Fremont Gets Default Notices, Survival Threatened
NEW YORK (Reuters) - Fremont General Corp FMT.N said on Tuesday it has received default notices related to $3.15 billion of subprime mortgages it sold last March and said its survival could be threatened if it were sued.
The Brea, California-based parent of Fremont Investment & Loan said the notices from the mortgage purchasers concern its failure to maintain a $250 million tangible net worth. Tangible net worth equals total assets minus liabilities and intangible assets such as goodwill, copyrights, patents and trademarks.
Fremont said that because of "limited available liquidity," it can neither deposit cash into a reserve account, nor provide a letter of credit to satisfy a tangible net worth covenant associated with guarantees it provided in the loan sale. It said it is in talks for a waiver.
"To the extent that litigation is pursued and the company was not successful in defending any such lawsuit, its ability to continue to conduct business as a going concern would be called into question," Fremont said.
Standard & Poor's downgraded Fremont's senior debt one notch to "CC," its second lowest grade other than default.
Last Thursday, Fremont deferred an interest payment and reported "significant" liquidity risk and capital needs. It also said it hired Credit Suisse and Sandler O'Neill & Partners LP to explore options, including a sale of the company.
Fremont had been one of the 10 largest U.S. subprime mortgage lenders until regulators, including the Federal Deposit Insurance Corp ordered it last March to stop risky lending.
More than 100 mortgage lenders have quit the industry since the current U.S. housing crisis began, and many have gone bankrupt. Subprime mortgages go to people with poor credit.
Fremont made nearly $32 billion of subprime mortgages in 2006, the last full calendar year it offered the product, according to National Mortgage News.
Fremont shares fell 30 cents, or 42.9 percent, to 40 cents in afternoon electronic trading. The shares had traded at $2.36 as recently as Thursday, and as high as $13.41 last June 1.
(Reporting by Jonathan Stempel, editing by Dave Zimmerman/Andre Grenon)
