Cerberus’ subprime woes

August 14, 2007

Add Cerberus Capital Management to the list of firms hit by the subrime mortgage meltdown. Its portfolio company Aegis Mortgage Corp. filed for bankruptcy on Monday. And Aegis isn’t Cerberus’ only bet on the mortgage industry. 

Before the subprime mess descended on the U.S. and abroad, H&R Block said in April it will sell its subprime lender Option One Mortgage Corp. to Cerberus for what analysts estimated would be around $700 million to $800 million. On Aug. 9, H&R Block said it might not complete the deal until the end of December. Block said at the time that its subprime mortgage unit planned to cut more jobs this year than the 615 announced in May.

As Reuters points out in a story that day:

    The company, which bought Irvine, California-based Option One in 1997 for $190 million, says the unit generated more than $2 billion in pretax income through the end of 2007 from making loans to home buyers with weaker credit.
    But the lender began bleeding money in the past year as U.S. subprime mortgage markets imploded. Housing prices slumped and loan defaults climbed.

Cerberus outside spokesman Peter Duda at Weber Shandwick didn’t return a call seeking comment or explanation about Aegis. Neither did JJ Rissi, also of Weber Shandwick. A call to the company’s “media line” went unanswered.

Cerberus has prided itself on flying below the radar to the point of secretive, as this recent Portfolio story of founder Stephen Feinberg points out. 

But if more of its portfolio companies keep hitting the skids, it will be tough for Feinberg to remain in the dark. That “secretive” has already been lifted by Cerberus’ agreement to buy Chrysler, another deal under pressure. Hence the title of the Portfolio article:     “The Most Dangerous Deal in America.”

(Image credit. Alison Smith, http://www.amosink.com/)


It should be noted that there is a differentiated value for subprime or stated income loans in the commercial lending market. This loan type is not entirely bad despite the abuse of some in the residential lending arena. Oftentimes, individuals that want to start or acquire a small business, purchase a gas station, acquire a motel, open an auto repair shop or any of a myriad of sole proprietor establishements, and do not have the portfolio that would make them attractive to the big box leaders. Lending companies like Ocean Capital in Rhode Island offer subprime and stated income loans by using up close and personal evaluations of the borrower and the opportunity. We need companies like this to support new business opportunities.