Monday, June 29, 2009

FirstFed and Option ARMs "Last One Standing"

by Bill McBride on 6/29/2009 03:11:00 PM

Here is an interesting article on FirstFed in the Los Angeles Business Journal: Last One Standing (ht Will)

Since souring option ARMs have taken down a number of big lenders, the big question looms: Will FirstFed, a savings and loan founded in Santa Monica on the eve of the Great Depression, be next?
In January, regulators placed the thrift under a cease-and-desist order over concerns that its capital supply was rapidly depleting. Even its auditor expressed doubt about its ability to survive.

Yet the institution is still around ...
Basically FirstFed is the last of the Option ARM lenders (Wachovia, Countrywide, WaMu, IndyMac are all gone). And on their business:
FirstFed had been making option ARM loans without incident for more than 20 years. The loans held up well largely because option ARMs tended to be given to borrowers with good credit and proof of income.
[By 2005 a] growing number of borrowers began opting for the minimum monthly payment, which sometimes did not even cover the interest rate. ...

[CR Note: by 2005, Option ARMs were being used for "affordability" instead of for cash management]

FirstFed readily admits it made the mistake of dropping its own standards in a misguided attempt to remain competitive. It did that mostly in 2005, a year in which the thrift originated $4.4 billion in single-family loans – primarily option ARMs and most without full verification of income or assets.

But the thrift was also one of the first to pull back. By late 2005 and into 2006, managers made the decision to stop underwriting the riskiest loans and begin requiring proof of income. Within two weeks, their business dropped in half.

[CR Note: Notice the risk layering. Not only were these Option ARMs, they were stated income (liar loan) Option ARMs and even no asset verification!]
In late 2007, with a $4.4 billion portfolio of option ARM loans set to recast, FirstFed began working aggressively to modify its at-risk loans.
In the past year and a half, FirstFed has modified some 2,000 loans, which constitute $2.8 billion of its option ARM portfolio ... a new effort currently under way could modify all but $400 million of the remaining loans.
The average loan balance seems very high. From the Q1 10-Q SEC filing:
At March 31, 2009, 1,511 loans with principal balances totaling $718.5 million had been modified.
That is an average loan balance of $475 thousand and far short of the $2.8 in loan mods the article mentions - although FirstFed has probably modified a number of loans in Q2.

FirstFed is a candidate for BFF (or Thursday this week).