In an attempt to deal with its mounting loan problems, Irvine-based Financial Corp. of America has created a real estate division to handle nearly $2 billion worth of foreclosed properties and bad loans and has named Merrill Butler Jr., a prominent Orange County builder, to head the unit.
American Real Estate Group, part of FCA’s American Savings & Loan Assn., will oversee the S&L;'s joint ventures and construction loans, as well as its major troubled loans and all real estate acquired through foreclosure.
Butler, who was named president of the division, said that it will take “two years or so” to work out all of the S&L;'s real estate and loan problems, which had grown to $1.98 billion at the end of February from $1.75 billion at the end of 1985. Butler said, however, that he expects to see “some immediate results this year.”
“It’s a good step,” Jerome I. Baron, an analyst for First Boston Corp. in New York, said about the new division. He praised Butler as a “very talented guy” who is experienced enough to know when to complete an unfinished project and when to liquidate it as is.”
“The hiring clearly says they need some heavy-duty expertise, and they got it,” Baron added.
American’s new real estate group, Butler said, is needed to provide a “strong, clearly defined chain of command” for the institution’s efforts to sell off its weakest assets. Previously, he said, the job was spread out among several managers.
The S&L;'s foreclosed property, worth an estimated $931 million, consists primarily of unfinished real estate projects that the new division will try to complete, where possible, before selling, he said. A unit formed last summer to liquidate the S&L;'s bad loans and foreclosed real estate will be folded into the new real estate division.
Butler, also a director of both FCA and American Savings, has been a consultant to the company since 1984, when federal regulators forced out former chairman Charles Knapp and engineered the appointment of S&L; executive William Popejoy to replace Knapp.
In addition to heading up the real estate unit, Butler, 61, will take on the titles of senior executive vice president of the S&L; and executive vice president of FCA. He said he also will remain chairman and president of his own development company, Santa Ana-based Butler Group Inc. Butler also serves on the board of the Federal National Mortgage Assn. and is a past president of the National Assn. of Home Builders.
About 400 of FCA’s 5,300 employees will be assigned to Butler’s unit. In addition, Butler said he will hire about 40 new employees, all with real estate development backgrounds, because American is more a real estate development company than a traditional savings and loan. The new employees, Butler said, would fill mid- and high-level management posts and take a “builder-developer” view in deciding whether to complete projects or liquidate them.
Baron said the new real estate group appears to scuttle any need for FCA to create a new S&L; to acquire American S&L;'s bad and high-risk loans and dispose of them over the next few years.
Such a plan, often referred to as the “good bank/bad bank” solution, was suggested by Popejoy last fall. He claimed it would have allowed FCA to reorganize American Savings into a healthier S&L; capable of attracting the nearly $1 billion in capital it needs to meet regulatory standards.
Baron said that the good bank/bad bank solution was “probably legally impossible to do anyway.” But FCA spokeswoman Layna Browdy said the concept is not dead yet. It has, however, run into complex legal, regulatory and accounting issues, “and the answers don’t come easily,” she said.
The foreclosures and slow-paying and delinquent loans that have plagued American Savings prompted the S&L; to place an additional $422 million into loan-loss reserves in 1984, resulting in a $590.5 million loss, the largest ever reported in the industry. Last year, FCA posted a net income of $53.3 million, which it earned largely by selling mortgage-backed securities.
Baron said sales of mortgage-backed securities continued in the first quarter and that analysts expect FCA to report first quarter earnings of $1.25 a share--of which only about 45 cents per share will represent earnings on operations. The $1.25-per-share figure amounts to about $50.3 million in net earnings.