So what happens next? Can Fremont close down (file bk & send the keys to the FDIC)? Does FDIC let them off that easy?

From an operational perspective that is.

It one thing to order a hemorrhaging patient to get better, a whole other thing to actually stop bleeding.

Any ideas?

Mozo Maz,

I agree with you on the new paradigm. This reads like a best practices list from the guidance issued last week.

I think this is the most significant element, though contemplating further issuance of 50% DTI loans is not comforting:

"The initial revisions to the Bank’s residential loan policy and practices,
required by this paragraph, at a minimum, shall include the following:
(i) Provisions which require that the Bank’s analysis of a
borrower’s debt-to-income ratio include an assessment of the borrower’s ability to meet his or
her overall level of indebtedness and common housing expenses, including, but not limited to,
real estate taxes, hazard insurance, homeowners’ association dues, and private mortgage
insurance. In addition, the Bank’s qualifying standards shall include an analysis of the
borrower’s ability to repay the debt at the fully indexed rate, assuming a fully amortizing
repayment schedule. The Bank shall not increase the 50 percent debt-to-income ratio set forth in
its loan policy, and to the extent that the policy allows routine extension of loans resulting in
higher debt-to-income ratios, shall reduce such ratios to 50 percent."

Dryfly,

I think this is a loss mitigation and adult supervision exercise for the FDIC. At the end of the day, they are on the hook for the deposits, so they want to maximize the value of the assets and stop any further value destruction asap.

Implicit in this is a judgement that current management does have the right stuff as in:

"Each member of management shall have qualifications and experience
commensurate with his or her duties and responsibilities at the Bank. Management shall
include a chief executive officer with proven ability to manage a bank of comparable size, and
experience in upgrading a low quality loan portfolio, improving earnings, and other matters
needing particular attention"

and if the board doesn't step up and find someone ASAP, the FDIC will have a candidate of their own (either a turnaround hired gun or a retired bank CEO) to "suggest" to the board and they won't end the meeting until he/she is installed in office. I'm sure there are others with more knowledge of the bank regs than me, but I think the feds can come in and call the shots if things get bad enough - it seemed to me that sort of thing happened in New England in the early 90s.

barely, I doubt there will be unannounced audits. Every institution gets regular safety and soundness examinations, and as I said, anyone who hasn't already tightened up guidelines is doing so now, so even if they get chewed up a little in their next examination for having these loans in the portfolio, they'll at least be able to claim that as a result of the release of the guidance they made necessary changes. Again, I'm hypothesizing that another institution isn't as much of an overall disaster, from a risk management perspective, as FMT. If they are, I can't imagine that the FDIC won't go after them just like they went after FMT.

I'm just saying that while failure to follow the Nontraditional Mortgage Guidance is clearly part of what got FMT in trouble, I'm not convinced that it would have come down to a C&D without all the other horrors.

I'm quite sure that every thrift out there is reviewing this C&D--in case they got no one on the management team old enough to remember the S&L crisis--to make sure that none of it looks familiar.

A) There's no way that Fremont can write 100% stated prime loans and prove that it is meeting the other mandates. The C&D includes mandates for all residential mortgage lending that are not substantially different from the subprime mandates. The C&D also severely restricts commercial real estate practices.

B) There's no way that Fremont can cut back its lending operations so severely and meet the capital/risk reduction programs within the 180-360 day timeline using income from operations.

C) One way it can do so is to sell additional securities, but before it is allowed to do so it will be forced to come up with an FDIC-approved statement about its true financial condition, etc and provide that to buyers. No one's going to buy them.

D) The other way it can do so is raise additional capital from stakeholders, but the shareholders are losing control of the institution so why would they do so?

After reading the whole thing, my conclusion is that Fremont has to give away a huge chunk of its ops for free in order to have a chance to survive as an independent institution at all.

Morgan,

Barclay's is already in for a billion...the probability that they are doing everything in their power to avoid having one additional dollar of exposure to NEW approaches metaphysical certitude. Moreover, no lender is going to act unilaterally here. The governing principle in workouts is "share the pain" - so everyone is going to have show forebearance and put up some more capital if anyone is going to do that. My guess is that unless the Fed forces them to do it, the current lenders are not going to put up any more financing for NEW. Most likely they have been cutting exposure over the last few weeks as the quality of the collateral has deteriorated. The only way capital will go into the company is through bankruptcy. If you review the last few weeks, the bankruptcy court is the only place where people are committing capital for this business (two exceptions FICC - which the stock market seems to think is going to lose its deal and ACC which got a Don Corleone deal from Citigroup for a warehouse line - Citi gets an option to buy the business - probably for a song). Otherwise its a bid for the business in front of the judge, and BTW the wholesale platforms don't seem to be worth a whole lot.

Option1 out of 100% LTV:

Mortgage Grapevine: Option One-- out of 100% loans period

I would really like to know what the following is about:

"operating in violation of section 23B of the Federal Reserve Act . . . , in that the Bank engaged in transactions with its affiliates on terms and
under circumstances that in good faith would not be offered to, or would not apply to, nonaffiliated companies"

I don't know exactly what it's about, but in context I'd guess that the problem is the corporate warehouse line to the subprime origination company. In other words, FMT used both outside warehouse lines and an internal line (borrowed from the affiliate thrift). If the interest rate on the internal line was artificially low (which inflates the profitability of the origination sub), or was used to park problems past their sell-by date, or otherwise failed to have the kind of risk-management provisions that the bank would have included if it had provided that warehouse funding to a nonaffiliated third party, then they can be in violation of 23B.

(SANTA MONICA, CALIFORNIA) – March 7, 2007: Fremont General Corporation (the “Company”) (NYSE:FMT) , a nationwide real estate lender doing business primarily through its wholly-owned industrial bank, Fremont Investment & Loan, in connection with news reports regarding its discussions with respect to the possible sale of its sub-prime residential real estate loan origination platform, said today that there can be no assurance that the Company will be able to enter into any transaction involving its residential loan origination platform.

So it's one thing to lie to your employees, and another thing entirely to lie to the SEC. Well, at least someone fears something.