The demise of Ownit Holdings LLC shows that even with Wall Street and private-equity firms hunting for bargains, in today's brutal subprime market some companies are not even salvalgeable as acquisition targets.
According to a source close to the Agoura Hills, Calif., lender, Ownit explored a sale in the last week or so, but its potential losses from repurchase requests on defaulted loans were too high for any buyers to be interested.
Ownit also tried to sell some defaulted loans in the "scratch and dent" market, but the proceeds would not have covered the losses, the source said.
According to several sources, prices in that market have dropped sharply recently, to 60 to 65 cents on the dollar for some loans.
Ownit had to cease operations after JPMorgan Chase & Co., the funding agent on its $900 million warehouse line, cut off funding for new loans Monday, another source familiar with the situation said.
Neither JPMorgan Chase nor Merrill Lynch & Co. Inc., which had a minority stake in Ownit, would discuss the situation Thursday. Bill Dallas, Ownit's founder, chairman, and chief executive, said he could not comment.
Ownit, which funded $8.3 billion of subprime loans last year, notified its 16 regional managers Tuesday in a memo that it was ceasing operations and laying off roughly 800 employees.
The company failed at a tough time for subprime lenders that face stiff price competition, an unfavorable yield curve, and early payment defaults that are causing Wall Street lenders to push loans back to their originators.
Employees were surprised that the company ceased operations "almost overnight," according to Gina Donatoni, an Ownit regional vice president in North Hollywood, Calif. "Everyone is shocked. No one had any inkling this would happen."
Ms. Donatoni said she has received e-mails from Ownit executives with instructions on how to lock and secure local offices.
"I had to stand in my office on Tuesday and let 58 employees go - employees who are not getting a paycheck two weeks before Christmas," she said.
Bruce Dickinson, Ownit's chief operating officer, and John Duhadway, its chief financial officer, could not be reached for comment.
Marc Geredes, the president and chief executive of Loan Home Financial, a start-up in San Jose in which Goldman Sachs Group Inc. has a minority stake, said Ownit took a hit from early payment defaults and "loan performance issues."
Mr. Geredes also is the former president of First Franklin Financial Corp., a San Jose company that Mr. Dallas founded in the 1980s and sold to National City Corp. seven years ago. The executives are friends. (National City has agreed to sell First Franklin to Merrill.)
"The folks on Wall Street feel this is unsecured lending when they're buying loans from mortgage companies that don't have the liquidity to stand behind repurchases," Mr. Geredes said. "Every lender has signed warrants, and we all have to stand behind the loans we make."
Michael Waldron, a senior vice president at the Dallas subprime lender Sebring Capital Partners LLC, said it shut its doors unexpectedly last week and laid off 325 employees after it failed to find a buyer that could absorb its losses.
One of the sources close to Ownit said: "Repurchase requests are now frequent, regular, and sizable, and the industry is going to face issues on how to set up proper reserves for incurred but not reported repurchases. It is going to get worse before it gets better."
Mr. Dallas was part of a group of investors that bought the wholesaler Oakmont Mortgage in 2003 and changed its name to Ownit. Since then its production grew more than tenfold, to more than $8 billion last year, and this year it had aimed to increase volume by another 20%.
