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'Sub-Prime' Lender Merger Deals Collapse

Financial services: Global credit crunch is cited in derailment of two proposals involving Southland companies.


The global credit crunch helped derail two planned mergers involving "sub-prime" Southland lenders Monday as investors struggled to determine which companies that make risky consumer loans might survive the liquidity squeeze.

The collapse of deals between Life Financial Corp. and FirstPlus Financial Corp. and between PacificAmerica Money Center Inc. and Fremont General Corp. are part of the fallout from last week's crash in sub-prime lender stocks and of continuing disarray in the mortgage lending market.

Life Financial, a Riverside sub-prime lender, said it called off plans to be acquired by Dallas-based FirstPlus in a stock-based deal. Shares of FirstPlus, which uses football player Dan Marino to pitch loans of up to 125% of a home's value, plunged from about $40 when the deal was announced in March to a low of $2.56 last week. FirstPlus, which posted $822 million in revenue last year, saw its shares close Monday up 44 cents, at $3.75, on the New York Stock Exchange. Stock in Life Financial, which had revenue of $70 million, closed up 38 cents at $4 on Nasdaq.

FirstPlus itself has been seeking a buyer since late August.

Meanwhile, Woodland Hills-based PacificAmerica was abandoned by Fremont General, a Santa Monica-based insurance and financing company that, before the market for risky loans deteriorated, had promised to buy the sub-prime mortgage lender. Fremont had nearly $1 billion in revenue last year, and PacificAmerica had $94 million.

PacificAmerica stock fell by half, to $1.06, on Nasdaq, and Fremont shares rose 88 cents to $41 on the NYSE.

PacificAmerica said market turmoil makes it difficult to predict whether it will be able to find another buyer or source of funding.

Shares of sub-prime home equity lenders, which specialize in 125% lending or loans to people with bad credit, plummeted last week amid fears that a credit crunch would devastate their business.

Sub-prime lenders make most of their money by packaging and selling their loans as securities. But institutional investors have balked at buying the loans recently amid global economic turmoil.

The investors, which include insurance companies, pension funds and banks, fear higher default rates if a recession comes, as well as more prepayments as borrowers refinance their loans at lower rates. Prepayments reduce interest revenue to the lender.

Banks and brokerages that once provided credit to the sub-prime lenders have also shut the tap in some instances, leading to the bankruptcies of lenders including Southern Pacific Funding Corp. of Lake Oswego, Ore., and Cityscape Financial Corp. of Elmsford, N.Y.

Rising Treasury yields in recent days have helped ease investors' fears about prepayments, which in turn helped boost some stocks Monday. Shares of Aames Financial Corp., a Los Angeles sub-prime lender that has been placed on a credit watch for a possible downgrade by Duff & Phelps Credit Rating Co., rose 25 cents Monday to close at $2.38 on the NYSE. The stock of Impac Mortgage Holdings Inc., a Santa Ana real estate investment trust that buys some sub-prime mortgages, rose 88 cents to $4.44 on the American Stock Exchange.

But other lenders continued to suffer. First Alliance Corp., an Irvine sub-prime lender under state and federal investigation in regard to its lending practices, fell 38 cents more to $3.63 on Nasdaq.

Investors are also trying to distinguish companies that have solid financing and lines of credit from those that don't, analysts said. Sub-prime companies that are trying to negotiate with their lenders now are particularly at risk, said Daryl Leehaug, a Duff & Phelps analyst.

"They can't continue to originate loans if they don't have the warehouse lending [brokerage or bank financing] solidly in place," he said.

Sub-prime companies also may have to raise yields to induce investors to buy and in turn pass the added costs along to consumers..

These troubles will lead many sub-prime lenders to announce lower profits or even losses for the third quarter, said Steven Katz of the Fitch IBCA rating agency.

"I think that [lower earnings] combined with the liquidity squeeze means there could be more fallout to come," Katz said.

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