By Kim Hart
Washington Post Staff Writer
Friday, April 27, 2007

Friedman, Billings, Ramsey Group reported its largest loss in more than a year yesterday, saying the housing loans offered by one of its companies dragged down profit in the wake of a nationwide surge of defaults that has jolted the mortgage industry.

The Arlington investment bank reported a loss of $185.9 million ($1.08 a share) for the first three months of the year, compared with a profit of $26.6 million (16 cents) in the corresponding period a year earlier. FBR said its mortgage company, First NLC Financial Services, lost $124.2 million in the quarter. First NLC specializes in subprime loans, those generally offered to people with blemished credit or insufficient cash for a down payment.

Not long ago, FBR was a successful investment bank competing with top Wall Street firms. At the height of the housing boom in 2005, FBR bought First NLC for $101 million in cash and stock, acquiring a mortgage portfolio of about $475 million. At the time, the fast-growing lender operated in wholesale and retail outlets in 38 states, granting more than $4 billion in mortgages annually.

Yesterday's announcement not only puts FBR among the latest casualties of the widespread mortgage crisis, but it also slows its recovery after it paid $7.8 million this year to settle a long-running insider-trading investigation.

Last month, FBR laid off hundreds of First NLC workers and shut down five offices, leaving two offices remaining in Anaheim, Calif., and its headquarters in Deerfield Beach, Fla. FBR also said it is "evaluating strategic alternatives" that would reduce the rest of the company's exposure to the subprime mortgage sector. According to filings with the Securities and Exchange Commission, FBR may sell the business or bring in a new investor during the second quarter.

"This has been an extremely difficult operating environment for the entire non-prime mortgage banking industry, and it has resulted in a series of distressed sales and bankruptcies," Eric F. Billings, FBR chairman and chief executive, said in a news release. "We believe that FNLC's management has taken aggressive steps designed to limit foreseeable major risks with respect to the business."

A large number of investment houses spent millions of dollars to buy mortgage lenders from 2003 to 2005, enjoying a share of the seemingly endless line of home buyers qualifying for mortgages they otherwise could not afford because lending standards were looser.

"Now they are realizing they overpaid, and they're trying to unload them," said James Croft, founder of the Mortgage Asset Research Institute in Reston. "It looked like you could make a lot of money, and you could. But they stayed in the game too long."

FBR is not the only company to release bad news related to the mortgage industry. Countrywide Financial, the largest independent U.S. mortgage bank, said yesterday that its first-quarter profit dropped 37 percent. The company had to set aside money for losses from rising payment defaults from subprime borrowers. Last week, H&R Block agreed to sell its struggling mortgage lending business, Option One Mortgage, to a private-equity firm. This month, New Century Financial filed for bankruptcy protection, one of more than 50 lenders to take similar action or to shut their doors.

The downturn of the real estate market has been tough for FBR, which operates as a real estate investment trust. FBR said total revenue narrowed, to $181.9 million during the first quarter, from $338.7 million in the first quarter of 2006, mostly because of a $106.9 million accounting charge in the mortgage-banking segment. FBR also said its merchant-banking unit lost $21.8 million from the decline in value of investments in subprime mortgage companies and other long-term investments, and the company took a $34.4 million hit as it revalued its own subprime mortgage loan investments.

Investors appeared to take FBR's financial report in stride. Shares closed yesterday at $5.93, up 5 cents, in trading on the New York Stock Exchange.

Staff researcher Richard Drezen contributed to this story.