EARTHQUAKE / The Long Road Back : Lenders Bear Up Under Quake Loss : Insurance, Aid for Homeowners Seen as Factors

While certainly shaken and battered by last week’s earthquake, most mortgage lenders in Southern California say they have not sustained severe damage to their balance sheets--at least for the time being.

While the long-term outlook remains cloudy, lenders generally say the quake’s immediate impact will be minimal because the number of borrowers whose homes were damaged or destroyed is still relatively low. Earthquake insurance, federal disaster aid programs and special loan programs for distressed borrowers are also expected to help.

Glendale Federal, which is contacting each of its 15,000 mortgage borrowers in quake-affected areas, said only about 1% of its single-unit and small-apartment owner-borrowers sustained serious damage.

“I’m surprised, because with the density of the population, I think it could have been much worse,” Executive Vice President William J. Birch said.

For Great Western Bank, the earthquake is not a “material event” in terms of its financial impact, according to spokesman Ian Campbell, whose view was echoed by California Federal Bank in Los Angeles and Fidelity Federal Bank in Glendale.

Even in the unlikely event that all the 4,300 houses and apartment buildings thought to be seriously damaged end up in foreclosure, they would still represent only a fraction of the 60,000 foreclosures initiated in Los Angeles County last year, said Dale Dykema, president of TD Service Financial Corp. in Orange, a nationwide firm that assists lenders with foreclosures.

“It’s a situation where, for the most part, lenders are going to work with people who have suffered from the earthquake,” Dykema said. “No. 2, the problems statistically are not going to be very severe.”

Nevertheless, Dykema and others say some foreclosures are inevitable, particularly among owners who refinanced or bought their homes since property values peaked in 1990 and who have since seen their home equity wiped out by falling values.

Many of those owners are simply going to walk away from their houses, Dykema predicted, rather than take out a new loan to fix them.

But for Paine Webber analyst Gary Gordon, the quake’s longer-term implications are more critical than the number of actual mortgage defaults. “My guess is, it will cause some problems and might suggest to some people to get out,” Gordon said.

DRI/McGraw-Hill, a research firm that follows the construction industry, says the earthquake will damage the Southern California economy because insurance reimbursements and direct federal assistance will fall far short of covering the cost of the damages.

Residents will have to dig into their savings, resulting in a “loss of wealth” for area residents, the firm said.

But for now at least, the financial damage is expected to be contained because of aid programs set up to help property owners. Low-interest loans from the Small Business Administration of up to $100,000 are available to homeowners who qualify.

Those whose incomes are not high enough to qualify for SBA loans are eligible for Federal Emergency Management Agency grants that pay rent at another residence. Spokesmen for both programs say the agencies are trying to process applications and disburse money within seven to 10 days of receipt of the application.

Also mitigating lenders’ potential losses is the fact that an unusually high percentage of Los Angeles area homeowners--25% or more--have earthquake insurance--even though the deductibles on those policies are generally quite high.

Lenders are also offering concessions, mainly in the form of deferred mortgage payments, to distressed borrowers.

The offers include deferments of up to three months of mortgage payments with no late fees, though the deferred amount is typically due in full once payments resume. Conscious of a delicate public relations issue, lenders rushed to publish full-page newspaper ads explaining the loan deferrals against a background of sympathy.

But quake victim Jim Pearson, a real estate agent whose Sherman Oaks house sustained $40,000 in damages, and others claim the offers are not flexible enough.

Pearson says he tried and failed to persuade Bank of America to restructure his $390,000 mortgage. He wanted to add the deferred payments to the end of his loan, instead of at the end of the three-month grace period.

“It’s a big PR campaign to say, ‘Look at us, we are a big company and we are helping people.’ I think it’s a scam and unfair,” Pearson said. BofA and other lenders insist their efforts are sincere but note that not all loans can be modified.

In addition to the loan deferments, BofA and others are offering customers extended limits on personal lines of credit. Most banks and thrifts are also allowing depositors to withdraw time deposits without penalties.

Most of Dykema’s clients have asked him to postpone all foreclosure sales for at least a month, partly out of sympathy for quake victims and partly, he said, because some lenders “don’t particularly care to take properties back that have no value to them.”