A federally chartered bank in New Jersey closed its subprime lending subsidiary in March and fired employees who concealed “an onslaught of early payment default claims” in 2006 from its parent company, executives said.
In a presentation to shareholders Thursday, executives at OceanFirst Financial Corp. said the bank made subprime loans through a subsidiary, Columbia Home Loans LLC, based in Westchester County, N.Y.
Columbia’s loans were securitized and sold to Wall Street investors, who had the right to demand that Columbia repurchase them if borrowers defaulted soon after closing on a loan.
OceanFirst executives said a zero-down subprime loan offered by Columbia carried risks that were not sufficiently managed, resulting in “an onslaught of early payment default claims.”
The problem was exacerbated “by a concealment of the incidence of (early payment defaults) in 2006,” the company said. “Concealed information remained suppressed by Columbia officers until February 2007, preventing OceanFirst from reacting appropriately to the rapidly deteriorating market.”
Columbia’s subprime loan origination was shut down in March, and “those responsible for suppression of the information were terminated,” OceanFirst executives said.
While OceanFirst “initially found no widespread evidence of fraud, we have recently initiated a more thorough independent forensic review to confirm our earlier assessment,” the company said.
OceanFirst announced Wednesday that Columbia’s president, Robert M. Pardes, had resigned “for personal and family reasons.”
OceanFirst said it established a $9.6 million reserve for projected fourth-quarter-2006 early payment defaults, and revised its estimated earnings. The company is reporting another $12 million charge related to first-quarter-2007 subprime lending, including repurchases of loans with early payment defaults.
The problems at Columbia aren’t a threat to OceanFirst’s existence, the company said. Founded in 1902, OceanFirst Bank is a federally chartered stock savings bank with $2 billion in assets and 20 branches in New Jersey’s Ocean, Monmouth and Middlesex counties.
“While important to OceanFirst, Columbia’s mortgage banking revenue was not a major contributor to company earnings, and the current losses associated with subprime lending do not represent a critical threat to our continuing operations,” OceanFirst executives told investors.
In reporting its first-quarter results, OceanFirst said Columbia originated $38.2 million in subprime loans in the first three months of the year, of which $8.7 million were loans with 100 percent financing.
Nonperforming loans on the books increased to $18.2 million at the end of March, up from $4.5 million at the end of 2006. OceanFirst said most of the increase — $10.3 million — was attributable to loans repurchased by Columbia in the first quarter of 2007 due to early payment defaults.
OceanFirst reported a net loss of $5.4 million for the quarter, compared with a $4.3 million profit for the same period a year ago.