May 22 (Bloomberg) -- Fremont General Corp., whose loans to risky borrowers helped trigger the subprime mortgage crisis, will sell its commercial real-estate unit for $1.9 billion and bring in new managers led by billionaire banker Gerald J. Ford.

IStar Financial Inc., a real-estate lending and leasing company, will buy the commercial loan operation, Fremont said in a statement today. Fremont also will get $80 million by selling a minority stake in the remaining enterprise to investors headed by Ford, who once ran Golden State Bancorp Inc. Shares of Santa Monica, California-based Fremont surged 41 percent.

The cash infusion lets Fremont stay in business as a retail bank with 22 branches in California. The Federal Deposit Insurance Corp. told Fremont in March to stop making home loans to unqualified borrowers and said executives didn't effectively manage risks for mortgages and the commercial loans. Ford's team helped build Golden State into the second-biggest U.S. thrift with 352 branches until it was sold in 2002 to Citigroup Inc.

``This guarantees their survival,'' said Theodore Kovaleff, an analyst at Sky Capital LLC in New York who rates Fremont ``buy'' and owns the shares. Most rivals relied solely on residential loans and had no other assets to draw upon as the mortgage market soured. ``The commercial-lending side was one of the things that truly set Fremont apart from the other subprime lenders,'' he said.

Fremont shares climbed $2.89 to $10 in 4:02 p.m. New York Stock Exchange composite trading. Even with the gain, the shares sell for half what they fetched a year ago.

New Management

Ford will be Fremont's new chairman, replacing James McIntyre. Ford had been chairman and chief executive officer of Golden State, which operated in California and Nevada. It was sold to Citigroup in November 2002 in a deal originally valued at $5.8 billion.

Fremont CEO Louis Rampino will be replaced by Carl Webb, who was Golden State's president and chief operating officer under Ford. Golden State's ex-chief financial adviser, J. Randy Staff, will replace Patrick Lamb as Fremont's chief financial officer.

The FDIC's order was ``one of the factors'' behind the change in management, said Daniel Hilley, a spokesman for Fremont. He declined to discuss the other reasons.

Ford ``is investing in Fremont when there are relatively few believers,'' said Sean Egan, managing director of Egan-Jones Ratings Co. in Haverford, Pennsylvania. ``Some smart money with deep pockets has thrown them a lifeline, so it's likely the company will be able to garner the resources they need over the next couple years.''

Takeover Candidate

Kovaleff said Ford's team probably will dress up Fremont for a sale.

``Three years from now, Fremont's going to be history, because this is a company that is a good deposit-gatherer,'' Kovaleff said. The stock may eventually trade as high as 1.5 times to 2 times ``book value,'' or assets minus liabilities. The current book value is $14 to $15 a share, Kovaleff estimates.

Defaults on subprime loans, which are made to borrowers with poor credit ratings or high debt burdens, saddled Fremont with a fourth-quarter loss, which hasn't been fully quantified. Fremont missed the March deadline for filing its annual report with securities regulators, citing a review of its accounting for the value of its portfolio of home loans.

Furloughs and Sales

The company furloughed employees of the home-lending business in March and later said they'd be fired. Last month, Fremont agreed to sell its home-lending and mortgage-servicing business to the hedge fund Ellington Capital Management for an undisclosed sum.

Subprime loans nationwide have gone sour at higher-than- expected rates, with late payments reaching a four-year high in the final quarter of last year. At least 50 mortgage companies have halted operations or sought buyers since the start of 2006, according to Bloomberg data.

IStar provides real estate financing of $20 million to $150 million and acquires loans, according to the New York-based company's Web site. CEO Jay Sugarman said in a statement that IStar has worked as a co-lender with Fremont and is familiar with its operations.

IStar was formed by Starwood Capital Group Global LLC, a real estate investment company based in Greenwich, Connecticut led by Barry Sternlicht, the former head of Starwood Hotels and Resorts Worldwide Inc. Sternlicht served as non-executive chairman of IStar from 1997 until April 2000 when it was known as Starwood Financial Inc., according to the company.

IStar's Stock

IStar's shares, which have gained about 28 percent in the past 12 months, rose $1.79 today, or 3.9 percent, to $47.60. The company said it expects the acquisition to boost per-share earnings by 10 cents to 20 cents this year.

IStar plans to keep the majority of 166 employees of the commercial lending business, according to Fremont's statement.

As part of the sale, Fremont will receive a ``participation interest'' equal to 70 percent of the net loan portfolio.

Vincent Arscott, an analyst at Fitch Ratings, said he monitored Fremont's filings with banking regulators to see if the rash of headlines about mortgage losses would prompt customers to withdraw deposits en masse. Instead, deposits climbed to $10.7 billion at the end of March from $10.1 billion at the end of 2006. Deposits are insured by the FDIC to as much as $100,000.

``Since the depositors are insured, they may not be aware of the financial condition of the company,'' Arscott said.

More Capital

Some of the $1.9 billion proceeds from the sale of the commercial-lending business may be used to bolster the bank's capital base, Arscott said. The FDIC in March cited the company for failing to meet the minimum regulatory threshold.

After the sale, Fremont will be a much smaller company with 180 employees in the retail banking unit, Hilley said. Most of the 2,400 who worked at the home-lending unit have been fired. At the end of 2005, Fremont employed 3,200 people, according to company filings.

Shares of rival subprime home-loan companies also rose today. Accredited Home Lenders Holding Co. rose 4.9 percent and NovaStar Financial Inc. gained 7.1 percent. IndyMac Bancorp, which caters to borrowers with better credit records who don't qualify for top-rated mortgages, also rose 7.1 percent.

To contact the reporter on this story: Bradley Keoun in New York at bkeoun@bloomberg.net.

Last Updated: May 22, 2007 16:44 EDT