The final dirge has sounded for the once-mighty Lomas Financial Corp. The former mortgage-lending powerhouse has filed for Chapter 11 protection again after emerging from bankruptcy less than four years ago, and has made a deal to sell its remaining assets.
Observers say in its heyday, Lomas was the industry leader and the company everyone wanted to emulate. But after suffering losses in almost every way possible, the giant that was Lomas is no more. First Nationwide Bank's mortgage unit made a deal to buy the remaining assets of Lomas Mortgage USA for $150 million. But even that deal will need the permission of the bankruptcy court.
The story of the rise and fall of Lomas is a cautionary tale. Industry observers say the problem with the Dallas-based lender was a management team plagued by bad timing and bad decisions. After suffering losses in Texas real estate in the 1980s, the company's servicing portfolio suffered large losses during the refinancing boom in 1992 and in 1993.
"The guys at Lomas have consistently been on the wrong side of the origination and servicing market," said a Wall Street observer who has worked with Lomas for 10 years. "This is an interesting study on what not to do. They were the biggest and the baddest. They were the end-all, be- all, and everyone tried to be like them."
But, the observer said, Lomas ran into problems as it aggressively bought servicing, paying too-high premiums to get the large volume. The source compared Lomas to the rogue traders that have come to light recently, trying to recoup losses suffered on purchases but only losing more money in the process.
After Lomas emerged from Chapter 11 in December 1991, the company focused its energies on servicing. The timing could not have been worse: the largest refinancing boom in the history of the industry started a few months later. Not only did Lomas lose money on its portfolio, but it had a hedging strategy of interest rate swaps that lost money at the same time.
"They had the perfect hedge," said Steven Eisman, an analyst at Oppenheimer & Co. "They lost money if rates went in either direction."
While Lomas has been less than forthcoming about its numbers, Mr. Eisman said after the sale of some Ginnie Mae servicing rights to First Nationwide last month, about $21 billion in servicing was left. According to a survey by American Banker, Lomas originated $1.7 billion of loans at yearend 1994 and serviced $32 billion.
Another analyst, who declined to be identified, said during the refi boom, Lomas' servicing ran off at different rates than other companies' because it was made up of poor-quality loans.
"It was indicative of everything the company did," the analyst said. "The management did everything wrong and didn't learn from their mistakes."
Industry consensus is that the company's management was short-sited, paid high prices for low quality loans, and didn't change its business strategies when a change was needed. Lomas' accounting was aggressive - too aggressive according to some - which allowed the company to pay high prices for servicing that wasn't worth the premiums paid.
One mortgage industry executive said this is often what happens to a No. 1 company.
"What got you there might not help keep you there," said Mark L. Korell, chief executive at Norwest Mortgage. He said the mortgage industry was a dynamic, changing business, and one aspect of getting to the top and staying there was to have a flexible business strategy.
In 1989, Lomas stopped originating retail loans and sold its branches, citing an increase in competition. Before that, Lomas was known for its retail capability.
During the refi boom, prepayments forced Lomas to take $80 million of writedowns in just six months. Afterward, the company laid off 10% of its staff at the beginning of 1994.
Later that year, Lomas sold its computer servicing system, Lomas Information Systems, to Prudential Insurance Co. of America's mortgage company, Residential Services of America.
The entire company was finally put on the auction block in March 1994. First Nationwide bought Lomas' Ginnie Mae origination capabilities and one- third of the servicing portfolio. Tuesday's announcement of the sale of remaining assets to First Nationwide apparently concludes the sale of the company's assets.
A statement released by Lomas said: "The filing and the sale were necessitated by its deteriorating financial condition and the resulting concerns of the federally sponsored agencies - GNMA, FNMA, and FHLMC - as well as private participants in the mortgage-backed securities industry, and the company's inability to access the capital necessary to maintain its business."
On Oct. 2, Lomas announced it had been unable to meet an interest payment of $17 million on its mortgage unit's bonds and faced default at the end of the month. Shortly thereafter, Moody's downgraded the company's debt, and the common shares fell below the 50 cents to 62.5 cents at which they had been trading for weeks.
A block of 10,000 Lomas shares finished at 37.5 cents a share on Monday morning, the last recorded transaction. Trading was suspended Tuesday morning for the dissemination of the bankruptcy news and did not reopen during the day.
