Sub-prime lender to drop 2nd mortgages

Sub-prime lender to drop 2nd mortgages

	Published : Tue, 13 Feb 2007 22:37 By : Agencies Print this Story

LOS ANGELES (AP) - Shares of Fremont General Corp. shot up more than 10 percent Tuesday on the news that the company would no longer offer second mortgages to home buyers who need to borrow their down payment.

Fremont is a sub-prime mortgage lender that issues both first mortgages and second, or 'piggyback' mortgages, that supply the 20 percent of the purchase price for those who want to finance 100 percent.

The second mortgage loans account for a small portion of Fremont's total lending -- 8.7 percent in 2005 and 8.1 percent through September 2006, according to the company's financial statements.

Still, the company's share jumped $1.22 or 10.37 percent to $13.09 in late trading on the New York Stock Exchange.

The company has also been taking steps to tighten credit requirements for its loans as home values decline and defaults rise.

Fremont packages its mortgages and sells them as securities to investors, typically within several months after the loans are made, according to Theodore P. Kovaleff, senior bank and thrift analyst at Sky Capital LLC.

But the market for investing in second mortgages has dried up in recent months because holders of the first mortgage are first in line to get paid if a homeowner defaults, leaving many second mortgages worthless.

When home values are rising, 100 percent financing is less of a problem because homeowners having trouble meeting mortgage payments can refinance.

But as home values decline, defaults increase, making the secondary mortgages a problem to collect.

News of Fremont's decision to drop its second mortgage business was first reported on the Web site of The Wall Street Journal. The news was confirmed Tuesday by Linda Bandov, Fremont's director of corporate compliance, who declined to comment further because the company will issue fourth-quarter earnings Feb. 28.

Kovaleff said the news was good for Fremont investors, especially because the Santa Monica-based company relies on residential mortgages for slightly more than half of its business. The company also makes commercial loans.

'Fremont has strengthened its underwriting,' Kovaleff said. 'This is another example of Fremont toughening its credit standards.'

Kovaleff said Fremont could get back into the secondary mortgage business when home values begin to rise again and mortgage defaults decrease.