Since 2001, when New Century first adopted its rapid-growth strategy, loan production has soared 580% to $42.2 billion in 2004 — making the real estate investment trust the fifth largest originator of nonprime business, including Alt-A, home equity and subprime, and the largest subprime lender last year, according to a ranking of companies covered by MortgageDaily.com.

The fast-pace growth has been largely a function of favorable macroeconomic conditions, the company’s decision to extend its geographic reach and its rollout of an automated underwriting system, Moody’s said in the special report, Spotlight on New Century Financial Corporation.

At the same time, the significant increase in volume raises concerns over the credit quality of the loans and the business practices employed in originating them.

Moody’s determined that the credit quality of the loans the Irvine, Calif.-based lender originated during its highest volume growth period between 2001 and 2003 — when fundings jumped about 340 percent — has remained relatively stable.

New Century has been able to mitigate some of the risks inherent with rapid growth because it revamped many of its lending and appraisal practices prior to the outset of its pursuit of high volume, Moody’s said. The performance of the collateral originated and securitized by the REIT has steadily improved across all vintages, falling roughly in line with overall industry performance.

However, the increase in interest-only originations and loans with reduced documentation since 2004 has resulted in loan production of modestly riskier credit quality, the New York-based agency reported.

Factors that should partially offset higher risk are improved borrower quality, tighter appraisal standards and fewer exceptions to underwriting guidelines. Moody’s said.

While “the company’s improved lending practices could potentially help it to avoid material losses,” given that a less robust market is likely in the near term, Moody’s expects the subprime lender’s delinquencies and losses to rise along with those of the industry as a whole — especially in the riskier product lines.

“This will present a challenge to New Century’s relatively new servicing operation, which was re-started in October 2002 after several years of reliance on third-party servicing,” Moody’s stated in the announcement. “It is not clear at this point whether or not the company’s improved lending practices will result in better-than-industry performance.”

New Century’s servicing portfolio more than doubled annually to over 68,000 loans for a total dollar volume of $11.6 billion, from the approximately 25,000 loans for $3.9 billion serviced as of December 2002, according to a Fitch Ratings announcement in April.

At that time, Fitch Ratings assigned New Century a residential primary servicer rating of ‘RPS3’, which was “based on the company’s ability to service, collect, and liquidate subprime loan product.” The rating also reflected “the solid seasoning of New Century’s executive and servicing management teams, application of reliable vendor and proprietary technology, acceptable internal controls, as well as the servicer’s competent loan administration practices, and dependable default management and asset liquidation procedures,” Fitch said.

Wall Street analysts recently rated the REIT a 2.67 in its industry, which gave it a standing of “buy.”