COSTA MESA — Cal Star Financial Services Inc., a small Costa Mesa mortgage banking firm that is $13.6 million in debt and insolvent, said Wednesday that a federal grand jury in Los Angeles is investigating its operations.
Cal Star, which lost $2.2 million for its fiscal year ended Oct. 31, said the grand jury has issued broad subpoenas on the company and its chairman and chief executive, Dean M. Brewer.
"We are not aware of what the subpoenas may be in connection with," said Shannon Squyres, a company spokesman. "The grand jury subpoenaed all the records and documents of the company. Our attorneys are talking with the grand jury to try to get it to be more specific about what it wants."
The company had over-the-counter trading of its stock halted Tuesday, Squyres said, but allowed the stock to resume trading Wednesday. The stock closed Wednesday at 12.5 cents bid, the price if sold, and 37.5 cents asked, the price if bought.
Brewer reportedly was in San Francisco and could not be reached for comment. Bruce Harshey, the company's president, refused to comment.
Federal investigators would neither confirm nor deny the existence of any grand jury probe of Cal Star, and two quasi-federal agencies that purchase the loans Cal Star makes also declined to comment.
The company said in a prepared statement that it is trying to renegotiate the $13.6 million in loans it owes, but acknowledged that it does not have sufficient cash to retire the loans and could be forced into bankruptcy.
Cal Star said that its insolvency also threatens its status as an approved lender under regulations imposed by the Federal National Mortgage Assn. and the Federal Home Loan Mortgage Corp., the two largest purchasers of mortgages in the secondary market.
The company said that its net worth, under the agencies' definitions, was a negative $3.4 million at the end of October and has since worsened. It said that it did not know its current net worth--assets minus liabilities--and did not know the impact that its insolvency would have on its relationship with FNMA and FHLMC.
Cal Star bills borrowers and collects payments on a $300-million loan portfolio, the majority of which were sold to FNMA and FHLMC, Squyres said. In addition, the company's 11 offices in six states have been funding about $35 million in home loans a month, according to stock analysts.
Though the firm has not released financial results for 1989, Squyres said that the $2.2 million loss came on revenue of $11 million.
Cal Star had been funding its loans primarily from borrowings on lines of credit that it had established with two lenders. Squyres said that the lenders are failed savings and loans now under government control, but he did not know their identities.
The company said that it borrowed about $18 million from one lender and owed $11.6 million when it recently defaulted. It borrowed $22.75 million from a second lender and owed $2 million when it defaulted.
The Cal Star statement said that the company "discovered" that it had failed to make payments on the loans but said that it would inform the lenders Wednesday of its default. The company did not explain why it was unaware of its own default or why its lenders did not know.