Option ARM Specialist FirstFed Loses $35.5 Million

The quick version of second-quarter results for Los Angeles-based FirstFed Financial Corp. (FED): $588.4 million in non-performing assets, $259.7 in allowance for loan losses, and a $35.5 million quarterly loss. The bank’s press statement on earnings began by touting “lower loan loss provisions and a decline in single family loans less than 90 days delinquent in the second quarter of 2008.” That sort of optimism, justified or not, should be tempered by the more sober realization that the bank’s loss allowance is now just 44.1 percent of NPAs; last quarter, that ratio stood at 56.9 percent. The bank suggested it pulled back on its provision expense because early-stage delinquencies have been abating, as the number of option ARM mortgages it holds that are facing payment recast have begun to decline. FirstFed said that 594 loans with balances totaling approximately $266.3 million could hit their maximum allowable negative amortization during the rest of 2008. In comparison, 1,366 loans with balances totaling approximately $644.0 million were scheduled to recast during the first half of 2008; and 1,778 loans with balances totaling approximately $823.0 million were scheduled to recast in the second half of 2007. Another 1,422 loans, with balances totaling $653.0 million, could hit their maximum allowable negative amortization during 2009, the bank said. “While there can be no assurance that this trend will continue, it does reflect our efforts to work through the issues in the single family loan portfolio,” said Babette Heimbuch, FirstFed’s CEO. Most analysts suggest the company, which hold $7.2 billion in total assets, is capitalized well enough to absorb the losses in its portfolio. A story in the Wall Street Journal provided additional insight into the types of borrowers defaulting on its loans, noting that 25 percent of of FirstFed’s mortgage loans were tied up with an unattached second lien; these piggybacked mortgages represented nearly 50 percent of the bank’s delinquencies late last year. FirstFed has been offering option ARM mortgages for over a decade, and bank executives told the Journal that the entry of Wall Street helped push lending standards down to levels the bank wasn’t comfortable with. But they followed suit anyway, company president James Giraldin said, worried that they’d be out of business if they failed to do so. Some investors have been betting that will happen anyway, as credit losses mount; one year ago, shares were trading at $41.75, while Wednesday, shares closed at $9.31 — and had to rally 8.5 percent to get there. Disclosure: The author held no positions in FED when this story was published; indirect holdings may exist via mutual fund investments. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.