DBRS Rates Fremont General Corporation at BB (low) with a Stable Trend

Dominion Bond Rating Service (“DBRS”) has today assigned ratings to Fremont General Corporation (“Fremont” or the “Company”) and its primary operating entity, Fremont Investment & Loan (“FIL”), as indicated above. The trend is Stable.

The ratings are based on the Company’s sustained origination volumes and balance sheet growth, sound liquidity position, improved asset quality, adequate capital base, and market position as one of the largest originators of residential non-prime loans in the U.S. Offsetting factors include the high level of earnings volatility, sizable single-credit commercial real estate (CRE) loan exposures, an above-average-risk CRE loan portfolio, and the participation in the volatile residential non-prime mortgage business. Lastly, DBRS believes that Fremont’s dependency on the health of the real estate market adds to the overall risk profile of the Company.

DBRS’s ratings consider Fremont’s impressive and consistent residential origination growth. As the sixth-largest non-prime mortgage originator in the U.S., Fremont enjoys considerable market presence, as illustrated by its 4.4% market share. Origination volumes have remained strong, increasing an impressive 52% to $36.2 billion in 2005, and were a solid $8.4 billion for the first quarter of 2006. Fremont’s significant market presence and franchise strength give the Company the size and scale that are vital for sustaining origination volumes and maintaining cost efficiency in the highly competitive environment. Fremont achieved strong annual earnings through 2005, which were largely retained, thereby strengthening the growing balance sheet. However, in the most recent quarter ending March 31, 2006, profitability measures were challenged, with net income falling to a mere $32 million, largely owing to the weak execution of residential loan sales. Importantly, this illustrates the level of earnings volatility inherent in the Company’s business model and its reliance on non-repetitive and unpredictable revenue sources, such as income from the disposition of mortgage loans and other transactional revenues. To bring balance to its residential lending business, Fremont has begun to increase its servicing portfolio. DBRS believes that given Fremont’s participation in the cyclical residential mortgage industry, a certain level of earnings volatility is expected.

Liquidity is a positive factor in the rating. Fremont’s banking subsidiary, FIL, has a sound liquidity position, which benefits from its access to deposit funding, a strength over many of its mortgage peers. The $9.2-billion deposit base, which has sustained 10% annual growth over the past ten years, funds a substantial portion (71%) of its growing balance sheet. Importantly, liquidity has remained sound despite the company’s history of volatile earnings. Further, the access to Federal Home Loan Bank advances provides another layer of reliable low-cost funding.

Fremont’s portfolio of CRE loans provides a level of interest income; however, it exposes the Company to above-average credit risk owing to the segment’s business strategy of providing funding for the construction and repositioning of CRE projects. The concentration in multi-family (condominium) development projects further exacerbates these concerns. However, asset quality measures reflect strong performance, and DBRS considers the credit risk well managed. Furthermore, the credit quality of the CRE portfolio has improved dramatically, as exemplified by the impressive decrease in non-performing assets, which fell from a high of 62.1% of equity in 2002 to a manageable 7.9% at March 31, 2006. DBRS believes that the portfolio adds notable single-item exposures, with 15 loans having outstanding balances of more than $50 million, the largest being $99.8 million, representing 7.2% of equity.

The Stable trend is based on DBRS’s view that despite the recent decline in profitability, earnings should recover to a degree as secondary market conditions for the residential real estate loans improve. DBRS expects a certain level of earnings volatility given Fremont’s business model. The Stable trend incorporates DBRS’s expectation that the strong deposit base will support a sound funding and liquidity profile. Finally, while maintaining asset quality will be a challenge given the current uncertain environment, DBRS believes that the Company’s sound practices will adequately mitigate the balance sheet risks.

With $13 billion in assets, the Santa Monica, California–based Fremont General Corporation (NYSE: FMT) operates as a financial services holding company with its primary operating entity, Fremont Investment & Loan, providing residential and commercial real estate lending on a nationwide basis. The Company originates non-prime residential real estate loans on a wholesale basis that are sold to third parties through whole loan sales and, to a lesser extent, securitizations. For its on-balance-sheet portfolio, the Company also originates CRE loans that are primarily short-term bridge and construction facilities. Finally, the Company offers FDIC-insured deposit accounts, including certificate of deposit, money market deposit, and savings accounts, through its 21 branches in California.

Note:
The Trust Preferred Securities for Fremont General Corporation contain certain unique covenants that give them some equity-like characteristics.