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U.S. Investigates Possible Fraud at Homefed Bank : Thrifts: The Justice Department and RTC are examining books. A federal grand jury probe is also underway in San Diego.

October 24, 1992|CHRIS KRAUL | SAN DIEGO BUSINESS EDITOR

SAN DIEGO — Federal authorities are investigating whether failed Homefed Bank, a unit of Homefed Corp., illegally originated and processed loans to its customers, government officials have disclosed.

The Justice Department and the Resolution Trust Corp. are examining the thrift's records, and are also trying to determine if Homefed used illegal means when servicing its mortgage loans, according to documents filed with the Securities and Exchange Commission.

A source close to Homefed also said Friday that a federal grand jury in San Diego has investigated unspecified events at the thrift since regulators seized it on July 6. However, the source did not know the status of the grand jury probe.

"It's not a surprise," the source said of the federal probe. "When you look at the size of this association, something had to go wrong inside."

Another source said Friday that the Justice Department, through its bank fraud task force in San Diego, is also investigating the loan practices of Great American Bank and Imperial Savings, two other major failed thrifts.

The Justice Department and RTC declined to comment on the investigations.

Homefed, with assets of $13.5 billion, was the largest U.S. savings and loan ever to fail. Its demise came after two years of losses totaling $1.05 billion stemming mainly from bad commercial real estate loans. At the time of the seizure, more than 40% of its holdings were troubled assets.

The investigations came to light in an amended registration statement that the RTC filed with the SEC offering about $1.3 billion in securities backed by pools of mortgage loans, some of which may have been illegally processed, according to the filing.

The RTC said it "discovered some evidence of improper payments, overstated appraisals and other potentially fraudulent practices in the loan origination and approval process." The Justice Department also issued a subpoena requiring Homefed to hand over all of its records, the filing said.

Although the RTC isn't sure of the scope of the Justice Department's investigation, it said the probe "may include an inquiry into the existence of fraud in connection with the origination and servicing of all mortgage loans by Homefed."

If the federal agency investigations discover that the thrift used illegal means to service its mortgage loans, the mortgage pool's rate of default and yield may be affected, the filing said.

"In the event that fraud actually did exist in connection with the origination or servicing of any of the mortgage loans, it is possible that such mortgage loans would be more likely to default," the document said.

In another development, Homefed Corp. disclosed Friday that it had filed for protection under Chapter 11 of the federal bankruptcy code. The company listed $29.6 million in assets and $3.59 million in liabilities. But the filing lists $120 million in subordinated debentures issued by Homefed Bank as disputed and unsecured claims.

In making its bankruptcy filing Thursday, Homefed Corp. said it filed for Chapter 11 because of pressure from major bondholders, including Stonehill Investment Corp. and Leucadia National Corp. Those investors sought to place Homefed in bankruptcy involuntarily.

"We hope to accomplish a reorganization that deals with all claims in a definitive way and prompt way and not in a piecemeal fashion through litigation," said Homefed Corp. attorney Victor Vilaplana.

Bloomberg Business News contributed to this report.

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