Franklin Credit Hits a Wall; Warns It May Not Survive

Franklin Credit Management Corporation — one the larger scratch-and-dent mortgage operations out there besides C-BASS — said late yesterday that it would delay filing its third quarter operating results amid the need to account for “a substantial increase in the provision for loan losses.” The company said it expects to report “substantial negative stockholder’s equity” as a result of the losses, and said it may be insolvent if it doesn’t get waivers of credit terms from its principal financier.

From the press statement:

Due to the rapidly deteriorating real estate and mortgage origination credit market and resulting industry-wide increase in delinquencies involving mortgages originated in the years 2005 and 2006, particularly for second-lien loans, Franklin is in the process of reviewing and assessing the reserves for its portfolio of acquired loans, particularly second-lien mortgage loans acquired in those years.

The company’s primary financier — not named in the press release, although I’d love to know who — has suspended all funding activities at Franklin Credit, with the company saying the bank in question had agreed to waive any breaches of its debt covenants through the end of the year. But that waiver came at a very steep price, with Franklin Credit putting up “all previously unencumbered assets of the Company and its subsidiaries” as collateral for the waiver.

The troubles at Franklin Credit are noteworthy, especially given that troubles at fellow scratch-and-dent operation C-BASS have been implicated by MGIC and Radian as the reason both insurers will be late with their own earnings reports.

Franklin Credit’s current troubles are quite a different song from the one sung by CEO Gordon Jardin during the second quarter earnings report, where he said the company was “able to capitalize on the turmoil in the mortgage origination and securitization market,” snapping up assets on the cheap. (At the time, the company also said it was largely immune to turmoil in the rest of the mortgage market, although my commentary had noted concern at the time over longer-term debt facilities. It’s painful being right.)

It now is clear that there was a reason the loans were available at such a deep discount; and given the current mortgage climate, it’s a whole lot more difficult to turn a troubled loan into re-performing loan.