Fremont in talks to sell subprime unit
NEW YORK (Reuters) - Fremont General Corp. FMT.N said on Monday it agreed to sell about $2.9 billion of subprime mortgages and entered into exclusive talks to sell its residential lending business to the same unnamed party, and its share rose sharply.
Fremont said the loans represent the bulk of subprime loans marked for sale but not yet sold. The loans are being sold at a discount, resulting in a pretax loss of about $100 million.
The Santa Monica, California-based financial services company also said it intends to sell its loan-servicing platform and its loan origination business, as well as all servicing rights, advances, residual interests and mortgage-backed securities. The bank will remain active in commercial real estate lending.
Fremont said the buyer is completing its due diligence, negotiating terms and working toward a definitive agreement, but added there are no guarantee a deal will be completed. Fremont directed all press inquiries to a public relations agency, which declined comment.
Fremont General shares were up $1.81, or 25.7 percent, to $8.86 in early afternoon trading. The stock earlier rose as high as $9.62, its highest in more than three weeks.
The loan and unit sales come as subprime lenders scramble to overcome rising defaults and late payments amid a slowdown in the U.S. housing market. This slump in lending business has been exacerbated as Wall Street banks cut off funds and credit lines used by these lenders.
More than 30 lenders have quit the business over the past year, and six have filed for bankruptcy protection.
Fremont is one of several subprime lender that have sold loan portfolios to bigger banks and hedge funds to raise much needed cash and to reduce their exposure to rising losses. Subprime lenders extend mortgages to people with weak credit.
Problems in subprime markets, which roiled markets in February and March, may hit more lenders' stocks in coming weeks.
"We've been through a quiet period, but I'm expecting more uprising (by investors) during the upcoming earnings season when some companies show what's under the hood," said Standard & Poor's equity analyst Stuart Plesser.
"The problem will be how the secondary markets have reacted to the (loans) that have been sold. A lot of gain-on-sale margins on these loans will be hurt," said Plesser, who tracks savings and loan companies.
That could spell some trouble for larger financial companies that engage in subprime lending, such as Countrywide Financial CFC.N and Washington Mutual (WM.N), he said.
Fremont said its main unit Fremont Investment & Loan remains strong with $1.5 billion in cash and short-term investments.
The company also said it is selecting an independent accounting firm to replace Grant Thornton, which quit April 2.
In February, Fremont postponed the release of fourth quarter results. The company also received a cease and desist order from the Federal Deposit Insurance Corp., a bank regulator, which ordered Fremont to limit lending.
Last month, the company announced it would exit the subprime business and hired Credit Suisse as its advisor. The company also warned it expected a fourth-quarter loss from operations after setting aside more money for loan losses.
