On Monday the LAT profiled L.A.-based FirstFed Financial and on Wednesday it's the WSJ's turn. Both pieces, written in advance of earnings results this week, are mainly sympathetic to the company's big problem: how to handle the raft of pay option mortgages from a few years back. FirstFed CEO Babette Heimbuch admits that most borrowers getting loans in 2005 weren't asked for pay stubs or tax returns. Standards were tightened by the end of the year, but now all that unwise lending has to be undone. Not easy. The number of foreclosed homes held by the bank doubled in the second quarter from the previous three months, and delinquencies are way high. But Heimbuch dismisses recent suggestions that FirstFed could be in trouble. From the LAT:
Heimbuch and her executive staff point to the thrift's monthly operating reports as evidence it will survive and that, as she put it in a recent open letter to investors and depositors, "FirstFed is not currently in any danger of being taken over by the FDIC nor do we foresee any scenario that could even put us in that position." The operating reports, the latest released last month, show newly delinquent loans stopped rising four months ago and appear to be trending lower. Investors will get a better look at the books this week, when FirstFed releases quarterly financial results. Analysts will want to see whether capital levels, which were twice what regulators required as of March 31, have fallen as a result of loan losses and estimates of future troubles.
Heimbuch told the Journal that option ARMs had worked well for more than 20 years - until investment-banking firms entered the industry and set lower lending standards.
For most of the product's history, Ms. Heimbuch says, the introductory rate on an option ARM was one to two percentage points below the actual interest rate on the loan. As long as interest rates were flat or falling, the minimum payment was enough to cover the interest due, making the option ARM equivalent to an interest-only loan in the early years of the mortgage. But around 2003, as home prices accelerated, lenders began pushing mortgages that made payments more affordable. As competition increased, lenders dropped the introductory rate on option ARMs to 1% or even lower and made more loans to borrowers who didn't fully document their income or assets. FirstFed was initially reluctant to follow the crowd. But as mortgage brokers took their business to other lenders with easier terms, FirstFed's mortgage originations declined to $366 million in the second quarter of 2003, from $389 million a quarter earlier.