Minority Lending: A Tale of 2 O.C. Thrifts : Finance: While Plaza Savings & Loan has been successful in its mortgage banking operation, Guardian Savings & Loan has folded.
Working amid the industry giants that funneled home loans to blacks and other minorities in 1990 were two middling savings and loans based in Orange County.
One, Plaza Savings & Loan in Santa Ana, has been doing gangbusters work as it targets blacks, Asians, Hispanics and other ethnic groups.
The other, Guardian Savings & Loan in Huntington Beach, simply went bust.
How two thrifts catering to minorities could travel such divergent paths is as much a story of success and failure in the beleaguered thrift industry as it is a testament to the notion that financial institutions don’t have to be big to play a big role in the community.
“Lending in poorer areas shunned by many banks and thrifts is an expertise that requires much more understanding of the sources of family income and the values of properties,” said Edward J. Carpenter of Irvine, a financial institution consultant.
Just as Guardian did before it folded, Plaza focuses on one thing: mortgage banking. In such an operation, banks or S&Ls; lend depositor funds, package a bunch of the loans together and sell the package to investors. They use the proceeds to make more loans.
Plaza has been so successful that its 15 private shareholders--including Marion Knott Montapert of the Knott’s Berry Farm family and developers James M. Peters and George Argyros--are ready to go public. An initial offering of common stock is awaiting approval before the Securities and Exchange Commission.
For the 7-year-old Plaza, two keys to success have been an ability to package quality loans and sell them in the secondary market quickly and a hard-working staff to bring in loan prospects.
“We’re very aggressive with the solicitation of mortgages,” said John T. French, Plaza’s chairman. “We have 14 offices throughout California that do nothing but solicit loans. And we’re sprouting outside the state.”
Plaza opened loan offices this year in Phoenix, Portland, Ore., and Ft. Lauderdale, Fla. The thrift’s only full-service branch, where customers can make deposits as well as obtain loans, is in Santa Ana.
Plaza’s work force is a potpourri of race and ethnicity. Among its 675 employees there are those who speak Chinese, Spanish, Indian, German, Arabic and other languages and can trace their heritage to Africa, Italy, South Korea, Vietnam, Peru and a host of countries.
The workers, in effect, mirror the thrift’s strategy of diversity and allow it to play in the big leagues of home lending.
“We target minorities,” French said. “We have people who are bilingual who are loan processors. We have African-American loan originators who work in black communities.
“We’re addressing the issue (of loan bias). We don’t send a person who doesn’t speak Spanish into Santa Ana. We advertise on Spanish radio and in Spanish newspapers. We focus people in areas where they can best fit in. We work hard at being non-discriminatory.”
The S&L; typically approved a higher percentage of loan applications than other institutions did in 1990, though the difference between any two racial groups could range as high as 10 percentage points, according to a computer-assisted study by the Los Angeles Times of mortgage lending practices in Orange and Los Angeles counties.
In 1990 in Orange County, Plaza approved 74.2% of home mortgage applications submitted by Asians, 84% of those submitted by Hispanics and 80% of those presented by whites, the study shows. Statistics for blacks, who make up only 1.6% of the county population, were too small to be meaningful.
In the same year in Los Angeles County, Plaza approved 81.3% of home mortgage applications filed by Asians, 74.5% submitted by blacks, 74% presented by Hispanics and 84.9% filed by whites.
Approval rates for refinance loans were similar. The thrift does not make home equity loans.
French said the thrift always looks only to make solid loans--so-called A paper--to borrowers who conform to standards set by investors such as the two quasi-governmental agencies, the Federal National Mortgage Assn., known as Fannie Mae, and the Federal Home Loan Mortgage Corp., known as Freddie Mac.
He said Plaza is thinking of making somewhat riskier loans--so-called B paper--to borrowers who have, for instance, some past financial problems that leave them short of the Fannie Mae and Freddie Mac requirements.
The thrift also plows money back into the community. Last year, for instance, it gave $40,000 to the Santa Ana Unified School District and $220,000 to Comic Relief, which helps shelter the homeless.
Plaza currently is setting aside money from the profits on each loan to buy rundown houses in Santa Ana. Under the program, minority firms would be hired to rehabilitate the houses, and the houses would be sold to low-income minorities at favorable interest rates.
For its efforts, Plaza has been rated by thrift regulators as outstanding for three straight years for fulfilling requirements under the Community Reinvestment Act, which mandates minimum levels of community involvement for financial institutions.
Guardian Savings also targeted minority groups with much success, hitting neighborhoods throughout the Southland.
But its inadequate internal controls, sloppy record keeping and a variety of other improper acts--including covering overdue mortgages with payments from other mortgages--doomed it.
“There were a lot of things wrong at Guardian, and a lot of problems there, but the one good effort it had was its lending program, even though it was motivated by greed,” said William D. Davis, a former commissioner of the state Department of Savings and Loan.
“Over a period of years, the history of losses was minimal,” he said. “That (lending) part of Guardian’s operation was a good thing.”
Davis joined his predecessor at the state agency, William J. Crawford, in running Guardian in early 1991 after federal thrift regulators threw out the S&L;’s sole owner, Russell M. Jedinak.
Both as regulators and at Guardian’s helm, they understood what Jedinak was doing.
Jedinak pioneered the sale of risky home loans--so-called C and D paper--directly to Wall Street investors, thus bypassing Fannie Mae and Freddie Mac and their conforming, or some would say confining, regulations.
The pools of mortgages offered an unusual twist, securities based on separate pieces of the package, such as the high-interest Guardian charged for its loans.
Investors loved the deals and gobbled up package after package of $50-million worth of loans, making Guardian, with only $500 million to $600 million in assets, one of Wall Street’s biggest mortgage players as it funded $1 billion or more a year in loans throughout the 1980s.
But Jedinak was essentially a hard money lender, an industry term used to describe a lender whose only focus is how much collateral a borrower had. Such lenders usually could care less about a borrower’s credit history or ability to repay a loan, and look instead to foreclose on property the moment a payment is missed.
Crawford said he wouldn’t give Guardian a medal for lending to mortgage-deprived areas, but he would not discuss Guardian’s activities further.
Jedinak, who has refused to talk to the media in the past, did not return telephone calls to his new base of operation, Quality Mortgage Inc. in Huntington Beach.
Guardian did a good job on appraisals because it had to protect its interest in the collateral. But it was extremely aggressive and took loans from brokers that it shouldn’t have, industry leaders said.
The S&L;’s delinquency rate--loans more than 60 days past due--shot up to 10% to 12% of total loans, but Davis said the foreclosure rate was surprisingly low.
That was because Jedinak required huge down payments of 35% or more, and his wife, Rebecca, ran a collection effort that pounced on borrowers the moment they were a day late on their payments.
Still, Davis said, borrowers quickly realized that they had so much equity built up from the moment they walked into their homes that they couldn’t risk failing to make their mortgage payments.
For its entire portfolio, he said, Guardian had a ratio of loan to value--how much it was lending versus how much the properties were worth--of 65%, an anomaly in these days of 90% to 95% loans.
Even so, Jedinak evaded regulations to work around problems.
Regulators found that many loans sold on Wall Street were not on owner-occupied properties as promised in securities filings. That’s because brokers would point out to prospective borrowers that if they checked the square on the loan application saying they intended to rent the property out, they would pay a quarter percentage point more in interest.
In addition, Guardian would hold a check that bounced and keep calling daily to find out if there were enough funds in the account to make the check good. Bankers are supposed to charge such bad checks against the loan, putting it into the status of a delinquency.
Crawford and Davis, who presided over the burial of numerous failed thrifts as state regulators, believed that Guardian could have been saved, with help from federal regulators. Its biggest problem was its 14-story headquarters building on Beach Boulevard at Warner Avenue.
Jedinak bought the building for $55 million, but the best appraisal that Crawford and Davis could get on it was for nearly $38 million.
Federal regulators decided the value should be written down, an act that lowered Guardian’s capital to such an extent that it was deemed to be operating in an unsafe and unsound condition. Federal regulators seized the S&L; in June, 1991, and eventually sold the building for $22 million.
“The building was the big thing that knocked the thrift down,” Davis said. “There was nothing else that couldn’t be solved, like internal operating procedures.”
Mortgage Banking Operations Run on Little Depositor Money
Plaza Savings & Loan in Santa Ana and Guardian Savings & Loan in Huntington Beach, before it failed, are examples of how financial institutions can generate a great deal of loans with little depositor money.
The process is called mortgage banking, and it works like this:
A bank or an S&L; lends depositor funds to homeowners and puts together a package of, say, $50 million in various home loans. It sells the package into a secondary market, which issues securities based on the pool of loans.
That secondary market typically consists of Wall Street brokerages and two quasi-governmental agencies, the Federal National Mortgage Assn., known as Fannie Mae, and the Federal Home Loan Mortgage Corp., known as Freddie Mac.
With the proceeds from selling loan packages, financial institutions make more loans. Quick, efficient work is well-rewarded. In 1990, for instance, Plaza funded and sold more than $1.5 billion in loans and earned $2.1 million, even though it had $119 million in assets and only $91 million in deposits. So far this year, it has funded $3.5 billion in loans with assets of $333 million.
Private mortgage bankers, like the Hammond Co. in Irvine and Newport Beach, can do the same thing, except they use their own money or funds they can borrow to make the loans.
There are a variety of ways to sell mortgages in the secondary market, and Guardian developed an exotic method that involved selling pieces of the loan package, such as strips of interest-only proceeds.
Often, mortgage bankers retain the servicing rights on the loans, billing and collecting payments from borrowers. They earn a fraction of the interest charged for handling the servicing. Some, like Plaza, sell the servicing rights to other companies and put the money into their capital base to help them grow.
Minority Lending Practices at O.C. Thrifts
Some Orange County-based thrifts managed not only to compete profitably with larger institutions but were leaders in providing minorities with access to home-purchase mortgages. American Savings and Plaza Savings had loan-approval rates among the highest for Hispanics and Asians, respectively, in 1990. The total number of loans to blacks was too small to support conclusions, but Los Angeles-based Home Savings of America was a leading lender to blacks here, with just 34 mortgages. (Orange County-based institutions in bold.)
BY PERCENTAGE OF MORTGAGE LOANS TO ASIANS
% of No. of Approval Institution Total Loans Loans Rate Plaza Savings 44.2 193 74.2% United Savings Bank 40.6 41 73.2 World Savings 23.8 284 67.5 Coast Federal Bank 20.4 92 76.0 Western Federal Savings 18.3 105 77.2 Downey Savings 17.2 29 56.9 Home Savings of America 12.3 326 70.3 Directors Mortgage Loan 11.8 45 61.6 Great Western Bank 10.4 315 75.5 Glendale Federal Bank 9.8 39 73.6 Citibank 9.3 73 81.1 HomeFed Bank* 9.2 78 72.2 Wells Fargo Bank 8.6 21 58.3 Great American Bank* 8.5 28 59.6 Guardian Savings* 8.4 22 64.7 American Savings 8.0 69 73.4 Bank of America 7.9 169 59.5 First Federal Bank of Calif. 7.9 32 68.1 California Federal Bank 5.4 45 57.0 Western Cities Mortgage 5.0 31 68.9
BY PERCENTAGE OF MORTGAGE LOANS TO HISPANICS
% of No. of Approval Institution Total Loans Loans Rate American Savings 43.4 373 86.3% Great Western Bank 28.6 867 79.8 Guardian Savings* 16.0 42 65.6 First Federal Bank of Calif. 14.9 60 60.6 Home Savings of America 14.0 372 76.4 Western Cities Mortgage 12.6 78 85.7 Western Federal S&L; 11.2 64 61.0 Plaza Savings 9.6 42 84.0 Downey Savings 8.3 14 77.8 Bank of America 7.9 168 52.5 HomeFed Bank* 7.3 62 66.7 Great American Bank* 7.3 24 52.2 World Savings & Loan 7.0 84 57.9 California Federal Bank 6.1 51 57.3 United Savings Bank 5.9 6 54.5 Citibank 5.5 43 72.9 Glendale Federal Bank 5.3 21 56.8 Directors Mortgage Loan 5.0 19 57.6 Coast Federal Bank 4.9 22 71.0 Wells Fargo Bank 4.1 10 38.5
BY PERCENTAGE OF MORTGAGE LOANS TO WHITES
% of No. of Approval Institution Total Loans Loans Rate Glendale Federal Bank 84.4 335 73.1% California Federal Bank 84.0 706 62.6 Citibank 81.7 641 77.6 Directors Mortgage Loan 81.6 310 66.8 Bank of America 81.3 1,725 67.4 Wells Fargo Bank 81.3 196 65.6 Great American Bank* 81.0 268 64.0 Western Cities Mortgage 80.5 499 79.1 HomeFed Bank* 80.0 674 76.9 First Federal Bank of Calif. 75.7 305 70.3 Coast Federal Bank 73.2 330 77.5 Downey Savings 72.8 123 58.3 Home Savings of America 72.3 1,921 73.1 Guardian Savings* 67.6 177 78.0 Western Federal Savings 67.5 387 74.6 World Savings 63.7 759 67.7 Great Western Bank 59.9 1,815 74.6 United Savings 53.5 54 70.1 American Savings 46.7 402 71.8 Plaza Savings 43.0 188 80.0
BY NUMBER OF MORTGAGE LOANS TO BLACKS
No. of Approval Institution Loans Rate Home Savings of America 34 77.3% California Federal Bank 30 63.8 Bank of America 19 61.3 Great Western Bank 17 60.7 World Savings 9 40.9 Guardian Savings* 9 81.8 HomeFed Bank* 8 61.5 Citibank 8 47.1 American Savings 6 60.0 Great American Bank* 5 100.0 Western Cities Mortgage 5 50.0 Western Federal Savings 4 40.0 Coast Federal Bank 4 80.0 Plaza Savings 4 100.0 First Federal Bank 2 68.1 Glendale Federal Bank 2 66.7 Directors Mortgage Loan 2 40.0 Downey Savings 1 50.1 United Savings 0 -- Wells Fargo Bank 0 --
* Became insolvent and was seized by the federal government.
NOTE: Based on applications for home purchase loans not exceeding five times the applicant’s annual household income.
Source: Times analysis of 1990 data reported to the Federal Reserve
