COLUMN ONE : A Messy Cleanup Program : The Resolution Trust Corp. was created to sell assets of failed thrifts, but critics say it's bungling deals. In Louisiana, the agency's challenges--and problems--are severe.

By TOM FURLONG

June 28, 1991 12 AM PT

TIMES STAFF WRITER

NEW ORLEANS —

Elston Howard--a slender shipyard welder named for the former New York Yankee catcher--hardly knows what the Resolution Trust Corporation is. Yet he is clearly one of its victims.

After drawn-out talks last year, Howard and his pregnant wife abandoned an effort to buy a modest suburban house of their dreams--with fireplace and two-car garage--that was under RTC control. A bureaucratic misunderstanding wrecked the deal.

“We really wanted that house,” Howard said softly, more in sorrow than anger. “That’s why we tried so hard.”

Howard has lots of company. The RTC, the government agency created by Congress to cleanse the financial waste dump left by the savings and loan industry’s excesses of the 1980s, is nearing its second birthday engulfed in controversy, ill feelings and countless charges of ineptitude.

The RTC has managed to consume nearly $80 billion of public money while alienating many who are trying to buy its forsaken properties. The agency’s performance is vitally important to American taxpayers, who are picking up the tab for the bad loans made by failed thrifts.

The RTC owns a prodigious amount of troubled real estate--most of it located in the South and West--on which collapsed S&Ls; took their largest losses. The portfolio is a mundane melange of houses, offices, shops and vacant land reclaimed after borrowers quit making their loan payments.

The task of selling off these and other assets dwarfs anything of its kind ever tried by the U.S. government. “This is the greatest bankruptcy in the history of mankind,” said Richard G. Wolfe, Jr., a regional sales coordinator in the RTC’s Denver office.

If the agency performs ably and gets a good price for the real estate, some experts believe it could help save taxpayers at least $50 billion on a total salvage bill that eventually could come to $500 billion or more in the next 40 years.

But the early results are not encouraging.

Critics say the RTC is losing millions of dollars on deals aborted because it takes the agency weeks or even months to reach agreement on real estate sales that the private sector would conclude in days or hours.

Buyers find themselves stymied by what many view as a disorganized agency that values paperwork and procedure more than common sense and speed. Buyer “horror stories” about dealing with the RTC are now commonplace nationwide.

A growing number of lawmakers and banking regulators are calling for the RTC’s abolition or extensive reorganization. The General Accounting Office--Congress’ investigative arm--heightened the debate this month when it issued a report describing the RTC’s books as in disarray. According to the GAO, the agency still does not have a handle on all its assets. Its finances are disorganized, and it inadequately supervises its subcontractors.

Rep. Henry B. Gonzalez (D-Tex.), chairman of the House Banking Committee, was more caustic, calling the RTC an “unguided missile headed for certain disaster.”

The RTC’s defenders say the agency is sure to be criticized no matter what it does, because its task is enormous, complex and sensitive. Its real estate sales, they note, must be carefully conducted, with no whiff of scandal or favoritism.

“History will be kind to us,” said Donaldson V. Wickens, head of the RTC office in Baton Rouge, which covers Louisiana and Mississippi. “This agency was created from scratch.”

$150 Billion in Assets

A shellshocked Congress established the RTC in August, 1989, as part of the landmark legislation bailing out the savings and loan industry after years of horrendous losses. In 22 months, it has grown into one of America’s largest financial organizations, with assets greater than $150 billion, 15 regional offices nationwide and more than 7,000 employees.

The RTC’s shadow is longest from Florida to Arizona, home to the vast majority of its $18.4 billion in real estate--a figure likely to rise sharply if, as expected, up to 1,000 additional thrifts fail.

The repossessed real estate is a pox afflicting poor city neighborhoods and tony suburban ones. Its emblems range from boarded-up tenements in New Orleans to unfinished housing developments in suburban Denver.

At one busy intersection south of the Colorado capital, there are three shopping centers in financial trouble; two are owned by the RTC. In Austin, Tex., there is more repossessed real estate per person--$1,730 worth--than anywhere else in the country, according to DataSource RE, a property research firm in Boulder, Colo. Much of it is owned by the RTC.

Among the RTC’s most daunting tasks, though, is here in New Orleans, an elegant, if frayed, city that has been undergoing tough economic times since the mid-1980s.

“The last seven years have just been hell,” said real estate broker Skip Weber.

What is happening here provides a close-up look at the challenges that the RTC faces: what it’s trying to sell, how it’s faring, who has benefited--and who has not--from the nation’s property debacle.

Excepting Texas and Arizona, Louisiana has more RTC-owned real estate--mostly in the New Orleans area--than any other state in the nation. Its problems were overshadowed by events in other states--including Texas, Florida, California, Colorado and Arizona--where egregious cases of fraud, greed and poor judgment grabbed the national headlines as the savings and loan scandal unfolded.

Yet, the problems in New Orleans have been equally severe and even longer lasting. While previously hard-hit cities--Phoenix and Houston, for example--are recovering from the lending excesses of the 1980s, the real estate market in this city remains troubled.

The suburban market is mending. But in the city, with its eroding job base and overbuilt office market, property values are falling and foreclosure rates rising even as the good times continue to roll on tourist-minded, easy-going Bourbon Street.

Against this backdrop, the RTC is trying to peddle hundreds of repossessed homes in the city along with odd-ball commercial properties in the suburbs.

It has been a tough go, agency officials admit.

“We don’t have a lot of glamorous properties for sale,” said Joe Hines, head of the RTC’s repossessed property sales effort in Baton Rouge.

More Takeovers Seen

The RTC’s Baton Rouge office has sold $44 million in repossessed real estate this year, less than 25% of what it controls. The amount for sale is expected to grow sharply as additional thrifts are taken over in the months ahead, RTC officials say.

New Orleans currently has more than 4,000 vacant and abandoned residences, some two-thirds of them owned by absentee landlords, according to Marvin Butler, the city’s deputy director of housing and urban affairs. Six hundred of these are RTC-owned or controlled, he said.

Some are in such poor condition that the RTC is giving them away to nonprofit housing agencies for fix-up, under the agency’s mandate to provide affordable housing to people of low and moderate incomes. Other houses are being auctioned after languishing on the market for months.

The full extent of the problems becomes apparent on a tour of the city in the company of Charles McAfee, an accounting firm employee who oversees the RTC’s distressed properties in New Orleans.

No button-down bean counter, McAfee is a 28-year-old ex-football player whose size (6-1, 230 pounds) seems to serve him well on the job. His turf is some of the city’s toughest and most depressed neighborhoods.

“You need a guy like Charles to manage these properties,” Hines said.

McAfee is a gentle bear of a man who says little and has no desire for the spotlight. He was once recruited to play football at UCLA but says he did not like the urban atmosphere in Westwood. He went to a small college in Mississippi instead.

He maintains and supervises properties that were once part of 13 Louisiana failed thrifts. McAfee’s employer, the big Coopers & Lybrand accounting firm, has a contract to manage and sell these assets. The properties are typically abandoned duplexes.

One of the worst is a boarded-up tenement on Ursulines Street that is covered with graffiti. “6th ward gangbanger,” says the green spray paint on one side. “Property of the U.S. Government” is stenciled on the plywood window covers.

Out in the suburbs is an eclectic collection of commercial real estate--mainly shops and offices--that the RTC is also trying to sell. Brokers call them the “properties from hell.”

One dud is a failed strip shopping center whose chief drawback is that the shops sit perpendicular to the highway, making them impossible to view from the road. Worse yet, the developer tried to sell the shops as “commercial condos,” instead of just renting them.

“It never flew,” the RTC’s Hines said.

New Orleans’ properties began cascading into default in 1985 and 1986 after the price of oil collapsed and Congress slashed tax benefits for income property, a policy shift that sent values and rents plunging.

The one-two punch flattened such real estate investors as Dean Allison, once one of the city’s largest landlords.

Allison’s story is a riches-to-rags saga that went largely unnoticed here but is symptomatic of the tales that, taken together, created the savings and loan disaster. One of his lenders, Dryades Savings & Loan, was only recently seized by federal regulators, a RTC official said.

At the zenith of his influence a few years ago, Allison was a flashy and highly leveraged young businessman worth millions of dollars--at least on paper--who cruised around town in grand style, local property experts say.

“That was his trademark--driving around in a Rolls-Royce,” said Ivan J. Miestchovich, associate finance professor at the University of New Orleans. “Money was no object with him. It seemed like it was in unlimited supply.”

Allison reportedly owned as many as 1,000 living units in low-income neighborhoods. Though he and others like him were not slumlords, “they were not far from it,” said Butler, the deputy housing director.

When apartment rents began dropping because of the regional economic downturn, Allison’s real estate empire unraveled rapidly. One after another, his income properties went into default. “His rocket exploded,” Miestchovich said.

Allison now works as a furniture salesman in suburban Metarie and declines to be interviewed.

Mmahat Downfall

Louisiana’s economic problems also helped fell another major figure in town--John Mmahat, erstwhile chairman and chief stock holder of Gulf Federal Savings Bank, once New Orleans’ fifth largest thrift.

Regulators seized control of the thrift in 1986, after ousting Mmahat as chairman. They later charged in a lawsuit that Gulf Federal had made imprudent loans and violated lending rules.

Asked about the lending rule violation, Mmahat told CityBusiness magazine in New Orleans that he personally has “always obeyed the rules, and anyone who says I don’t is not only a liar, but a goddamn liar.”

Two years after Mmahat’s remark, thrift regulators won a $35-million legal malpractice suit because the now defunct Gulf Federal, acting on the advice of Mmahat’s law firm, repeatedly violated key lending rules. The judgment, against Mmahat as well as his law firm, was recently upheld by the U.S. Supreme Court.

Mmahat, now working as a lawyer in New Orleans, said in looking back: “The failure of Gulf Federal was the failure of our (commercial) real estate loans.”

The assets of 66 failed thrifts have been taken over by the RTC’s Baton Rouge office; as many as 22 more are expected to be seized before the job is done.

To handle the work, the RTC has hired more than 350 people--including the main support staff of 257 in Baton Rouge and the field agents who run the agency’s collection of insolvent thrifts. The staff supervises auctions and the contractors, such as Coopers & Lybrand, who manage and sell the properties. A large legal staff seeks judgments against those who owe the RTC money.

The RTC’s customers frequently come away feeling frustrated and angry. The problem, in part, is the rigid rules governing the agency.

One thorny issue has been a rule--recently modified--that the RTC sell property in depressed states such as Louisiana at no less than 95% of appraised value.

Though intended to stabilize values by preventing property sales at bargain-basement prices, the rule effectively sabotaged many potential sales. Appraised and market values were too far apart, with appraisals badly out of date in a collapsing real estate market.

The conflict became glaringly apparent to Fred Johnson when he thought he had a buyer for a rundown duplex on Ursulines in need of extensive repair. Agents for the RTC rejected the $25,000 offer, because it was well below the $46,000 appraised value.

“I believe the asset managers are jerking us around,” said Johnson, who works for a private agency that fosters home ownership in low-income neighborhoods. “We offered them $25,000 cold-cash dollars.”

RTC officials say their contract managers were only following the rules. As now revised, however, those rules give the RTC the authority to discount prices 20% below the appraised value. If a property does not sell in six months, the price may be discounted another 20%.

The buyer unhappiness is hardly reserved to Louisiana.

In one recent national survey by the Real Estate Exchange Reporter, a newsletter published by DataSource, almost two-thirds of respondents who had dealt with the RTC said they would probably never try to buy real estate from the agency again.

Many said that they found RTC officials to be uninformed and unenthusiastic. A RTC spokesman dismissed the survey as meaningless because so few buyers--about 50--took part.

The newsletter also published a collection of “horror stories” from readers, including one from an anonymous would-be buyer who said he submitted five cash offers for a hotel and “never received a response.”

A Denver real estate investor, who asked not to be identified, told The Times that he has been waiting since October for a reply to his offer to buy several dozen unfinished home sites for $6 million. The delays are costing the RTC at least $80,000 a month in expenses, he said. Tim Craddock, a real estate broker in Norman, Okla., said a professor at the University of Oklahoma recently attempted to buy a four-story office building in town for $800,000--$50,000 above the list price.

Instead of accepting the offer, the RTC put the building up for rebid in order to get a higher price, Craddock said. But the move flopped and the property ultimately sold for less than $700,000. Craddock would not identify the professor, who is one of his clients.

Other buyers tell similar stories, though most are not willing to be identified by name because they fear being blackballed from future RTC deals.

But not everyone is critical. One of the RTC’s defenders is a candid real estate broker named Liz Ashe, who drives a white Mercedes and sold about 350 repossessed residences in the New Orleans area last year--about half of them owned by the RTC.

Ashe has little sympathy with gripes about the RTC. Those buyers and brokers who complain, she says, simply do not have the patience, perserverance or know-how to deal with the RTC bureaucracy and sell its properties. “I specialize in junk property,” she says proudly.

In their own defense, RTC officials generally acknowledge past mistakes, but quickly point out the agency’s performance is improving steadily. Treasury Secretary Nicholas F. Brady said recently that the agency is doing a “reasonable job,” given the enormity of its assignment.

As aspiring homeowner Elston Howard’s story indicates, though, RTC missteps can hurt some of the very people--those with moderate and low incomes--that Congress gave it a special duty to help.

Start of Problems

The story began a year ago when the Howards tried to buy a home in Marrero, a suburban New Orleans community that lies across the Mississippi River from downtown. It is a working-class area--known as the West Bank--that has been hammered hard by Louisiana’s economic problems.

The house, on a street named Runnymeade, was part of the property portfolio of First Savings Bank of New Orleans, a thrift that had just been seized by the RTC and placed in conservatorship.

Pregnant with her second child, Sharon Howard especially wanted the home, because relatives and friends lived nearby. After nearly two months of dickering over price and repairs, the Howards offered $47,500 to buy it.

First Savings--its operations firmly under RTC control--accepted the offer, but with a condition: If the Howards did not qualify for a home loan, they would lose their $1,500 down payment.

The demand was so unusual--indeed outrageous--that Howard’s real estate agent exploded in frustration and called off the deal.

“At that point, I said, ‘This is ridiculous.’ ” said the agent, Beverly Rambo. “They don’t make enough to lose that kind of money.”

What went wrong?

David Stanton--then the First Savings employee in charge of selling repossessed property--got confused about the rules governing forfeiture of customer down payments.

According to RTC rules, those buying repossessed houses are to lose their good-faith down payments if they get cold feet and back out of the sale--not if they lack the economic means to qualify for a loan.

“I misinterpreted the rules,” Stanton acknowledged in a phone interview.

Subsequently, the Howards purchased a slightly more expensive house several miles away in a neighborhood they do not like nearly as much. The house on Runnymeade sold in April for $42,000--some $5,500 less than the Howard’s last offer eight months before.

The RTC At a Glance Resolution Trust Corp. What: U.S. agency created by Congress to sell off assets of failed thrifts When: Formed August, 1989. Why: Bad assets in failed thrifts bankrupted the thrift industry’s deposit insurance fund How much: Cost estimates range up to $160 billion, not including interest. Total bill to taxpayers could reach $500 billion or more over 40 years Where: 15 regional offices, 7,012 employees

THE RTC ‘WASTE DUMP’

The Resolution Trust Corp has inherited a huge portfolio of assests from the nation’s failed savings and loans that it must sell over the next five years. Among its toughest challenge is the sale of more than $18 billion in real estate--from houses to shopping centers--on which the borrowers defaulted. According to its critics, the RTC has already botched many sales and cost the taxpayers millions of dollars.

TOTAL ASSETS (as of 3/31/91): $159 billion

Legal Judgments: $148 million

Mortgages: $85.4 billion

Other Loans: $14.2 billion

Repossessed Property: $18.4 billion

Securities (junk bonds, mortgage-backed bonds etc.): $28.9 billion

Other Assets: $11.9 billion

Repossessed Property

Vacant Land: $7.98 billion

Commercial Property: $8.32 billion

Single Family Residences: $1.58 billion

Other Residential: $574 million