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Regulators' order spurs First Federal Bank to quit lending

The action comes in response to the Los Angeles savings and loan's heavy losses on risky mortgages.

January 27, 2009|E. Scott Reckard

Troubled by delinquent mortgages at First Federal Bank of California, regulators have prompted the L.A. savings and loan to quit lending and ordered it to submit a detailed plan for how it intended to remain well-capitalized for the next three years.

The cease-and-desist order, which parent company FirstFed Financial Corp. disclosed late Monday, also requires the Westside firm to stop making interest payments on $150 million in publicly held debt.

FirstFed said it would eliminate 62 jobs, mostly lending positions, to trim costs by more than $4 million a year.

The job cuts are being made with "deep regret," Babette E. Heimbuch, FirstFed's chief executive, said in a news release. "Given the economic pressures we are under, doing so has become necessary."

The collapse of big S&Ls such as Washington Mutual Inc. has left FirstFed as well as BankUnited Financial Corp. of Florida as the only remaining S&L operators that during the mortgage boom specialized in so-called option ARMs, variable-rate loans that allowed borrowers to pay so little that their balances rose.

Often made without documenting borrowers' incomes, option ARMs played a major part in the downfall of Countrywide Financial Corp., Washington Mutual Bank and Pasadena's IndyMac Bank. The Office of Thrift Supervision, the U.S. Treasury Department agency that regulates savings institutions, had given Newport Beach-based Downey Financial Corp. a cease-and-desist order before seizing its Downey Savings unit in November.

FirstFed began tightening its lending requirements in late 2005, before its rivals did so, improving its odds of survival, analysts said. Nonetheless, its ratio of nonperforming assets -- a measure of bad loans -- stood at 7.9% on Sept. 30, up from 1.4% a year earlier.

Deposit accounts at First Federal remain insured by the Federal Deposit Insurance Corp. for at least $250,000 per customer.

FirstFed recently had been reshaping itself into a more traditional lender, mainly making mortgages with an initial interest rate fixed for five years. The loans required borrowers to document that they could afford the payments.

The regulators' order would have allowed FirstFed to continue making only a trickle of loans, so the company decided to stop making them entirely, Heimbuch said.

It now will focus on raising additional capital -- a bank's financial cushion against losses -- or shrinking itself so the capital it has on hand will represent a greater percentage of its loans.

Heimbuch noted that the restrictions on FirstFed contrasted with the Treasury's program of injecting capital into stronger banks to encourage them to make more loans.

"We are disappointed that despite the fact that Treasury is trying to get banks to do more lending, this situation will take an institution that has been lending out of the market," she said in a telephone interview.

The regulatory definition of well-capitalized is 5% for so-called Tier 1 capital and 10% for "risk-based" capital. FirstFed, which hasn't yet released its fourth-quarter financial results, had Tier 1 of 8.4% at Sept. 30 and risk-based capital of 15.9%.

FirstFed announced the regulatory action and its cutbacks after the close of regular stock trading, during which its shares fell 2 cents to $1.57.

They are down 96% from a year ago.

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scott.reckard@latimes.com

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