By Olin Ericksen
March 21 -- Risky mortgage practices rocking the
nation are coming home to roost for one Santa Monica-based
Fremont General confirmed Tuesday that nearly 2,400 employees
nationwide could lose their jobs by May after the company
reported it was withdrawing from the sub-prime lending market,
which offers adjustable interest rates on home loans to those
with shaky credit.
"As Fremont reported on March 5, the company had determined
to cease funding ‘sub-prime’ mortgages, and many
employees in that business were asked to remain at home on
paid leave until further notice," read a statement issued
by the company.
"Given the uncertainty of this situation and its impact
on employment, the Company has given notice of termination
to these employees on leave, to become effective on May 18,
2007,” the statement said. “During this period,
unless they secure other employment, these employees will
remain on Fremont's payroll and be covered under the employee
Daniel Hillary, a spokesman for the public relations firm
Abernathy MacGregor Group representing the company, said he
did not know how many of those 2,400 branch employees may
be based in at its Santa Monica headquarters.
On March 2, the company was ordered by the Federal Deposit
Insurance Corporation (FDIC) to "cease and desist"
its subprime lending practices after national foreclosure
and delinquent payment rates rose to the highest level in
many years during the last financial quarter, according to
"The FDIC found that the bank was operating without
effective risk management policies and procedures in place
in relation to its subprime mortgage and commercial real estate
lending operations," read the FDIC statement.
"The FDIC determined… that the bank had been operating
without adequate subprime mortgage loan underwriting criteria,
and that it was marketing and extending subprime mortgage
loans in a way that substantially increased the likelihood
of borrower default or other loss to the bank," according
to the statment.
Company officials said they would comply with the order,
according to a press release.
Fremont General is only one of many lending companies to
receive specifically tailored orders by the FDIC in the wake
of the recent developments in the sub-prime market, according
to a FDIC spokesperson.
It is also the latest in a string of Southern California
companies to announce layoffs and business closures.
On Monday, two Irvine-based mortgage lenders were the latest
companies hit by the increasing number of defaults. People's
Choice reportedly will close its office, while New Century
got news that the primary buyer of U.S. mortgages, Fannie
Mae, would not longer buy its loans.
The flurry o closures follows a December announcement by
Agoura Hills-based Ownit Mortgage Solutions, Inc that it would
close shop and lay off 800 employees.
While delinquency and default rates in the state are rising,
California ranks 43 and 40 respectively for late payments
on mortgages and foreclosure, according to the Mortgage Bankers
Association, which tracks national statistics.
A recent report by the group showed a decline on the ability
of sub-prime borrowers to meet their payments last year, with
the worst cases in the South and Midwest and in Texas, according
to the report.
"For the fourth quarter of 2006, 49 out of 50 states
and the District of Columbia saw their delinquency rate increase,
while 44 states saw an increase in the foreclosure inventory
rate," said the report.
Critics of subprime lending practices say that in addition
to putting the industry and thousands of jobs at risk, many
homebuyers are not clear what they are getting into when they
sign up for the loans.
Many homebuyers sign up at discounted rates, only to see
the adjustable rates ratchet up as Federal interest rates
With the slowdown of the housing market in 2006, such interest
rates began to climb steadily, and those in the subprime market
began to see their house payments skyrocket.
Subprime lending has sent jolts through the stock market
in recent weeks and has prompted Congressional leaders to
ask the CEOs of troubled lending companies to testify about
While many are losing their homes, the subprime market has
been a boon for lending companies.
For the third quarter of 2006, Fremont's portfolio of commercial
real estate loans totaled a record $6.1 billion and residential
real estate loans held for sale stood at $5.5 billion, according
to the company’s web site.
Net income for the company in the third quarter of 2006 was
$29.5 million, after taxes, the site said.