Second Mortgage Loans No Longer Offered By One Lender

The Examiner reports that shares of Fremont General Corp. shot up nearly 10 percent Tuesday after news that the company would no longer offer second mortgage financing to buyers who need to borrow their down payment.

Fremont is a bad credit home loan lender that issues both first mortgages and second, or “piggyback loans,” that supply the 20 percent of the purchase price for those who want to finance 100 percent.

The second mortgage financing accounts for just a small portion of Fremont’s total lending - 8.7 percent in 2005 and 8.1 percent through September 2006, according to the company’s financial statements.

The mortgage company has also been taking steps to tighten its credit requirements for its home loans as home values decline and defaults rise.

Fremont packages its mortgages and sells them as securities to investors, typically within several months after the home loan is made. But the market for investing in second mortgages has dried up in recent months.

Holders of the first mortgage are first in line to get paid if a homeowner defaults, after all, leaving many second mortgages worthless.

When home values are rising, 100 percent financing is less of a problem for lenders because homeowners having trouble making the payments can apply for a mortgage refinance.

But as home values decline, defaults increase, which often times makes the second mortgage a major problem to collect.

News of Fremont’s decision to discard its second mortgage business was first reported by the Wall Street Journal and confirmed Tuesday by Linda Bandov, Fremont’s director of corporate compliance, who declined to comment further on the issue.

The Journal said the news was good for Fremont investors, because the Santa Monica-based company relies on residential mortgage loans for slightly more than half of its business. The company also makes commercial loans.

Fremont could get back into the secondary market when home values begin to rise again and mortgage defaults decrease, experts predict.

SOURCE: The Examiner