Homefed Failure Fans Political S & L Battle : Thrifts: Federal takeover also raises fears of a major blow to California’s already battered economy.

The government’s takeover Monday of San Diego-based Homefed Bank has deepened election-year political fighting over the massive clean-up of the savings and loan industry and raised anxiety about the failure’s economic consequences for California.

Homefed, the nation’s eighth-largest thrift with $13.5 billion in assets, was seized by federal regulators who said Congress’ failure to provide more funding for the industry bailout undermined efforts to find a private buyer for the institution.

“It’s very disappointing to us and to people in Southern California,” where Homefed is deeply involved in commercial and residential lending, Timothy Ryan, the nation’s chief thrift regulator, said Tuesday.

But congressional Democrats insist that Homefed was a fiscal cripple for a long time, and they accuse regulators of looking for a scapegoat. “The attempt to put the blame on us is pure political posturing,” insisted Rep. Esteban E. Torres (D-Pico Rivera), a member of the House Banking Committee.

In addition to the political bickering, Homefed’s failure raised concerns that the government takeover could have a major adverse impact on California’s already weak economy, particularly its sputtering real estate sector.

Homefed Capital Corp., the thrift’s real estate arm, has hundreds of millions of dollars in lines of credit with scores of struggling developers in California. If the regulators cut off or tighten these credit lines, some developers themselves could go out of business.

“If they turn off the spigot on the lines of credit, there could be bankruptcies that would have a ripple effect with wide-ranging economic consequences in California,” said a source familiar with Homefed’s portfolio.

Homefed, which lost more than $1.05 billion in the last two years, was hobbled by troubled real estate and commercial loans in California and other depressed markets, including Washington, D.C. More than 40% of its assets are considered troubled.

Sources said Tuesday that the takeover was prompted by growing fears that bondholders for Homefed Corp., the thrift’s parent company, were on the verge of forcing the firm into bankruptcy. This would have complicated efforts to recapitalize or sell the institution.

Homefed failed to attract fresh capital from private sources earlier this year. Regulators then put it in a special program designed to make a quick, federally assisted sale to another institution or investors. But the failure of Congress to make funds available to regulators became a major obstacle, as conditions in the thrift’s portfolio continued to deteriorate.

There is no more money available at the Resolution Trust Corp., the agency handling the thrift cleanup, to dispose of S&Ls; by making up their financial losses, the gap between deposits and the value of assets, such as real estate and mortgages. Depositors are safe because the full backing of the government stands behind the thrift accounts, up to a maximum of $100,000.

However, the RTC has no alternative but to keep operating crippled institutions such as Homefed as nationalized banks. The normal shutdown process would involve selling the deposits and branch operations and parceling out the assets to various buyers, with the RTC using federal funds to cover losses. This cannot be done because the RTC’s ability to spend money expired April 1. The Senate voted for more money, but the House overwhelmingly rejected the proposal.

Ryan insisted that taxpayers could have saved millions, if not billions of dollars, on Homefed and other troubled thrifts because serious buyers could have been enticed to purchase deposits and assets before the thrifts were formally seized by the government. All they would need to clinch the deals would be financial guarantees against future losses that could be provided if Congress approves the funding, Ryan argued.

Instead, with the federal takeover, “Homefed will sit there and rot” as skilled managers leave and the value of assets deteriorates, financial consultant Bert Ely said. “All the remaining insolvent S&Ls; also will have their closure delayed,” he predicted. This could raise the final cost of the S&L; cleanup, now estimated at $130 billion, without even counting the expenses of future interest payments on the 30-year bonds used to finance the operation.

Regulators refused to say Tuesday how much Homefed’s collapse will cost taxpayers. But sources familiar with its financial condition said the bill would exceed $1 billion, ranking it among the nation’s most costly failures. The 1989 collapse of Irvine-based Lincoln Savings & Loan cost taxpayers $2.6 billion, the most expensive failure to date.

Ryan’s claim that money could have been saved under his plan is strongly challenged by some experts and by the Democrats.

“It’s convenient in an election year to blame Congress . . . when something happens,” said James Barth, a professor of finance at Auburn University and a former chief economist for the federal thrift regulatory system. “Did the regulators simply wake up yesterday and discover that Homefed was a deeply troubled institution? What about a year ago? Why didn’t they take action when they had funds? Apparently Ryan didn’t find a buyer for Homefed when he had the resources.”

Rep. Bruce F. Vento (D-Minn.), a member of the House Banking Committee, was more blunt: Ryan “screwed around with this for the last two years--this baby (Homefed) lost $1 billion. . . . They have been dragging their feet.”

Voting for RTC funding is a politically dangerous act in a year when voters already have considerable scorn for elected officials. Rep. Torres insisted that House Democrats will not support the RTC until the Republicans deliver a majority of their own party for the funding. “They’ve got to get their act together,” he said.

Rosenblatt reported from Washington and Kraul from San Diego.