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By ALEX VEIGA AP Business Writer
LOS ANGELES—Fremont General Corp. said Tuesday it received default notices on $3.15 billion in subprime mortgages it sold to investors a year ago.
It also warned it likely will fail to meet conditions of the deal that call for the bank to maintain a minimum net worth or buy back the loans.
Two unnamed investors who purchased the home loans in March 2007 contend the lender violated the terms of the sales agreement, which specify the mortgage bank's tangible net worth not fall below $250 million. Tangible net worth is the sum of all assets minus liabilities.
The Brea, Calif.-based holding company for Fremont Investment & Loan anticipates its tangible net worth will be below $250 million when it reports 2007 fourth-quarter financial results.
Shares of Fremont fell 20 cents, or about 28 percent, to 50 cents. The stock has traded between 58 cents and $13.80 in the past 52 weeks.
The company said it may need to take additional write-downs and add to reserves as it prepares its full-year 2007 financial statements, which could translate into additional losses.
Fremont was required to hand over its financial statements to the investors at regular intervals but failed to do so for three consecutive quarters last year.
As a result, the investors have asked Fremont to repurchase about $11 million of the loans.
The original terms of the sale required Fremont to set up an account with money to make up the difference between the $250 million and its current tangible worth. It can also provide the investors with a letter of credit showing it has access to that amount.
Fremont said it would not be able to provide either. The company said it was working with the investors to obtain a waiver but has no assurances it will be granted.
It also warned that, should the default lead to a lawsuit and judgment against the company, it's ability to continue as a going concern "would be called into question."
Fremont was primarily a mortgage lender until early last year, when it was forced by the Federal Deposit Insurance Corp. to cease originating mortgages.
The agency claimed Fremont was operating without proper risk management oversight. The company proceeded to sell its mortgage assets after the lending operations were closed.
In November, Fremont reported third-quarter earnings fell 38 percent to $18.3 million, or 23 cents per share, from $29.5 million, or 39 cents per share, in the prior-year period.
The company turned a profit during the quarter largely due to a $65.6 million gain from the sale of its commercial real estate lending operations.
Theodore P. Kovaleff, an analyst with Sky Capital LLC in New York, said he was puzzled over which assets Fremont may need to write-down, given that the company purged itself of subprime mortgages.
"They sold off all their subprime, they really haven't been doing that much in the way of banking business that is not just plain vanilla, and that shouldn't be leading to write-downs and the extent of what they're intimating," Kovaleff said.
On Monday, two credit agencies cut their ratings on Fremont to non-investment grade, citing concerns over the company's access to cash and a decision to defer dividends on certain securities.
The California bank was also dropped from the S&P SmallCap 600 Index, Kovaleff said.
The index requires that companies have a market value of at least $300 million.
It also warned it likely will fail to meet conditions of the deal that call for the bank to maintain a minimum net worth or buy back the loans.
Two unnamed investors who purchased the home loans in March 2007 contend the lender violated the terms of the sales agreement, which specify the mortgage bank's tangible net worth not fall below $250 million. Tangible net worth is the sum of all assets minus liabilities.
The Brea, Calif.-based holding company for Fremont Investment & Loan anticipates its tangible net worth will be below $250 million when it reports 2007 fourth-quarter financial results.
Shares of Fremont fell 20 cents, or about 28 percent, to 50 cents. The stock has traded between 58 cents and $13.80 in the past 52 weeks.
The company said it may need to take additional write-downs and add to reserves as it prepares its full-year 2007 financial statements, which could translate into additional losses.
Fremont was required to hand over its financial statements to the investors at regular intervals but failed to do so for three consecutive quarters last year.
As a result, the investors have asked Fremont to repurchase about $11 million of the loans.
The original terms of the sale required Fremont to set up an account with money to make up the difference between the $250 million and its current tangible worth. It can also provide the investors with a letter of credit showing it has access to that amount.
Fremont said it would not be able to provide either. The company said it was working with the investors to obtain a waiver but has no assurances it will be granted.
It also warned that, should the default lead to a lawsuit and judgment against the company, it's ability to continue as a going concern "would be called into question."
Fremont was primarily a mortgage lender until early last year, when it was forced by the Federal Deposit Insurance Corp. to cease originating mortgages.
The agency claimed Fremont was operating without proper risk management oversight. The company proceeded to sell its mortgage assets after the lending operations were closed.
In November, Fremont reported third-quarter earnings fell 38 percent to $18.3 million, or 23 cents per share, from $29.5 million, or 39 cents per share, in the prior-year period.
The company turned a profit during the quarter largely due to a $65.6 million gain from the sale of its commercial real estate lending operations.
Theodore P. Kovaleff, an analyst with Sky Capital LLC in New York, said he was puzzled over which assets Fremont may need to write-down, given that the company purged itself of subprime mortgages.
"They sold off all their subprime, they really haven't been doing that much in the way of banking business that is not just plain vanilla, and that shouldn't be leading to write-downs and the extent of what they're intimating," Kovaleff said.
On Monday, two credit agencies cut their ratings on Fremont to non-investment grade, citing concerns over the company's access to cash and a decision to defer dividends on certain securities.
The California bank was also dropped from the S&P SmallCap 600 Index, Kovaleff said.
The index requires that companies have a market value of at least $300 million.