Coast seeks to foreclose on Casden apartment complex.

Does Warner Center suit typify new thrift problems?

The big, 1,279-unit Warner Center apartment complex in Woodland Hills, a seven-year-old, $150-million project owned by Beverly Hills-based developer Alan Casden, could become a "problem asset" for local thrift Coast Savings Financial this year, according Coast disclosure documents.

The Business Journal has learned that Los Angeles-based thrift filed suit June 22 against Casden, seeking to take control over the complex at 5555 Canoga Ave., but last week the suit was ensconced in the chambers of Los Angeles Superior Court Judge Stephen O'Neil and unavailable for review.

The Warner Center apartment complex does not generate enough cash to honor credits extended by Coast; moreover, an $8.5 million guarantee fund set up in 1990 to make good on IOUs to Coast will be exhausted sometime this year, according to Coast papers filed with the Securities and Exchange Commission.

Coast officials last week declined comment on the matter, as did their law firm, downtown Los Angeles-based McKenna & Fitting. Casden, a well-known apartment developer in the Los Angeles area, could not be reached for comment.

However, Casden's lawyer, Ed Rosenfeld of the Beverly Hills firm Rudin, Appel & Rosenfeld, said, "Coast is seeking to foreclose on their deed of trust. We have not yet answered the complaint. The project is 90 to 95 percent occupied, but there is not enough revenue to sustain the mortgage. There is a glut of apartments in that part of the city, due in part to the large number of defense industry layoffs."

If the Warner Center apartment complex does become a problem for Coast Savings, it could highlight an ominous new trend for Southland banks and thrifts -- the emergence of "problem" residential loans, piling onto the already large volume of troubled loans on commercial real estate.

"The S&Ls in California historically have been immune to problems in residential real estate. Since World War II, very few people ever lost money making residential loans here, but this recession might change that reality," said Charles Biderman, a short-trader and author of the Santa Rosa-based newsletter Market Trim Tabs. (Short-traders are speculators who bet the price of stocks will go down, not up.)

Even S&L executives concede that the residential market is soft. "Landlords are getting less than what they expected from rentals. What we have seen in multi-family delinquencies is stress associated with the recession. Apartment dwellers are consolidating into fewer units," said James Hurley, senior vice president at Los Angeles-based California Federal. "Cap rates (returns on investment) are going down."

For S&Ls, the emergence of sour residential loans is as welcome as a large hill near the end of hiker's trek.

The thinking until recently has been that thrifts would have more or less survived the 1990s economic slump, save for their headlong rush into commercial real estate in the 1980s, both as lender and co-developer. Deregulation in the 1980s led to exuberant but inexperienced lending on exciting commercial ventures, the thinking went.

Thrifts have largely stopped making commercial loans in the 1990s, and have been working out solutions to the raft of bad loans. Some have sold off major portions of their portfolios, or have been taken over by the federal government.

Some analysts think several local thrift giants -- such as Coast Savings, California Federal and H.F. Ahmanson (Home Savings) -- have turned the corner, in part because they went back to their knitting, which is making residential loans and taking consumer deposits.

Indeed, brokerages such as the New York-based S.G. Warburg have touted CalFed as a thrift that might reward stock market investors with 500 percent returns in the next year.

And Goldman Sachs likes H.F. Ahmanson, parent company of Los Angeles-based Home Savings, the $47.7 billion-in-assets thrift behemoth.

But as the recession's shadows grow long upon the Southland, other analysts are beginning to look at residential real estate as a new threat to thrift profits and survival.

And residential problem loans are increasing: The percent of non-performing loans on one- to four-unit buildings increased from 1.20 percent at yearend 1989 to 3.59 percent at yearend 1991 at H.F. Ahmanson, according to the Mortgage Bankers Association.

The dollar value of foreclosures, as well as the number of foreclosures, has been growing in Los Angeles County since 1989, according to TRW-REDI, a real estate information service. In early 1990, monthly foreclosure volume ran less than $30 million a month; in 1992, it has been running at more than $230 million every month. In April, 893 properties were foreclosed on in Los Angeles County, or about 45 every working day.

In a bad turn for thrifts, properties that are foreclosed upon now may be worth 10 percent to 20 percent less than in the 1980s -- indeed, the big, seven-year-old Warner Center apartment project may be worth less than the loans and credits outstanding on the property, according to Coast's disclosure statements.

"Largely because of the operating deficits and based upon appraisals of the projects involved, the fair value of the Warner Center project and certain other projects collateralizing the bonds is believed by Coast to be less than the potential liability under the related letter of credit," reported Coast.

For S&Ls, the prospect of a residential real estate meltdown are ominous; even with their venture into go-go banking in the 1980s, the vast majority of their portfolios are on homes or apartment buildings.

Said short-trader Biderman, "There is more pain to come."