While the mortgage crisis has affected just about all local lenders, two have been hit the hardest.
Brea-based Fremont General Corp. and Newport Beach-based Downey Financial Corp. are struggling to turn around as bad loans take a toll on their businesses.
Customers defaulting on loans that were too big for them have been eating away at the lenders’ bottom lines for about a year now.
Defaults are on the rise. But analysts are debating how bad the situation really is, and how bad it might get.
To guard against new defaults, lenders have tightened their standards for new borrowers. But the stricter standards mean that less loans are being made, cutting into the banks’ overall growth.
And they aren’t recouping all their money from selling the homes that are foreclosed on because property values continue to fall.
There have also been fears that borrowers will walk out on their loans, not wanting to pay for something that’s decreasing in value.
Government aid programs, such as the economic stimulus bill recently signed by President Bush, and in-house refinancing to help borrowers make payments are hoped to stem some of the bleeding, but it’s too soon to measure the effects.
Those programs could help Fremont, which operates Fremont Investment & Loan, as the majority of its problems are rooted in loans made to people at the low end of credit-worthiness scale, or subprime borrowers.
Once the nation’s No. 4 issuer of subprime loans, Fremont’s recent market value was less than $200 million, down 90% from where it was in early 2006 when the industry was hot with newly minted loans.
Last year it lost about $200 million from defaults and waning demand for new loans.
In early 2007 federal regulators closed Fremont’s mortgage business and said it needed a plan to restore finances.
In December, it hired Stephen Gordon to run the company. He’s the former head of Irvine’s Commercial Capital Bancorp Inc., which was sold to Washington Mutual Inc. in 2006.
“We’re making every effort to turn this around,” Gordon said.
He said Fremont would be renamed and that its business strategy would change, possibly into a new community bank.
Earlier this month, the company moved its headquarters to Brea from Santa Monica.
It has almost $9 billion in assets and operates 22 branches throughout the state.
Not all see the changes as enough to save the bank.
The credit rating agency Standard & Poor’s recently said Fremont General is strapped for cash and might not be able to pay its debt.
Fremont has already sold off at least $10 billion in loans, and in January it agreed to sell its Irving, Texas, location. It also sold its commercial real estate lending business.
Downey’s Spiral
Like Fremont, Downey’s problems stem from loans to those with less than great credit.
Downey’s adjustable-rate mortgages were issued to borrowers with less than prime credit, but better than subprime, known as Alt-A.
By the latest count, 9% of Downey’s $14 billion in assets were bad loans, up from just 1% a year ago.
The loans, also called option ARMs, switch to higher rates after two years, and have put payments out of reach for some borrowers who didn’t plan ahead.
The rates generally go up a couple of points, or by about 30%.
Option ARMs also offer credit card-style minimum payments that tack on the difference to the balance of the loan, making them harder to pay in the future.
Most of the adjustable-rate loans Downey made were issued between 2005 and 2007, which means the bulk of them is resetting.
Future growth at Downey will likely be a lot slower than the ride it had to the top of the housing market.
Wall Street is looking for negative earnings growth of 40% this year, with a rebound next year with 75% growth.
In 2007, the number of new loans Downey made was half that of the previous year.
In January, Downey said it lost $109 million in the fourth quarter compared to a profit of $52 million a year earlier.
It also said it set aside $218 million from earnings to cushion itself against future defaults.
Downey has refinanced with some of its borrowers in hopes to avoid losing everything through a default.
Jim Cramer of TV’s “Mad Money” once called Downey a similar buyout candidate to Oakland-based Golden West Financial Corp., which Wachovia Corp. bought for $25 billion in late 2006. He has since cautioned against the stock.
Downey’s founder and chairman Maurice McAlister is on the Business Journal’s list of people to watch in 2008.
At 82, McAlister owns 20% of the company’s shares and has never made public any plans to sell.
He could give the stake to his daughter Cheryl Olson, who already has a 2.5% stake in the company.
In December, Olson stepped down from her post as vice chairman of the company, but left the door open to return.
In November it was thought Texas Billionaire Gerald J. Ford might take a shot at controlling the company when he bought 7% of its stock, but bets were off when he cut his investment down to 5% just weeks later.
