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Fieldstone Struggling

1st quarter volume $0.8 billion

May 17, 2007


Fieldstone Investment Corp. is fighting several lawsuits, including one claiming it fired a whistle blower. Meanwhile, mortgage originations fell, losses increased and the company in jeopardy of violating covenants in its warehouse line agreements.

Cynthia Harkness, former general counsel for the Columbia, Md.-based lender, filed a complaint with the Occupational Safety and Health Administration in March, according to a recent filing with the Securities and Exchange Commission. She alleged discrimination in violation of Section 806 of the Corporate and Criminal Fraud Accountability Act of 2002, Title VIII of the Sarbanes-Oxley Act of 2002.

Fieldstone terminated the attorney in retaliation for reporting SEC violations by senior executives at the company, Harkness alleges. She is seeking reinstatement, lost wages and legal expenses, among other damages.

But a response filed by the real estate investment trust with OSHA last month requests dismissal of the claims because no Sarbanes-Oxley claims were stated and "the events alleged in her complaint fail to establish that she was engaged in protected activity under [the Sarbanes-Oxley Act] or that she was, as a result of such activity, unlawfully discharged," according to the 10-Q filing.

"We intend to vigorously defend this claim and believe that Ms. Harkness' complaint is without merit and that we have meritorious defenses available," Fieldstone said. "However, there can be no assurance that an adverse outcome would not have a material effect on our results of operations, financial condition, or cash flows."

Fieldstone also noted a purported stockholder class action lawsuit was filed against it in the Circuit Court for Howard County, Md. That case alleges the price being paid by Credit-Based Asset Servicing, or C-BASS, to acquire Fieldstone is inadequate and that the board of directors withheld information that may have changed shareholders' approval of the merger.

The merger with C-BASS is expected to close by next month.

"Due to the inherent uncertainties of the judicial process, we are unable to predict the outcome of this matter," the filing said. "We intend to vigorously defend this claim and believes that it is without merit and that we have meritorious defenses available."

Several other pending lawsuits were noted in the filing, including one case filed in 2004 by the Bass family seeking additional proceeds from the sale of their interest in the company.

First quarter originations were $0.8 billion, according to the filing. The latest period was off 21 percent from $1.0 billion a year earlier. Wholesale originations of $0.7 billion decreased 19 percent from the prior year, while retail production $0.1 billion fell 31 percent.

"The decrease in loan fundings was due primarily to a decline in the overall mortgage market and recent changes to our product offerings, underwriting guidelines, and pricing in response to current market conditions the effect of which is to restrict the range of mortgage products we originate," the company said.

Fieldstone said it hopes to improve originations with new Alt-A programs, a simplified rate sheet and a new commission plan. The company eliminated its conforming operations last year.

Loan delinquency of at least 30 days was reported at 12.0 percent, including 2.6 percent on loans past due 60 days or more. During the fourth quarter, 30-day or greater delinquency was 1 basis point better.

Steps to improve loan performance reportedly include the elimination of poorly-performing loan products, tightening appraisal process controls and increasing the speed and intensity of default collections.

A first quarter loss of $68.6 million was blamed on fewer secondary investors requiring hiring yields, Fieldstone reported. As a result, a reduced cost structure through consolidations, layoffs and lower commissions will be complimented by a new loan origination system and vendor re-structuring.

Noting that it expects industry turmoil to continue in the short term, Fieldstone said, "If 2007 results do not improve relative to 2006 results, the company may violate the covenants of its credit facilities."

"In the event of a breach of a covenant contained in a facility that triggers an event of default, then the lender may accelerate outstanding principal repayment owed under the facility and such acceleration may permit other lenders to accelerate all of the outstanding principal repayment under their facilities," the report said. "In such a situation, the company believes that it would be able to generate sufficient cash from existing operations, maintain sufficient liquidity, including the liquidity provided by C-BASS under the terms of the merger agreement, or make alternative arrangements to enable it to continue to meet its obligations for 2007."

A total of $1.5 billion in committed warehouse financing was outstanding as of March 31. Among the lenders listed were Credit Suisse First Boston Mortgage Capital LLC; Credit Suisse, New York Branch Commercial Paper Facility; JPMorgan Chase Bank, N.A.; Lehman Brothers Bank, FSB1; and Merrill Lynch Bank USA.

Sam Garcia worked in mortgage lending for twenty years prior to becoming publisher of MortgageDaily.com.

e-mail: [email protected]

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