Fremont Faces Default Under Loan Purchase Contracts
Beleaguered Fremont General Corp. said Tuesday that it had received default notices from two unnamed third parties that had purchased a total of $3.15 billion of residential subprime mortgages from the lender last March. The former subprime lending giant had sold the loans under terms requiring it to maintain a tangible net worth of at least $250 million, as part of the loan sale agreements. The company's net worth has since fallen well below that threshold, it said in a press statement today. Net worth covenants are, generally speaking, a common practice in whole loan sales, and are usually used to protect the buyer from finding itself taking unecessary losses on any loans it purchased. Essentially -- short of bankruptcy -- buyers, particularly in the subprime loan space, want to make sure their sellers have enough capital to take back the inevitable bad loans in violation of representations and warranties made during the sale. Underscoring this point, Fremont disclosed that the two purchasers have pushed $11 million in buy-back requests to Fremont recently. While the bank said it is "evaluating these requests ... to determin whether they are appropriate," sources suggested to HW that in most cases, lenders have little recourse against forced repurchases. That $11 million figure is significant, especially for Fremont. The troubled bank said last week that cash was already running low, and that it would seek a possible sale of the company amid growing liquidity concerns. Rating agency Standard & Poor's has already downgraded Fremont, saying the bank has "no sustainable franchise and it faces severe asset quality and capital problems."