Sub-prime lender seeks bankruptcy protection

Rising defaults in the market for sub-prime mortgages have claimed another victim: Brea-based ResMAE Mortgage Corp. said Tuesday that it had filed for Bankruptcy Court protection.

Separately, Santa Monica-based sub-prime lender Fremont General Corp. said it no longer would offer second mortgages to home buyers who need to borrow their down payment.

The sub-prime market -- loans to people with bad credit, high debt loads or other risk factors -- has been rocked in recent days by news that more borrowers are having trouble making their payments.

Last week, Irvine-based New Century Financial Corp. said it would have to restate earnings for 2006 because of losses tied to sub-prime mortgage defaults.

In its bankruptcy filing, privately held ResMAE said brokerage Credit Suisse Group Inc. agreed to buy its assets for $19 million. But the court said it would allow other bids.

ResMAE is at least the 20th mortgage company to be sold or closed as delinquencies rise and the market for home loans to high-risk borrowers contracts.

ResMAE said it had been “devastated” by a surge in defaults, which led to increased demand by investors that it buy back loans that have gone bad.

Many sub-prime loans have been packaged and sold to investors via mortgage-backed bonds. Investors have been attracted to the bonds by the relatively high interest rates on the loans.

But analysts said many of the buyers who jumped into the housing market last year were stretched financially and now find themselves unable to keep up.

ResMAE was founded in 2002 by three former executives of Long Beach Mortgage Co.

ResMAE said it made nearly $8 billion of loans in 2006. The company said its offices would remain open during the sale process.

ResMAE said that Merrill Lynch & Co. helped trigger the company’s tailspin by demanding that it buy back $308 million of loans under so-called early payment default provisions.

Merrill Lynch said it followed the terms spelled out in its agreements with ResMAE: “We properly exercised our contractual rights to protect our financial interests. We offered numerous negotiated settlements in an effort to help the company and those were rejected.”

Fremont General said Tuesday that it would stop making second, or “piggyback” mortgages, that allow borrowers to use a second loan in lieu of a down payment when buying a home. The company said it could no longer sell the second loans at a profit because of the turmoil in the sub-prime business and investors’ fear of defaults.

Shares of Fremont General jumped $1.30 to $13.16 on the news. The stock plunged 30% last year.