Lender Manages to Grow in Rocky Sub-Prime Market

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In the recent rough-and-tumble times of sub-prime lending, Fremont Investment and Loan hasn’t just survived, it’s grown.

While other sub-prime lenders scrambled to keep the lights on after investors on Wall Street grew leery of the industry, Fremont snatched up employees from struggling rivals and kept making mortgage loans.

“We were always in front of the parade,” said Murray Zoota, Fremont Investment’s president and chief executive.

Fremont has prevailed by adhering to “disciplined” underwriting guidelines, Zoota said. The default rate on Fremont’s mortgages is half or less than the industry average, he said.

Fremont also has gotten support from its parent, Santa Monica-based Fremont General Corp., the insurance and financial services company with more than $8 billion in assets and $1.4 billion in annual revenue. In the past decade, Fremont General has provided the thrift with about $200 million in funding to grow its operations.

In 1989, when Fremont General purchased the thrift, the lender had $40 million in assets, 38 employees and was making consumer and commercial real estate loans. Today, Fremont counts $5.5 billion in assets, 960 employees and is originating $2 billion in sub-prime mortgages a year.

Sub-prime mortgages loans to homebuyers with less-than-perfect credit or no credit at all now provide most of Fremont Investment’s revenue. Fremont jumped into the sub-prime market just as it was just taking off in 1994.

Though the sub-prime sector now accounts for about 20 percent of mortgage lending, according to Department of Housing and Urban Development, it barely existed 10 years ago.

Filling a niche

Fremont and other sub-prime lenders “are filling a significant niche that was under-served eight to 10 years ago,” said Tom Borcich, director of the southern Los Angeles County region for the California Association of Mortgage Brokers. “That’s why there was such radical growth.”

In 1996, Fremont originated $183 million in sub-prime mortgages. By 1999, that figure had grown to $2.2 billion.

“They are very solid,” said Jay Cohen, an analyst with Merrill Lynch & Co. who covers Fremont General. “They continue to expand their franchise. Their business is helped by good economic growth.”

Still, it’s no secret the sub-prime industry is risky. Many sub-prime lenders have gone under or struggled as institutional investors backed away from those with too many bad loans in their portfolios.

Fremont’s conservative style likely has meant a tradeoff between higher profits and longevity, but it appears to have served the lender well. The company has been able to increase its share of the market while rivals like ContiFinancial Corp. and First Plus Corp. were closing their doors.

Fremont is among a handful of sub-prime lenders that have made it through the industry’s travails. Others include auto lender AmeriCredit Corp. of Fort Worth, Texas, and mortgage lender Household International Inc. of Prospect Heights, Ill.

In November 1998, Fremont picked up about 100 employees from Irvine-based Pacific Thrift & Loan Co., which was being taken over by regulators. “They said, ‘We are shutting down, you are welcome to hire our employees,'” Zoota said. “We were in a position to pick up some of the pieces.”

But the sub-prime shakeout, which started in 1998, stands to continue, Zoota said. “The market is adjusting. I don’t think it is over,” he said.

In March, Irvine-based First Alliance Corp. filed for bankruptcy reorganization, while last month parent First Union Corp. pulled the plug on The Money Store Inc., which was one of the largest sub-prime lenders when First Union bought it two years ago.

“It was a gold rush mixed with fool’s gold,” Zoota said. “Some got rewarded. Some are in the cemetery.”

Fremont has devised exit strategies other than securitizations for its loans, Zoota said. Because the thrift has deposits of its own, Fremont holds onto some of the loans it makes, collecting interest for itself. It also sells loans to other financial institutions.

All the while, Zoota said he has remained diligent about Fremont’s underwriting and credit policies.

Central Valley roots

Fremont Investment & Loan got started in 1937, when it was called Fresno Loan and Thrift. “It was a tiny little company hustling car loans,” said Zoota, who joined the company in 1977.

In November 1983, he became president of the company and moved its operations from the Central Valley to Southern California. He set out to shed the auto finance division and diversify operations to commercial real estate loans, which became a mainstay for the company.

“The last car loan was made in the ’80s,” Zoota said. Auto lending “is a tough business. We kept getting lower and lower on the food chain.”

Automakers’ credit divisions, such as Ford Motor Credit Co. and General Motors Acceptance Corp., kept getting bigger pieces of the auto lending pie, squeezing the profits of Fremont and others.

In February 1989, the thrift was sold to Fremont General, which was looking to become a diversified financial services holding company and saw the thrift as a good opportunity to expand, according to Zoota. With a large parent company behind him, Zoota first grew the business in Southern California then took aim at the rest of California. After establishing a statewide presence, Zoota wanted to expand on the West Coast and then nationally.

Zoota’s strategy hasn’t called for full-service banking, which would put Fremont in competition with larger, more established thrifts and banks. Fremont only offers certificates of deposit and money market accounts and has stayed away from savings and checking accounts, automated teller machines and credit cards.

“We’re like Southwest Airlines no frills,” Zoota said.

Fremont has 19 branches, mostly in Southern California, though the thrift originates sub-prime loans across the nation.

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