Fremont General finds buyer for sub-prime loans
Fremont General Corp., a Santa Monica-based bank that once specialized in mortgages for risky borrowers, said Monday that it had found a buyer for most of its remaining sub-prime loans and that it was negotiating the sale of its customer-service arm, which handles bill collections and foreclosures.
Fremont stock jumped $1.83, or 26%, to $8.88 on the news. The shares, which had traded as high as $16.91 late last year, tumbled in March after Fremont quit making home loans under pressure from regulators. The stock fell as low as $5.78 on April 4, after Fremont said its accounting firm, Grant Thornton, had resigned.
Fremont said it would sell $2.9 billion in mortgages at a pretax loss of about $100 million, meaning the unidentified buyer would be paying about 96.5 cents for every dollar of face value on the loans. That’s about the same discount that Fremont projected for a previously announced sale of $4 billion in loans last month.
During sub-prime’s heyday in 2003 and 2004, lenders could sell batches of loans on Wall Street for $1.04 for every dollar of face value. But defaults have walloped the business recently, causing loan buyers to back away, regulators to tighten lending rules and dozens of lenders to put themselves up for sale, shut down or declare bankruptcy.
Because it is a bank, with ample capital and reserves and a federally insured deposit business, Fremont has run no risk of insolvency, and it said Monday that it had $1.5 billion in cash and short-term investments.
Competing sub-prime lenders that are not banks had far less cushion against losses, forcing some, including New Century Financial Corp. in Irvine, to file for bankruptcy protection as losses mounted and Wall Street partners cut off funding.
Fremont, which also makes commercial real estate loans, was forced out of the sub-prime business last month when the Federal Deposit Insurance Corp. cracked down on risky lending at the company’s Brea-based Fremont Investment & Loan.
It said Monday that it had entered an agreement to sell the $2.9 billion in loans. The unidentified buyer also signed a letter of intent to negotiate the purchase of Fremont’s loan servicing business and “a portion” of its loan-origination arm, the company said.
The meltdown in sub-prime loans has forced lenders to stop writing the highly risky mortgages that were common in 2005 and 2006, such as 100% financing for borrowers with bad credit who weren’t required to document their income.
Many borrowers who had hoped to refinance loans after two or three years of low teaser rates will now be unable to do so, making sub-prime servicing businesses valuable for their collection expertise, but reducing the value of loan-origination operations.
Buyers are skeptical about those businesses because “origination of something that’s disappearing is a magic trick that no one has quite figured out,” said Stan Ross, chairman of the Lusk Center for Real Estate at USC.
