Some say Standard was seized too soon


November 04, 1992|By David Conn | David Conn,Staff Writer

The government takeover of Standard Federal Savings Bank last month capped a long series of political and economic events that caused the accelerating decline in the past two years of one of the nation's largest mortgage servicers.

Since the takeover, supporters and critics of both Standard Federal and the federal Office of Thrift Supervision, which placed the Gaithersburg savings bank in receivership Oct. 21, have differed over one question: Did it have to happen?

The OTS maintains it did everything possible to forestall what it believes was the inevitable. The loss, and the likely burden on taxpayers, is all the more disappointing considering that regulators came close to arranging an outright sale of the thrift last spring, according to Standard Federal officials.

Standard's former majority shareholders, Chairman Allan Lang and his son, Vice Chairman Marvin Lang, who together lost about $150 million in stock, did not respond to requests for comment. R. Emmett Garlock, former president and chief executive officer, referred all questions to the Resolution Trust Corp.

But some supporters of Standard Federal claim that a few phone calls to the thrift's largest institutional depositors could have postponed, if not prevented, the takeover.

The answer lies with the nature of Standard Federal's primary activity. Almost a quarter of its assets were devoted to the volatile business of mortgage servicing.

Standard Federal purchased not mortgage loans, but the right to service them, or collect principal, interest, tax and insurance payments for the loans and forward them to their respective recipients each month. In return, the thrift kept a small portion of each monthly payment, typically one-quarter to one-half of a percentage point.

The key to the business is volume, and Standard Federal employed 1,300 people in Frederick, and more in centers in other states, to process a portfolio of $36 billion in mortgages, the largest such portfolio of any thrift in the nation.

Those operations, as well as the remaining 600-plus employees at the company's Gaithersburg headquarters and in 18 branches around the Baltimore-Washington area, are now in limbo. The Resolution Trust Corp. says it will try to find a buyer for part or all of the failed thrift, but it has run out of money to stabilize and market the institution.

By near universal agreement, Standard Federal's problems centered around its enormous portfolio of serviced mortgage loans. By June 30, more than 20 percent of Standard Federal's $1.8 billion in assets lay in the value of its mortgage servicing contracts. Unlike cash in the bank, these assets are considered "intangible," valued according to how much income they are expected to generate in the future.

In 1989, Congress proposed to limit the amount of mortgage servicing rights that a thrift could count toward its capital. Capital, the amount by which assets exceed liabilities, is the cushion that financial institutions must keep to protect stockholders and the federal deposit insurance fund against losses.

The proposal, if implemented, would have dropped the bottom out of Standard Federal's capital, requiring the thrift to raise an estimated $100 million to keep operating.

So Standard Federal, as part of a coalition of about three dozen thrift mortgage servicers, mobilized, hiring Paul Laxalt, former governor and Republican senator from Nevada, to lobby for less restrictive capital rules in the proposed law.

His main opponent was Sen. Donald W. Riegle Jr., D-Mich., who chairs the Banking Committee and whose state is home to two of the biggest unregulated mortgage servicers, subsidiaries of General Motors Corp. and Fireman's Fund Corp.

L At the urging of the thrift coalition, the rules were eased.

"This was one of the most well-funded, hardball lobbying efforts I've ever seen," a congressional source recalled.

The industry won the battle, but suffered one important defeat Thrifts were required to cut 10 percent off the market value of those assets before they calculated capital.

And though Standard Federal was "grandfathered" by the Federal Deposit Insurance Corp., allowing it to count toward capital all the servicing rights already on the books, the new rules effectively prevented Standard Federal from buying new ones.

That change would come back to haunt Standard Federal when interest rates began to fall sharply last year. The value of the thrift's servicing contracts depends on the income they generate over the years. When interest rates fell, homeowners refinanced their mortgages, and many of the loans that Standard Federal paid for the right to service suddenly were gone.

And because of the FDIC's regulation, the company was barred from replacing those purchased servicing rights with new ones that were more valuable.

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