HomeFed Shaken to Its Foundation : S&Ls;: Once the darling of the industry, the San Diego-based thrift has been beset with mounting bad loans and may fall short of regulators’ capital requirements.

Seldom has a savings and loan fallen so far and so swiftly as has HomeFed Corp. A year ago, its managers were among the most admired in the industry, its capital enviably healthy, its 214-office California branch system highly coveted. Speculation that the S&L; was a legitimate takeover candidate boosted its stock to $47.50 per share in late 1989.

Today, the nation’s fifth-largest thrift has been shaken to its foundation after reporting a huge 1990 loss, mounting bad loans and the ominous expectation that it will soon fall short of regulators’ capital requirements. The problems have knocked the bottom out of HomeFed stock, which closed at $6.25 per share in New York Stock Exchange trading Monday.

To hear HomeFed Chief Executive Robert Adelizzi, the S&L;’s troubles stem from a unique and mostly external “confluence of factors,” including the Persian Gulf War, statewide drought, drop in housing values and 1986 Tax Reform Act. Worst of all, commercial real estate values have been pounded by serious overbuilding across the nation, he said.

But outsiders are less charitable, and place much of the blame on Adelizzi and other managers at San Diego-based HomeFed. They say faulty underwriting--particularly of its extensive out-of-state loans--is at the root of HomeFed’s life-threatening problems. HomeFed overextended itself with risky loans in booming Florida; Georgia, and Washington, D.C., markets, they say, and then didn’t react soon enough when things soured.

HomeFed’s problems have gotten so bad that several analysts give it only an even chance, at best, of survival. Its rising tide of bad loans and more stringent capital requirements mean HomeFed could join the dubious roll of fallen Southern California thrifts such as Imperial, Great American, Lincoln, Gibraltar and Columbia.

“I have rated the stock ‘avoid.’ It’s just too difficult to predict what’s going to happen. I hope things work out, but it’s a tough call,” said David Hochstim, analyst with Bear, Stearns & Co. in New York.

“I’ll let the handicappers set the odds,” Adelizzi said in response to HomeFed’s detractors. “We’re survivors.”

Whatever the cause, the dimension of HomeFed’s problems outside California is truly staggering. Nearly one third of its $2 billion in overall loans out of state are either not earning interest or being foreclosed. The situation in Florida, where more than half its $330-million portfolio is under water, is especially desperate.

Like a lot of California thrifts, HomeFed in the early 1980s followed the siren call to booming Sun Belt markets and opened loan offices in Florida, Georgia and Texas as well as in Maryland and Massachusetts. But HomeFed “came late to the party” and made too many loans to borrowers who “had no staying power,” said Gary Gordon, a PaineWebber analyst who until recently was recommending HomeFed stock.

“I have finally gotten religion, and I now recognize that (HomeFed’s out-of-state loans) are a serious long-term problem,” Gordon said.

Another Wall Street analyst said HomeFed continued to lend in risky out-of-state markets long after other California S&Ls; recognized the error of their ways and retreated. Another analyst said the high level of loan problems makes it evident that HomeFed was not using “rainy day underwriting” practices.

HomeFed used to enjoy a reputation as a savvy apartment building lender and developer. But that reputation was apparently inflated. More than half of its $700-million out-of-state apartment loans have gone bad, a performance that “raises eyebrows” for Jonathan Gray, analyst with the Sanford C. Bernstein & Co. investment firm in New York.

“It’s a decidedly sub-par performance. One in every 30 loans might default but not one in every two” loans should sour if an S&L; has been diligent in its underwriting, Gray said.

HomeFed’s apartment loans in Atlanta, some made on projects near properties that had already failed, led Gray to wonder aloud whether HomeFed’s loan officers even visited the areas before approving the loans.

“Atlanta is to apartment lending what the black hole is to physics. The apartment industry there is overbuilt, riddled with fraud and inappropriate conduct,” Gray said. “So HomeFed is not alone. But still, they have done an exceedingly poor job.”

HomeFed’s dismal performance in 1990 would seem to support those appraisals. Slammed by having to set aside $536 million to cushion against losses on apartment, office and other bad loans, HomeFed reported a 1990 loss of $248 million. Nonperforming loans--those on which interest is overdue or not being collected--nearly tripled over the year to $1.2 billion, or 6.4% of its $18.3 billion in assets--a dangerously high ratio that seriously cuts into HomeFed’s earning power.

Quite a reversal of fortune for HomeFed. The management team led by Adelizzi, 56, a straight-talking, no-glitz ex-Marine who joined HomeFed in 1961, was seen as just the ticket to ensure HomeFed’s survival in an industry wracked by a seemingly unending skein of failures.

Another HomeFed strength was its reputation as a profitable real estate developer and owner of more than 12,000 acres, most in master-planned communities in San Diego County. In the 1980s, HomeFed made huge profits by selling chunks of land to builders or by entering into joint ventures with developers, financing the construction with HomeFed loans.

In 1989, for example, HomeFed’s pretax gain from real estate operations was $80 million.

But its success as a developer may have made the S&L; a bit too enamored of making profitable but risky construction loans to apartment, office and retail center developers. The activity increased to the point that only 58% of its loans today are traditional mortgages on single-family homes. That ratio compares with 90% or more home loans in the portfolios at Irwindale-based Home Savings of America and Oakland-based World Savings, two still-healthy thrifts.

HomeFed now is struggling with trying to liquidate a $540-million portfolio of foreclosed properties, ranging from an apartment complex in Boca Raton, Fla., to a $70-million office building in San Diego’s Sorrento Valley. Such sales are an expensive and time-consuming process.

But 1991 could be an even tougher year for HomeFed. On July 1, HomeFed will fall far short of a new requirement for about $100 million more in “risk-weighted” capital. Adelizzi said the thrift will fall short because it has not been able to sell enough of its real estate holdings--assets that are penalized by the capital rule.

Adelizzi will not give out specifics, but said he plans to sell $2.5 billion in loans and other assets as part of a plan to come into conformity with capital requirements. But such a shrinkage can be harmful, because it forces an S&L; to sell off its salable, well-performing assets, depriving it of profits.

“What you are left with is a higher concentration of crap,” one analyst said of the practical aftermath of asset shrinkage. HomeFed’s financial statements are already showing the effects of declining asset quality. Its net interest income--the difference between what it earns from loans and other assets and what it pays out to depositors--showed a steady decline in 1990 and could continue to drop this year because of the growing pile of nonearning assets.

HomeFed’s capital shortfall will also require the S&L; to file a plan outlining how it will get back into conformity. The filing of the plan typically brings on a round of regulatory restrictions that can severely limit an S&L;’s lending activities.

If that weren’t enough, examiners from the the Office of Thrift Supervision and the Federal Deposit Insurance Corp. are auditing HomeFed’s books. Although Adelizzi said he believes that HomeFed has set aside adequate reserves to cushion against future loan losses, the government audits have often led to further loan write-downs and losses.

Gordon of PaineWebber says the depression in the commercial real estate market could take years to work itself out and could even worsen in California over the next two years. That would be bad news indeed for HomeFed.