Two Socal financial institutions are under the gun for making subprime residential loans, which are loans to folks with weak credit records or high debt. Irvine-based New Century seems to have the bigger problem - a federal criminal inquiry into accounting and trading of its securities. In addition, the SEC wants to meet with New Century to discuss last month's announcement that the company would restate earnings for the first three quarters of 2006 due to "errors" in accounting and reporting of losses on loan repurchases. All this is likely to make its financial arrangements with lenders precarious - to the point where auditors could warn of "substantial doubt" about New Century's ability to stay in business.
Santa Monica-based Fremont General said it plans to stop making subprime residential loans and is in talks with potential buyers of the business. (That business is handled through the company's Fremont Investment & Loan unit.) Fremont is expected to enter into an agreement with the Federal Deposit Insurance Corp. that will require it to retain "qualified management," revise lending policies, ensure that borrowers are given sufficient information, and submit a plan for shoring up capital. Fremont plans to report a net loss from continuing operations in the fourth quarter after setting aside more money to buy back loans that defaulted.
Why is all this happening? Well, many of the homeowners getting loans from outfits like Fremont and New Century were in way over their heads. Subprime lending is typically based on a low monthly fixed rate for a year or two, followed by a "reset" that can be much, much higher. That's why you're starting to see late payments and notices of default within this sector. Some borrowers will try to refinance, which generates more fees for the subprimers, but financial institutions are starting to tighten the reins on these loans. And the other alternative - selling your house - isn't as easy as it used to be, certainly not at a profit. The feds plan to new guidance for mortgage lenders based on concerns that lenders are not accounting for an "elevated credit risk." From the WSJ:
The regulators, including the Federal Reserve and four other agencies, said lenders should assess whether potential borrowers can cope with payments once the higher rate takes effect. They also cautioned lenders against skimping on verification of borrowers' income, and told them to clearly spell out risks to consumers. Lenders and other interested parties have 60 days to comment before the regulators produce a final version of the guidance.