Fremont General Corp.’s decision to exit the sub-prime mortgage market came despite an apparent willingness by regulators to work with the company’s industrial bank to upgrade its practices, sources told the Business Journal on Wednesday. The Federal Deposit Insurance Corp. late Wednesday issued a “cease and desist” order, calling upon Santa Monica-based Fremont General to reform both its residential mortgage and commercial lending practices within 90 days. Fremont said it has agreed to the terms. Fremont Investment & Loan writes subprime loans but not conventional mortgages. The official FDIC order was a follow-up to last Friday’s announcement by Fremont that following discussions with regulators it instead planned to divest the subprime unit. The head of the unit told employees in a conference call this morning that the company was in discussions with as many as six potential buyers. The company said Monday it would not fund any mortgage that had not been closed by the end of that business day. Employees of the shuttered subprime lending unit remained on paid leave as of Wednesday. But an FDIC analyst told the Business Journal that regulators were not requiring the company to exit the market entirely. The agency instead ordered Fremont to develop a five-year strategic plan for the business — better assessing the ability of borrowers to make payments once the adjustable rate mortgage’s introductory rate ends. Subprime mortgages have been one of the few options for home buyers with low credit ratings. Fremont in the second quarter of 2006 did tighten its loan origination policies, and reported the following quarter that the changes appeared to be having a positive effect. Even so, loan repurchases and re-pricings — short-term guarantees to the investors to whom Fremont resells its loans — rose 45 percent in the third quarter from the previous quarter. While most of Wall Street’s focus has been on Fremont’s mortgage unit, the FDIC for the first time Wednesday made clear that controls in the commercial lending unit also need reform. Fremont funds loans in both units in part from its retail banking operations. The company announced on Feb. 28 that it was delaying its fourth quarter earnings report. Fremont stock since then lost more than half its value before rebounding slightly on Wednesday. Shares closed up $1.68, or 25 percent, to $8.46 in regular trading Wednesday, then fell 63 cents to $7.90 in after-hours activity.
