C-Bass owners may write off $1 billion stake

August 01, 2007|By Laura Smitherman | Laura Smitherman,Sun reporter

The company that acquired subprime lender Fieldstone Investment Corp. of Columbia two weeks ago is now in financial trouble and could be written off as worthless by its owners.

MGIC Investment Corp. and Radian Group Inc. announced late Monday that they may write off their stakes in Credit-Based Asset Servicing and Securitization LLC.

The New York joint venture, known as C-BASS, invests in subprime mortgages and packages the debt for sale. MGIC and Radian had valued their combined investments in C-BASS at roughly $1 billion.

C-BASS, where management also owns a small stake, said yesterday that it was in "advanced discussions" with a number of investors to alleviate a cash crunch, according to a news release.

The company said it remained confident in the overall credit quality of its portfolio.

The development illustrates the swift deterioration of the subprime mortgage industry and the breadth of those affected. MGIC, the largest U.S. insurer of home loans, and competitor Radian were not directly involved in extending the subprime loans, which often carry higher or adjustable interest rates and are typically reserved for borrowers with weaker credit.

MGIC and Radian had previously agreed to merge.

Also yesterday, American Home Mortgage Investment Corp. said that it doesn't have cash to fund new loans and may liquidate its assets.

The company focused on higher-quality loans than subprime but also made so-called "low-doc" loans that allow borrowers to produce little documentation of income or assets.

It relied on bank financing to help fund home loans, and revealed that it has "substantial" unpaid margin calls pending to lenders.

C-BASS reported yesterday an "unprecedented" level of margin calls, which typically means a request for additional collateral or cash from lenders, and blamed the situation on "the current severe state of disruption in the credit markets."

C-BASS said it had met $290 million in margin calls in the first six months of this year and then an additional $260 million worth in the first 24 days of July.

The Fieldstone acquisition by C-BASS for $188 million closed in mid-July. Fieldstone, which sold mortgages nationwide, had been hit by a rising number of loan defaults and was facing a liquidity crunch of its own.

Fieldstone also is the target of an investigation by the Labor Department into allegations from its former general counsel, Cynthia L. Harkness. She claims she was fired in retaliation for reporting alleged violations of securities and other laws by senior management. She made the complaint under the Sarbanes-Oxley corporate accountability law.

Dozens of subprime mortgage companies have declared bankruptcy, shuttered operations or been sold in recent months, and the news has roiled stock markets. Amid fears about credit conditions last week, the Dow Jones industrial average and Standard & Poor's 500 index posted their worst week in five years. The Dow and S&P 500 each slipped more than 1 percent yesterday.

"A few very short days is all it takes for liquidity providers to get nervous and start to pull credit lines," said Steve Stelmach, an analyst at Friedman Billings Ramsey. "There are larger ramifications. If liquidity dries up in the mortgage market, it's going to be tougher for everyone to finance home purchases."


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