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California largest U.S. market for high-risk home loans
Tuesday, 03 April 2007

California Investigates Subprime Mortgage Industry (Update2)
Attorney General Jerry Brown opens an investigation of the subprime mortgage industry. Half of the 20 biggest U.S. subprime lenders, including No. 2 New Century Financial Corp., which is trying to avoid bankruptcy, are located in California.

California Investigates Subprime Mortgage Industry (Update2)

By Karen Gullo

March 29 (Bloomberg) -- California Attorney General Jerry Brown is investigating the collapsing subprime mortgage industry in the state, the largest U.S. market for high-risk home loans.

Gareth Lacy, Brown's spokesman, said yesterday that the attorney general has an ``active and open investigation'' that's a continuation of probes into predatory lending practices that began a couple of years ago. Lacy wouldn't say which companies may be targeted or how far the probe has progressed.

``I think it's appropriate for the attorney general to take a look, especially if there's been abuses in lending practices,'' state Senator Mike Machado, a Democrat from Stockton, California, said in a telephone interview. ``There's a lack of scrutiny over the practices and the brokers engaged in originating some of these loans.''

Half of the 20 biggest U.S. subprime lenders, including No. 2 New Century Financial Corp., which is trying to avoid bankruptcy, are located in California, according to the newsletter Inside Mortgage Finance. The industry is under scrutiny by regulators after delinquencies on subprime mortgages rose to 13.3 percent last quarter, the highest since September 2002.

About 13 percent of the U.S.'s subprime loans are in California, according to the Washington-based Mortgage Bankers Association. Mortgage industry analyst Bob Visini of First American Loan Performance said that 13 percent accounts for 22 percent of the subprime mortgage debt in the U.S. because California is the nation's most expensive real estate market.

Predatory lending practices and improper disclosure of terms may violate state consumer-protection and fair-lending laws, Machado said.

30 Lenders

At least 30 lenders have halted operations, gone bankrupt or sought buyers since the beginning of 2006 as defaults on subprime mortgages increased. Subprime loans, a term applied to some of the riskiest home mortgages, are made to borrowers with poor credit ratings or high debt burdens.

Battling a wave of defaults by borrowers, Irvine, California-based New Century Financial said yesterday in a regulatory filing that it had signed agreements with officials in Idaho, Iowa, Michigan and Wyoming to stop lending in those states. More than a dozen states told the company to halt operations after consumers complained their loans weren't funded after being approved.

Ohio Attorney General Marc Dann said in a statement yesterday that New Century had agreed to halt all foreclosures, pending a review of whether those foreclosures are legal.

Laura Oberhelman, a New Century spokeswoman, said the company hadn't received an inquiry from the California Attorney General's office.

Fremont General

The No. 5 U.S. subprime lender, Santa Monica, California- based Fremont General Corp., was cited by federal regulators this month for giving loans to borrowers who were unable to repay them. Fremont, which also operates retail banking and commercial-lending businesses, shut its home-lending operations March 5, put employees on paid leave and hired Credit Suisse Group to sell the mortgage unit.

People's Choice Home Loan Inc., based in Irvine, filed Chapter 11 on March 20.

California previously investigated subprime lenders and was one of 49 states to share in a $325 million settlement with Irvine-based Ameriquest Mortgage Co. last year over claims that the company cheated customers by misrepresenting loan terms and getting inflated appraisals.

Ameriquest, the sixth-largest U.S. subprime mortgage company, is a unit of closely held Orange, California-based ACC Capital Holdings Inc.

In 2002 California and other states obtained a $484 million settlement from Household Finance Corp. that resolved an investigation into claims that the company misrepresented loan terms and failed to disclose other information to consumers.

Household, based in Prospect Heights, Illinois, is now a unit of London-based HSBC Holdings Plc, Europe's biggest bank by market value.

To contact the reporter on this story: Karen Gullo in San Francisco at This e-mail address is being protected from spam bots, you need JavaScript enabled to view it

Last Updated: March 29, 2007 15:37 EDT
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aJp84dFMpeps

 
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