EARTHQUAKE: THE LONG ROAD BACK : Banking Aftershock : Thrifts: Home Savings could lose millions on new loans aimed at keeping homeowners from walking away from damaged property.
Home Savings of America, the nation’s largest thrift, introduced a new lending program Tuesday to help its earthquake victims deal with damage to their homes, but it noted that the plan may result in significant losses because many of the riskier loans may never be fully repaid.
Irwindale-based Home Savings declined to estimate the size of the potential losses. But its chief executive, Charles R. Rinehart, said in an interview that he sees little chance of recovering money on as many as 200 of the new loans, whose balances will average about $100,000. That would expose the thrift to losses of as much as $20 million.
But Rinehart and some financial analysts say Home Savings’ move is a savvy one designed to head off the higher losses that would result if homeowners abandoned their properties in droves. The riskier loans are expected to be made to homeowners with little equity left in dwellings that were badly damaged.
Home Savings is the first large Southern California lender to admit that the earthquake will have a major impact on its profit. Until now, lenders have generally said the quake would not cause significant financial damage.
Asked if it was considering new kinds of loans for quake victims, a Great Western Bank spokesman said Tuesday that the bank was “still reviewing all possibilities.” Other major lenders were not available for comment or did not return phone calls.
In the interview, Rinehart said Home Savings will have a more precise figure for quake-related loan losses at the end of March, when its first quarter ends.
“It will be something that will be visible, in the millions of dollars,” he said. “But what number you put in front of the millions is not known . . . at this time.”
With about 32,000 borrowers in quake-affected areas, Home Savings said about 370 of those have homes that are reported to be “seriously damaged.” About two-thirds of the homes have been inspected, it said.
Home Savings is offering two new kinds of loans to the vast majority of its borrowers who have adjustable-rate mortgages. Fixed-rate borrowers are not eligible because Home Savings usually sells those loans to institutional investors and cannot unilaterally alter their terms.
The first new loan is a 12-month “bridge loan” designed for borrowers with sufficient equity in their property to qualify for more debt or for those eligible for federal quake assistance programs. These loans, which require no monthly payments and carry a below-market interest rate, can be paid off at the end of a year or added to a first mortgage.
The second loan type, which involves much more risk and is expected to result in the losses, is aimed at borrowers with little or no equity remaining in their houses because of falling property values. These loans will cover the amount of repairs and will carry no interest charges or payments.
But Home Savings would receive a second mortgage on the property that would be repaid if property values increased. If the value rises above the first-mortgage amount when the home is sold, the difference will be split 50-50 between the owner and lender until the entire amount of the second mortgage is paid off.
First Boston thrift analyst David B. Hilder said Home Savings is “making a rational economic calculation. It is better to provide funds for good borrowers with good credit histories to fix up their houses because those people are likely to keep making payments on their original loans.”
“The idea is that (the anticipated loan losses) would be a lot less of a hit than if the guy walked from the property,” said Joseph A. Jolson, an analyst with Montgomery Securities.
