Loan modifications have saved many people from losing their homes, but can they rescue a thrift from being seized by regulators?
Babette Heimbuch, the chairman and chief executive of FirstFed Financial Corp., said she is "hoping" regulators will take into account the 2,000 families its $6.8 billion-asset First Federal Bank of California has saved from foreclosure so far, as the company struggles to save itself by raising capital from investors.
"We're hoping the FDIC realizes that every day they let us work it out is the least-cost solution for the government," Heimbuch said in an interview last week.
"What they always say is, 'the longer we let the dead banks go on, the more it costs us' — and that's not true for us," she said. "We are the least-cost solution."
Sounding at times like a cheerleader ("We can do this!" was one rallying cry she uttered in the interview with American Banker), Heimbuch said FirstFed is finally seeing a slowdown in new delinquencies and lower redefault rates on its $2.7 billion portfolio of mostly option adjustable-rate mortgages. Such improvements could help attract investors to the struggling Santa Monica, Calif., thrift if they see an end to massive losses, she said.
"We really are hoping that by September we're able to look back at this portfolio and say we've put it to bed," she said. "This will make it easier for us to raise capital because investors will know what the total losses are going to be."
Analysts were skeptical. Other failed institutions — notably the $12.8 billion-asset Downey Savings and Loan, down the road in Newport Beach, which was seized in November — also touted the success of loan modifications before being taken over.
FirstFed is caught in an increasingly common vise, trying to raise capital from new investors while operating under an Office of Thrift Supervision cease-and-desist order. If it fails to maintain capital levels above 5%, the January order says, it must submit a detailed contingency plan on how to raise capital through a merger, acquisition or voluntary liquidation.
Brett Rabatin, an analyst at Sterne, Agee & Leach Inc., said regulators are giving institutions "every fair chance" to find a way to meet the criteria imposed on them.
"Regulators are still taking a measured, slow approach unless they see a liquidity issue that would cost them money," Rabatin said. "They don't want to shut them down unless they absolutely have to."
The thrift unit, First Federal, had a core capital ratio of 5.10% at March 31, down from 5.35% at yearend, just 10 and 35 basis points above the level regulators require for it to be considered well capitalized.
Bert Ely, a banking consultant in Alexandria, Va., said FirstFed is likely to have fallen below the capital requirements in the second quarter, which would force it to apply for a brokered-deposit waiver from the Federal Deposit Insurance Corp. Brokered deposits made up roughly 26% of its $4.8 billion in deposits in the first quarter. "If they had to stop accepting brokered deposits, it would create liquidity problems for them," Ely said.
FirstFed has been reducing its reliance on brokered deposits, which are now under $1 billion, down from $1.6 billion at yearend. "We are decreasing brokered deposits and letting them run off, and we would have to apply for a waiver" if capital levels fell below the minimum, Heimbuch said Tuesday.
She said the thrift's retail deposits are growing as customers take money out of the stock market and move some deposits from larger institutions, some of which have closed or merged, in order to keep FDIC insurance.
Ely did comment that FirstFed's first-quarter loss provision of $75 million was "not overly large" (it took a $220 million provision in the fourth quarter) and that the company has virtually no exposure to commercial real estate or construction loans, which he called "almost too good to be true."
"If you take the numbers at face value, it's not too bad. I've seen far worse," Ely said.
Last week, FirstFed issued a press release touting its "higher success rate" at loan modifications compared with other lenders. But analysts said the thrift had an ulterior motive.
"They're trying to create the public case for getting a waiver," Ely said. "I think it's an issue that will come up, and it puts the FDIC in a tough spot, if they drop below well-capitalized."
Lower redefault rates on loan modifications, combined with a slowdown in new delinquencies, would make the case that the company is working through its troubled portfolio.
Roughly 30% of loans modified in the first quarter had redefaulted after nine months, compared with what regulators say was a 63% redefault rate nationwide. Heimbuch said FirstFed is modifying loans using its own internal program so as not to be "hamstrung" by the Obama administration's Home Affordable Modification Program, which does not cover every situation a borrower might experience.
The company had modified $1 billion of loans through May and said it plans to modify another $800 million in coming months, primarily by offering borrowers five- and 10-year loans at a rate below 5%, fixed through 2014, she said.
New delinquencies at FirstFed have slowed for five consecutive months. Noting that at least six months must pass before a bank repossesses a property after a borrower goes delinquent, Heimbuch said delinquencies will fall dramatically by the fourth quarter, barring any further change in California law.
Chip MacDonald, a partner in the Jones Day law firm who tracks regulatory orders, said FirstFed may have avoided the massive delinquencies expected from 2006- and 2007-vintage loans.
"If they avoided some of the riskiest vintages, that's a big positive," MacDonald said. "It sounds like they're doing a lot of things to right the ship, but it's challenging to do it just with loan modifications."
Indeed, FirstFed began tightening its lending requirements in late 2005, Heimbuch said, though it continued originating some stated-income loans through early last year. FirstFed's loan volume fell dramatically in 2006, she said, because the company began asking borrowers to turn over records from their checking accounts to verify their income.
"Without saying we were going to do a full underwriting, our volume was cut in half once we began asking for primary checking accounts," she said.
Still, the company's ratio of nonperformers to total assets is still rising, largely because total assets have shrunk. The ratio hit 9.62% at May 31, up from 7.19% in January and 8.03% a year earlier.
Moreover, nonaccrual loans jumped 20% in the first quarter from a year earlier, to $471.3 million.
FirstFed is trying to unload repossessed properties but finding the going difficult; California rent-control ordinances and a rise in bankruptcy filings make it hard to evict defaulted borrowers or their tenants.
"I think we're past the worst of it," Heimbuch said. "We have a stigma to overcome, and that's why we've been so aggressive on these modifications. That's what management is doing to make the bank better."