S&Ls; Post Loss of $631 Million in 3rd Quarter

Battered by falling real estate prices and sinking housing starts, the savings and loan industry suffered steeply worsening losses in the third quarter, regulators reported Thursday.

S&Ls; lost $631.4 million in the quarter, compared with $302 million in the previous three months, according to the Office of Thrift Supervision’s survey of thrifts operating free of government control.

Although most thrifts are making money, their modest profits are overwhelmed by the torrent of red ink from the dangerously weak S&Ls; that hold a full third of industry assets. Thursday’s report showed that the ailing thrifts have become steadily weaker as real estate prices tumble, amassing unexpectedly big losses.

The government already controls 185 insolvent S&Ls;, and the latest report shows that 500 more could become takeover candidates.

“The recession has clearly snuffed out whatever light there was at the end of the tunnel,” Rep. Charles E. Schumer (D-N.Y.), a member of the House Banking Committee, said Thursday. “It is now clear that the losses will be greater and the crisis will last longer than had previously been thought. The figures are very disturbing: It is still going to be a long, hard haul before the taxpayer emerges from this deep hole.”

Losses of $268.6 million at California’s 142 thrifts came largely from investments in weak real estate markets outside the state itself, OTS director T. Timothy Ryan Jr. told a news conference.

But the residential market in California is quite healthy, compared with the rest of the country, according to Ryan.

Nationwide, about a third of the industry’s assets--$343 billion out of $1.054 trillion--are now held at S&Ls; in precarious condition, classified by regulators as either certain to fail or badly troubled, according to the OTS quarterly report.

If the real estate recession persists, virtually all of these precariously weak institutions could collapse into insolvency and be seized by the federal government. The Resolution Trust Corp. already holds a staggering $150 billion in financial and real estate assets from defunct institutions.

The Treasury had previously estimated that the cost of closing hundreds of insolvent thrifts would run as high as $130 billion, not including the cost of future interest on bonds sold to raise the money.

The construction of new homes has fallen to the lowest level since 1982, while the commercial side of the business is plagued by high vacancy rates, Ryan noted. This means the industry is suffering from a double blow. Developers, builders and consumers are shying away from seeking new loans. At the same time, many old loans are going bad because the borrowers can’t keep up their payments in an economic climate where it’s hard to sell homes or get tenants for office buildings and shopping centers.

Residential real estate prices have eroded somewhat in California, but the state is not plagued with the deep declines in value and the resulting troublesome growth in delinquent loans appearing in other states. Only 1.51% of California real estate loans are behind in scheduled payments, the OTS reported. The figure is higher in 38 states and ranges up to 4.31% in New York and a daunting 6.91% in Massachusetts.

On a national basis, healthy thrifts, with about two-thirds of total assets, keep making money, despite the real estate downturn.

The best of the government’s four categories covers 1,130 S&Ls; considered “well capitalized and profitable,” with solid portfolios dominated by traditional mortgages. This Group I had net income of $508 million during the quarter and has continued to earn profits despite the economic slowdown.

Group II S&Ls; already meet the government’s standard for capital--the money invested in the business by the thrift’s owners--or will soon meet the guidelines. They had aggregate earnings of $138 million, continuing a profitable trend.

The first two groups accounted for assets of $711 billion, about two-thirds of the thrift industry. Regulators are confident that virtually all these institutions should be able to stay in business.

But the profits of the strong S&Ls; were overwhelmed by the flood of red ink from the rest of the industry, which keeps getting weaker and weaker. The government categorizes these thrifts as Group III, “troubled with poor earnings and low capital,” and Group IV, fatally crippled institutions destined for seizure.

Regulators are worried because the losses are worsening at the weakest institutions. The Group III thrifts lost $230 million in the third quarter, compared with $120 million in the previous three months.

The losses at Group IV reached a staggering $1 billion, up from $662 million.