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FirstFed Increases Single-Family Loss Allowance as Portfolio Faces More Stress

FirstFed Financial Corp., parent of First Federal Bank of California, expects to substantially increase its allowance for loan losses related to single-family home loans.

The bank expects to report a loan loss provision of between $140 million and $160 million for the first quarter, resulting in an after-tax operating loss of between $65 million and $75 million for the company.

The company also released data on single-family characteristics that show the bank has a high ratio of stated-income loans and that the LTV ratios have deteriorated as home values have slid in California.

Almost all of the increased loss reserve for the first quarter relates to the company's single-family home loan portfolio, FirstFed said. The increase will bring the company's total allowance for loan losses to about 5% of the outstanding loan balances at the end of the first quarter, roughly double the loan loss allowance ratio at the end of 2007.

Actual loan losses for the first quarter are estimated at $28 million, with single-family home loans again accounting for the lion's share of the total.

The bank said its multifamily and commercial real estate loan portfolios, which together account for about 30% of the total loan portfolio, are not experiencing significantly higher delinquency or default rates.

The "continuing decline in California real estate prices" during the first quarter is the primary factor behind the bank's decision to sharply increase its loan loss reserve.

In addition, a large quantity of borrowers with rate resets in late 2007 or the first quarter of this year posed trouble for the bank. FirstFed said it successfully modified the terms of borrowers with $122 million of home loans that were close to their payment reset deadlines.

Still, FirstFed said it expects that many of the loans affected by payment resets will go through the foreclosure process over the next few quarters.

Despite the increase in expected loan losses, FirstFed said that it expects its capital ratios to remain in excess of the minimums required for a bank to be considered "well capitalized" by regulators.

The bank also released a large volume of data related to its home loan portfolio. Loans originated in 2005, after the last big refi boom, account for 43% of the portfolio. Loans from the troubled 2006 vintage account for 23%. The bank said that 5.5% of the loans in its single-family portfolio had loan-to-value ratios of between 85% and 90% of the home value at origination, and 1.2% have LTVs in excess of 90%.

But the decline in home values has had a dramatic impact on LTVs. Today, FirstFed estimates that at least 2.5% of its portfolio has an LTV in excess of 100%, while 15% of the single-family portfolio is estimated to have an LTV of between 90% and 100%, and 27% has an LTV of between 80% and 90%.

In addition, the bank said that 31% of the portfolio consisted of "stated income, verified asset" underwriting, while almost 32% consisted of "stated income, stated asset" underwriting. Another 11% are listed as "no income, no assets."

Analysts at Friedman Billings Ramsey give FirstFed's shares a price target of $15, arguing that the current stock valuation limits downside.

However, FBR also advised investors to "wait for some sign of stabilization in credit trends to purchase the shares."

Shares of FirstFed climbed about 6% after FBR upgraded the company to "market perform" from a previous stock rating of "underperform."

Santa Monica, CA-FirstFed Financial Corp., parent of First Federal Bank of California, expects to substantially increase its allowance for loan losses related to single-family home loans.

The bank expects to report a loan loss provision of between $140 million and $160 million for the first quarter, resulting in an after-tax operating loss of between $65 million and $75 million for the company.

The company also released data on single-family characteristics that show the bank has a high ratio of stated-income loans and that the LTV ratios have deteriorated as home values have slid in California.

Almost all of the increased loss reserve for the first quarter relates to the company's single-family home loan portfolio, FirstFed said. The increase will bring the company's total allowance for loan losses to about 5% of the outstanding loan balances at the end of the first quarter, roughly double the loan loss allowance ratio at the end of 2007.

Actual loan losses for the first quarter are estimated at $28 million, with single-family home loans again accounting for the lion's share of the total. The bank said its multifamily and commercial real estate loan portfolios, which together account for about 30% of the total loan portfolio, are not experiencing significantly higher delinquency or default rates.

The "continuing decline in California real estate prices" during the first quarter is the primary factor behind the bank's decision to sharply increase its loan loss reserve.

In addition, a large quantity of borrowers with rate resets in late 2007 or the first quarter of this year posed trouble for the bank. FirstFed said it successfully modified the terms of borrowers with $122 million of home loans that were close to their payment reset deadlines.

Still, FirstFed said it expects that many of the loans affected by payment resets will go through the foreclosure process over the next few quarters. Despite the increase in expected loan losses, FirstFed said that it expects its capital ratios to remain in excess of the minimums required for a bank to be considered "well capitalized" by regulators.

The bank also released a large volume of data related to its home loan portfolio. Loans originated in 2005, after the last big refi boom, account for 43% of the portfolio. Loans from the troubled 2006 vintage account for 23%.

The bank said that 5.5% of the loans in its single-family portfolio had loan-to-value ratios of between 85% and 90% of the home value at origination, and 1.2% have LTVs in excess of 90%. But the decline in home values has had a dramatic impact on LTVs. Today, FirstFed estimates that at least 2.5% of its portfolio has an LTV in excess of 100%, while 15% of the single-family portfolio is estimated to have an LTV of between 90% and 100%, and 27% has an LTV of between 80% and 90%.

In addition, the bank said that 31% of the portfolio consisted of "stated income, verified asset" underwriting, while almost 32% consisted of "stated income, stated asset" underwriting. Another 11% are listed as "no income, no assets."

Analysts at Friedman Billings Ramsey give FirstFed's shares a price target of $15, arguing that the current stock valuation limits downside. However, FBR also advised investors to "wait for some sign of stabilization in credit trends to purchase the shares." Shares of FirstFed climbed about 6% after FBR upgraded the company to "market perform" from "underperform. (c) 2008 Mortgage Servicing News and SourceMedia, Inc. All Rights Reserved. http://www.mortgageservicingnews.com/ http://www.sourcemedia.com/