S&Ls; Suffering an Identity Crisis : Loan Brokers, Mutual Funds Usurping Traditional Roles


Like many other California savings and loans, Independence One pointedly began calling itself a “bank” a few years ago because it was embarrassed by the chaotic state of the thrift industry.

Now Independence One Bank is proposing something far more radical: It wants to become a commercial bank because it is no longer able to compete in the home loan business. The Mission Viejo-based financial institution wants to obtain a commercial bank charter so it can concentrate on making business loans.

As for the increasingly cutthroat mortgage business, the traditional staple of the savings and loan industry, Independence One wants out.

“Everybody and his grandmother is making residential mortgage loans,” said Robert Campbell, an Independence One vice president. “There are too many providers and not enough profit. It’s not a market where an emerging financial institution like us can carve out a niche.”


Financial institutions such as Independence One are in the grip of an identity crisis just as the $110-billion-plus taxpayer bailout of the savings and loan industry is starting to wind down.

Devastated by the high interest rates of the early 1980s and still saddled with long-running problems with loan quality, the industry is taking punches that never seem to let up.

Mortgage bankers are now cutting deeply into their loan volume, and mutual funds are taking away their savings accounts.

“It’s like Hollywood, the ‘Friday the 13th’ movies,” said E. Gareth Plank, thrift analyst with Mabon Securities in San Francisco. “Freddy Krueger manages to revisit the thrift industry time and time again.”


California once had among the most formidable and stable savings and loans in the nation, with large followings both on Wall Street and Main Street. Now even powerhouses such as Great Western Bank and Home Savings of America face uncertain futures as they take dramatic steps to turn themselves around.

Since the 1930s, S&Ls; have had a special mission--not to mention tax breaks and cost-of-money incentives--to provide mortgages to families chasing the American dream of homeownership. But the importance of that mission faded as the marketplace changed.

The nation’s thrift and banking industry began to blend in identity more than a decade ago--a trend that accelerated in 1989 with the passage of the Financial Institutions Reform, Recovery and Enforcement Act, the landmark banking law known as FIRREA.

In addition to bailing out the savings and loan industry, FIRREA centralized regulatory authority for banks and thrifts and made capital requirements more uniform for all financial institutions. (One of the few remaining key distinctions is that savings and loans are allowed to have only 10% of their assets in business loans.)

Now, with the emergence of aggressive mortgage banking firms and the huge secondary market for home loans, the raison d’etre of the thrift industry is fading fast. Indeed, a two-year government study delivered to Congress this summer concluded that thrifts should be abolished or severely limited in where they invest depositors’ money.

“The original reasons for the creation of S&Ls; have dissipated,” said Independence One’s Campbell. “S&Ls; are a dinosaur poised for extinction.”

Whatever the future holds, the last few years have taken a fearsome toll on the California industry.

Takeovers, mergers and failures have pared the number of the state’s thrifts to 104--half as many as were operating only six years ago. Assets are down by one-third over the last five years and 15,000 S&L; jobs have disappeared, a 20% decrease.


While some of the survivors are healthy, there is no assurance that the worst is over. The state’s weak economy and rising unemployment continue to jeopardize California residential real estate values, the foundation of the industry’s financial well-being.

Hemorrhaging continues, for example, at Great Western, Home Savings and California Federal Bank--three huge financial institutions based in the Los Angeles area. All three reported large loan losses in the second quarter in bids to put their problem-asset problems behind them, and investors have generally reacted favorably. Shares of Great Western and H.F. Ahmanson & Co., Home Savings’ parent firm, are trading near their 52-week highs.

Many of these large financial institutions are having trouble competing with the mortgage banking chains and money funds that have cut deeply into their traditional markets.

Mortgage banking giants such as Countrywide Funding in Pasadena and American Residential Mortgage in San Diego have taken huge chunks of the home loan business. They often offer lower-priced loans because they operate more cheaply and don’t have the community banking requirements that thrifts do.

Mortgage bankers nationwide now originate more home loans than banks and thrifts together, with 55% of the new-loan market, up from 19% in 1985. “There has been a fundamental shift that I think is permanent,” said American Residential Mortgage Chairman John M. Robbins.

However, savings and loan executives point out that mortgage bankers have always excelled in declining interest rate markets, in which fixed-rate loans and refinancings are the hot mortgage products.

Once rates start rising or become volatile and the mortgage market is dominated by variable-rate purchase mortgages, these executives believe, the thrifts will reassume their market leadership.

At the same time, depositors will come back to S&Ls; and banks after one of the big uninsured money funds goes broke or loses money once rates go up, says Richard Deihl, chairman of Home Savings’ parent company.


Yet even the thrifts that do survive may end up getting rolled over by the consolidation sweeping the nation’s banking industry, said James M. Cirona, formerly a top thrift regulator and now president of the Western Farm Credit Bank in Sacramento.

“Once the (surplus) of government-controlled thrifts is depleted . . . you will see a lot more interest in commercial banks acquiring thrifts,” Cirona said.

Surviving S&Ls; could take advantage of their branch networks and good customer relations to carve out niches as true consumer-oriented banking institutions, said L. William Seidman, former head of the Federal Deposit Insurance Corp.

In the end, it doesn’t matter what you call yourself, but how you pursue your goals, according to Herb Sandler, head of World Savings in Oakland, among the most respected thrifts in the nation.

“You can call me a savings and loan, an XYZ or an ishkebibble,” Sandler said. “What difference does it make to anyone anymore? The question no longer is what you are, but whether you have a vision and a strategy.”

Battered Thrifts

Government seizures, tighter regulatory requirements, mergers and increased competition have battered the California thrift industry in recent years. Total thrifts have dropped by half and assets are down by one third.

Savings and loans headquartered in California:

1992: 104

Industry assets in California (in billions):

1992: $273 billion

Sources: California League of Savings Institutions