FirstFed posts another loss tied to home mortgage loans
The lender signed up many borrowers with low initial payments that then ballooned.
FirstFed Financial Corp. today reported its second consecutive quarterly loss, a $35.5-million deficit stemming from troubled housing-boom loans that allowed California borrowers to pay initial low monthly payments that caused their loan balances to balloon. The losses totaled $2.60 a share, in line with expectations, and FirstFed stock rose 39 cents, or 4.5%, to $8.97 in early afternoon trading in New York. In the second quarter of 2007, the thrift earned $29.1 million, or $1.74 a share; in the first quarter, the company lost $69.8 million, or $5.11 a share.
FirstFed, the Los Angeles-based parent of First Federal Bank of California, provided refinance loans for borrowers with good credit who were eager to extract equity as home prices soared. It now faces a double whammy created by the battered housing market and its own easy-money lending, which its executives acknowledge helped inflate the price bubble in the middle of this decade.
Problems with subprime loans offering two or three years of low payments are well known. Now, mortgages with five years of low payments -- FirstFed's home loans offered up to five years of easy money -- are causing problems and leading to a record number of foreclosures throughout Southern California and elsewhere.
Some borrowers are fighting back. A demonstration was scheduled Thursday at the Westwood headquarters of KB Home to protest loans with five-year initial rates that the home builder issued in a partnership with Countrywide Financial Corp., now part of Bank of America Corp. Organizers said borrowers "will be trapped in their loans and unable to refinance before their interest rates reset" because of high loan amounts and decreasing home values.
Many FirstFed borrowers, especially those who piled second mortgages atop their main loans, now owe more than their homes are worth -- just as their loans hit 110% of the original amount, triggering a requirement that they make full payments that include principal and interest.
Another insidious factor compounds the problems: FirstFed was among the lenders making boom-era loans without requiring borrowers to fully document their incomes and assets.
FirstFed said it set aside $90.2 million during the quarter for losses as it writes off uncollectable loans, modifies others to make them more affordable and sets aside reserves for future losses.
It cut back on the riskiest combinations of loans in late 2005, and said its newly delinquent loans are declining slightly, as reported Monday in The Times.
"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," FirstFed Chief Executive Babette Heimbuch said in the earnings release.
