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Santa Monica Lender Lays Off 2,400 Workers After Making Shaky Loans

By Olin Ericksen
staff Writer

March 21 -- Risky mortgage practices rocking the nation are coming home to roost for one Santa Monica-based lending institution.

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 benefit plans."

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 mortgage analysts.

"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 rise.

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 their practices.

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.






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