Delta laying off half its workforce

BY ELLEN YAN | ellen.yan@newsday.com

7:26 PM EST, November 8, 2007

In a bad day for subprime lender Delta Financial Corp., the Woodbury-based firm laid off almost half its 1,000 workers Thursday morning as its chief said there were "no viable alternatives" and then late in the day reported a $39.6 million net loss for the third quarter.

The company outlined major plans to "buckle down" beyond cutting 450 workers and closing at least the Chicago and Arizona office of its retail subsidiary, Fidelity Mortgage. To avoid the same funding problem that drove the bigger, Melville-based American Home Mortgage into bankruptcy, Delta is negotiating for more "working capital" to weather the mortgage industry crisis, just like it did in August with a $60 million loan from a hedge fund manager.

The company also will undergo a $7.5 million restructuring, a necessity now that it's left with only one-third of the staff it had a year ago. Plus, it plans to expand a venture launched in September, retail sales of loans backed by the Federal Housing Administration, and write more restrictive lending guidelines, including "more robust income documentation."

Chief executive and president Hugh Miller blamed the company's latest downturn on financial ratings agencies' recent downgrade of billions of dollars of mortgage-backed investments. The firm had a spotted reputation years ago as a predatory lender, but under pressure from watchdogs and government it had cleaned up business in the last few years with fixed-rate loans and other changes.

"We continue to believe there is both a need and demand for non-conforming loans and hope to continue to satisfy that need as we have done for the last 25 years," Miller said in the report. "In doing so, we believe that, if and when the turmoil subsides, we are likely to face a marketplace with a small number of competitors and a much higher barrier to entry."

Managers at the Woodbury-based firm called in employees Thursday morning with the layoff news and by noon, many of them were gone after promises of severance pay, which Delta estimated at $1.4 million.

It was not clear how many of the 100-plus positions on Long Island would be lost at Delta, Long Island's 20th largest publicly-traded company. Even before yesterday's layoffs, much of Delta's headquarters looked like a ghost town.

Company vice president Larry Karpen said he did not know staff and layoff numbers for the Woodbury offices and declined to elaborate on the third quarter report.

A woman who works for another company in the office complex said at least 20 people were seen leaving the Delta office with boxes, crying and hugging each other.

"While it was our expectation that the reduction in force we experienced this past August would be sufficient to sustain our business through what is a global credit crisis," Miller wrote in a short e-mail to workers, "the recent and unexpected turmoil in the sub-prime and securitization sectors is having a further and significant adverse impact on our business.

"Please understand that there are no viable alternatives to today's actions."

The company seems to be falling to the same market forces that battered American Home Mortgage, which could not sell its loans and closed in August. That was the same month Delta cut 300 jobs, suspended its dividends and got more funding capital to make more loans.

Delta was supposed to hold a conference call Thursday morning to announce third-quarter finances but canceled at the last minute, a repeat of when desperate August negotiations for more capital delayed second-quarter results, which eventually showed its earnings sank to $777,000, a far cry from the $4.9 million in the first quarter.

The third quarter report, released after the market closed and the stocks had dived to a 52-week low of $2.40 in after hours trading, said only $809 million in loans were made out in the three months ending in September, a 19 percent decrease from a year ago.

They're all signs that the subprime business is catching up with Delta. Even as the subprime market was tanking, Delta grew its loans, $2.6 billion between April and June 30 of this year, compared with $1.9 billion in the same period for 2006. But with scared investors running away from subprime loans, Delta faced a downward-domino effect in several ways.

Less freed-up capital means their loan-making business was starting to grind to a halt, which affects revenues, and left Delta holding loans that were possibly risky.

The layoffs raise questions of how well Delta can operate with one third of what had been almost 1,400 workers a year ago.

But Drew Biondo, laid off as the company spokesman yesterday, noted that when he joined the firm about five years ago, Delta's workforce was just under 700.

"They just want to originate a minimal amount of loans and once the market turns," he said, "they'll crank up operations."

Jonathan Starkey contributed to this story.