California home prices reached astonishing levels in 2005, but getting a loan was a snap at lenders offering low initial payments. At FirstFed Financial Corp., for example, the vast majority of borrowers weren't required to produce pay stubs or tax returns to prove they earned as much as they claimed.
FirstFed executives say they started worrying as the year wore on. Rivals were giving "piggyback" second mortgages to stated-income borrowers, in effect wiping out down-payment requirements. By the end of 2005, FirstFed began tightening lending standards at its savings and loan, First Federal Bank of California.
"We thought housing prices had gotten a little out of control," the thrift's chief executive, Babette Heimbuch, said recently at FirstFed's headquarters near Playa Vista. "Everyone was in such a frenzy of doing stranger and more exotic loans that we just felt it was time to back away."
As former rivals have tumbled this summer -- Countrywide Financial Corp. swallowed by Bank of America Corp., IndyMac Bank seized by federal regulators -- FirstFed has found itself walking a tightrope. Can it unwind the damage from loans made three or four years ago in time for less delinquency-prone mortgages to take their place on its books?
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.
Certainly, depositors and investors have reason to be on edge, given the struggles of other banks and thrifts that overdosed on lending during the boom years and the recent spate of bank failures.
FirstFed never waded into subprime mortgages -- higher-cost home loans to the riskiest borrowers. Indeed, 30% of its loans were made to owners of multi-unit apartment buildings, mortgages that so far have held up well. The problems have come from its biggest business: cash-out refinancings for California homeowners, many of whom then extracted additional money from the homes by getting second mortgages from other lenders.
