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Escrow Funds Diverted

Escrow Funds DivertedUBS Vs New Century

April 6, 2007


UBS Real Estate Securities has filed a lawsuit against five New Century Financial Corp. subsidiaries, alleging they “misappropriated UBS’s money and escrow money being held for borrowers.” On the upside, a bankruptcy trustee approved the use of financing that will help the real estate investment trust position itself for a sale.

The five entities “failed to deposit into the custodial account millions of dollars of mortgage payments that they received from borrowers on loans purchased and owned by UBS,” according to the suit. Additionally, they “failed to account for missing escrow payments made by borrowers on loans purchased by UBS.”

Misappropriated money totaled at least $3.8 million, the suit alleged.

The suit was filed Thursday in U.S. Bankruptcy Court for the District of Delaware, where New Century filed for Chapter 11 bankruptcy on Monday.

Named as defendants are New Century Mortgage Corp., New Century Asset Holding, Home 123 Corp., New Century Credit Corp. and New Century Financial Corp.

Spokespersons for both UBS and New Century declined to comment on the suit.

UBS declared, on or about March 12, an “Event of Default” by the New Century firms of their master repurchase agreement of June 23, 2006, and stated that it would not be renewing their servicing contract, which subsequently expired on April 2, according to the suit.

But New Century firms did not deposit into custodial and escrow accounts at Deutsche Bank National Trust Co. all the funds they received from principal, interest and escrow payments and from prepayments, UBS charges in its suit.

They have not complied with requests for “a reconciliation and accounting of all payments received on behalf of UBS from mortgage borrowers” and have failed to transfer escrow funds to UBS’s new servicer, according to the suit.

By these failures, the suit charges, the New Century companies “have unlawfully converted property owned by UBS and mortgage borrowers, which has caused injury to UBS and the mortgage borrowers” and have also “breached their fiduciary duties.”

UBS, in the suit, asks for an injunction from wrongfully retaining the funds and the imposition of a constructive trust over payments and escrow funds.

The suit also seeks money and punitive damages, interest, costs, attorney’s fees and “such other and further relief as the court deems just and proper.”

Meanwhile, New Century announced that the U.S. Bankruptcy Court has approved a motion permitting it, on an interim basis, to access up to $50 million of the $150 million debtor-in-possession financing arranged for New Century by The CIT Group and Greenwich Capital Financial Products Inc.

The court also approved other “first day” motions that will facilitate the company’s operations as it pursues the sale of its assets and operations through the Chapter 11 process, the REIT reported.

Those actions, said New Century President and CEO Brad A. Morrice in the statement, “will help New Century provide for its associates and continue operating without interruption.”

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