several of its lenders planned to sell their outstanding mortgage loans and use the proceeds to offset payment obligations by the company, while retaining the right to recover the difference. The company has signed consent agreements with several states and received cease-and-desist orders from others in recent weeks. The state agreements are intended to keep New Century from accepting new mortgage applications on grounds that it has violated state laws, including failing to fund mortgage loans after closing. AP-CS-04-02-07 1809EDT