First Federal collapse / Option ARM impact

sgip

sgip

Well-known member
First Federal of Santa Monica was taken over by the FDIC today. FF was a huge Option ARM originator, but also ahead of the curve in modifying their OA portfolio. Will be interesting to see what comes out of this. Most of the World/Wachovia/Wells and WAMU/Chase OA loans have been unattended to partly because of the low rates they currently experience.

1) Did you every close on an OA? If so, what was your experience over time?

2) Any friends finance their homes with OA's? If so, what are they telling you - if anything?

3) Know anyone who's trying to mod one?

I originated a few OA's from 1987-1989, and one in the 1990's for a family member. It made sense at the time and they since exited the program. I've not spoken to anyone who has a OA recently and with FF's collapse it got me thinking...
 
[quote author="Soylent Green Is People"]First Federal of Santa Monica was taken over by the FDIC today. FF was a huge Option ARM originator, but also ahead of the curve in modifying their OA portfolio. Will be interesting to see what comes out of this. Most of the World/Wachovia/Wells and WAMU/Chase OA loans have been unattended to partly because of the low rates they currently experience.

1) Did you every close on an OA? If so, what was your experience over time?

2) Any friends finance their homes with OA's? If so, what are they telling you - if anything?

3) Know anyone who's trying to mod one?

I originated a few OA's from 1987-1989, and one in the 1990's for a family member. It made sense at the time and they since exited the program. I've not spoken to anyone who has a OA recently and with FF's collapse it got me thinking...

[/quote]
Yup, OneWest picked up FF and all their deposits and good assets. I don't think we'll be seeing option arms for years and years until the next bubble forms.
 
[quote author="evalseraphim"]Dagnabbit, I was ~1.5 years too early.

Despite their assurances to the contrary, with FFB, it was only a matter of "when," and not "if."[/quote]

Ah... that thread. I was a bit early with it too. One good thing about IHB, my posts are still there even if the links to them (not IHB's fault but the stupid LA Times). It has this gem direct from the Chairman/woman, Babette.

First Fed worries are unfounded

Regarding "Official calls bank system secure" (July 21): To link First Fed to "analyst concerns" creates a level of unease and fear that is totally unfounded. First Fed 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.

First Fed has nearly twice the regulatory capital required to be considered "well-capitalized" under federal standards. First Fed has never been, nor are we currently, a subprime lender. We decreased our originations of option adjustable-rate mortgages in late 2005.Today we are funding traditional single-family loans that are fully underwritten with full documentation. The weakness in the real estate market in no way affects the safety of deposits insured by the Federal Deposit Insurance Corp.

First Fed has weathered many economic cycles since our founding in 1929. We will see our way through this current cycle as we have in prior cycles over the last eight decades.

Babette E. Heimbuch,

Chairman: First Federal Bank of California

And directly from me at the time...

"I should have wrote back suggesting Babette read that thing called a 10Q. And maybe understand that mortgages on their books are considered "assets" and when those "assets" go down in value they need to raise more assets for the liability (deposit) to asset ratio. But, hey I don't have the time to show a chairman that, and I am sure she knows more than I do, and sees something I can't in the 10Q."

The 10Qs don't lie, but liars lie about their 10Qs. It is funny looking back on the things I was right about. Yeah... my head is a little bigger now than it was then, but rightfully so. Just ask our friends over at Brightwater. Why am I not a chief economist at a major bank making seven figures again?
 
We had an Option ARM on our first house. Actually we had a 30 yr fixed first at a higher rate, and one day an agent called us and gave us an incredible rate that made sense at time because we weren't planning to live there for more than five years. So we refinanced, but exited a month before Money magazine called the housing collapse. But yes, we do think of what would have happened if we weren't able to unload on time other than pay off in full. May be we could have refi-ed because they mortgage amount was very low and LTV was a qualifying one too.

My colleague had an OA four years ago when things were already being discussed about the implication of OA. A few of us did ask them to buy something they can afford on a regular loan than buy with OA dreaming of flipping in 3 yrs because that wouldn't happen. They didn't listen. They had stretched their pay check too far- they have stopped making payments already, but still living in the house.

One of our friends had an OA. But they refi-ed to a 15 yr fixed and got out at the right time. Again, they had put a 20% down, and made some extra payments and had the LTV ratio to qualify.

I think those who knew that it won't last forever did just fine. Those who saw everyone gain and entered almost at the end of the game lost out.
 
The one OA I did in the 90's was for my Mother. Yes, I put my own sweet dear Mom on an OA... because it made sense at the time. Within a few years she sold her home and paid off the balance. Interest Only ARMs at the time were rare and OA's were the only way to go.

Was in Mission Viejo this weekend. There is an Albertsons market near the lake with a FF branch - one of those tiny supermarket branch locations. They had managers in the office that Saturday along with an FDIC representative standing by to answer questions. With 7 banks closed last Friday and all of their associated branches, I guess the FDIC's hiring spree is going to be put to the test. Really surprised to see a lone Fed guy standing at that small of a branch. I guess it's better than letting a panic start at an unattended, albeit small branch.
 
[quote author="Soylent Green Is People"]The one OA I did in the 90's was for my Mother. Yes, I put my own sweet dear Mom on an OA... because it made sense at the time. Within a few years she sold her home and paid off the balance. Interest Only ARMs at the time were rare and OA's were the only way to go.

Was in Mission Viejo this weekend. There is an Albertsons market near the lake with a FF branch - one of those tiny supermarket branch locations. They had managers in the office that Saturday along with an FDIC representative standing by to answer questions. With 7 banks closed last Friday and all of their associated branches, I guess the FDIC's hiring spree is going to be put to the test. Really surprised to see a lone Fed guy standing at that small of a branch. I guess it's better than letting a panic start at an unattended, albeit small branch.[/quote]
From what I heard, there will be about 200-300 bank closures in 2010. This is way too many to handle for the FDIC and its employees. As such, they contract out with FDIC approved consulting firms that bring in people who have banking/lending experience to assist them. I have worked on a few bank closures this year through one of these FDIC approved consulting firms, including the closure of FF this weekend.
 
From tales told by an FDIC'er, the FDIC would close about 700 banks this year, if they had enough money to do so. Perhaps those TARP funds would have been better spent by appropriating them to the FDIC.
 
[quote author="evalseraphim"]From tales told by an FDIC'er, the FDIC would close about 700 banks this year, if they had enough money to do so. Perhaps those TARP funds would have been better spent by appropriating them to the FDIC.[/quote]
Eva, it is way more efficient for the FDIC to use contracts to assist them when they get really swamped than to over hire staff because during the slow periods they don't have that much to do. The flow of work has lots of peaks and troughs.
 
[quote author="USCTrojanCPA"]
[quote author="evalseraphim"]From tales told by an FDIC'er, the FDIC would close about 700 banks this year, if they had enough money to do so. Perhaps those TARP funds would have been better spent by appropriating them to the FDIC.[/quote]
Eva, it is way more efficient for the FDIC to use contracts to assist them when they get really swamped than to over hire staff because during the slow periods they don't have that much to do. The flow of work has lots of peaks and troughs. [/quote]

I'm afraid you misunderstood. My comment had nothing to do with temp vs. permanent employees, it had to do with being able to pay depositors and absorb the bank's losses. While the Fed can print money, the FDIC only gets theirs via the whims of Congress.
 
[quote author="evalseraphim"]
[quote author="USCTrojanCPA"]
Eva, it is way more efficient for the FDIC to use contracts to assist them when they get really swamped than to over hire staff because during the slow periods they don't have that much to do. The flow of work has lots of peaks and troughs. [/quote]

I'm afraid you misunderstood. My comment had nothing to do with temp vs. permanent employees, it had to do with being able to pay depositors and absorb the bank's losses. While the Fed can print money, the FDIC only gets theirs via the whims of Congress.[/quote]
My bad, I did misunderstand your question. You can rest assured that Congress will keep the faucet of money available to the FDIC flowing...whether it be from the Fed printing money or them issuing more bonds. The last thing they'll allow to happen is for any depositor under the dollar limits to lose a penny....just image what kinda chaos and runs on banks that would cause if they didn't.
 
That faucet will still be on, but they need a firehose what with the Feds upping the limit from $100k to $250k.

The size of the crisis will not be like the earlier S+L debacle if quantified by number of failed individual banks, but this multi year crisis will dwarf others only in the $$$$$ the Feds now promise to make whole. Over promises bring under delivery. Thank God for now we have the Chinese to keep bank runs at a minimum <!-- s;) -->;)<!-- s;) -->
 
Rumors... We hear rumors...

I hear rumors that the FDIC didn't need to take over First Fed, that if the FDIC could have waited until March First Fed could have survived. I don't know what kind of assets / liabilities they had that made March 2010 the magic bullet, but that's what I hear. Either that, or the First Fed folks are trying to follow the playbook of the WaMu whisper campaign against the FDIC.
 
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