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Under new management.

When a parent thrift gets tied up in RTC receivership, its subsidiaries get roped in as well. With the process slowly improving, however, some mortgage companies are finding they come out with a new lease on life.

While he was chairman of Miami's $8.2 billion Cen-Trust Bank, David Paul ran the thrift "as if it were his own public piggy bank," said Florida Comptroller Gerald Lewis last fall. Faith Hochberg, senior enforcement attorney for the Office of Thrift Supervision (OTS), added that Paul's spending habits "exceed virtually anything this agency has encountered before."

Federal regulators are suing Paul for $30.8 million in damages and asking that he be permanently banned from working in the banking industry. Only the $40 million sought from Charles Keating, head of California's Lincoln Savings & Loan, is a larger claim on personal assets in a thrift failure. Another $250 million is demanded by the government in a civil suit charging Paul and other officers and directors with breach of fiduciary duty, waste and mismanagement.

It's not hard to see why.

In the process of building CenTrust into the nation's 23rd-largest thrift, Paul put up a 47-story headquarters building that now dominates the Miami skyline. A marble staircase led to his private office, which had 24-karat gold leaf on the ceiling and goldplated sinks in the bathroom. His cigars were kept fresh in a personal mahogany humidor. A few miles away, the $233,000 CenTrust yacht, Bodacious, was anchored.

For a while, Paul had "Portrait of A Man as the God Mars" by Rubens -- which the S&L had paid more than $13 million for-hanging in his home. It was removed after regulators complained because the painting, which was part of the $29 million CenTrust art collection, was outside bank offices.

Cancelling the lease on the CenTrust corporate jet probably was one of the government's first actions after taking over the bank. With hangar fees, those expenses came to $1.4 million annually.

Of course, it will be tough to get back money already spent, including the $5 million Paul received in salary and benefits from January 1988 to September 1989. During that time, he also got a $6.1 million "home imprvement loan" from CenTrust.

Asset sales

Today the government is overseeing CenTrust's $1.3 billion junk bond portfolio, which the savings bank obtained through former Wall Street dealer Michael Milken. CenTrust had one of the five largest thrift portfolios devoted to junk bonds.

All told, regulators expect to lose $1.7 billion on CenTrust. And that's despite the sale of some attractive CenTrust assets, including gold-plated ice tongs, a mutton serving dish with an 80-pound lid and CenTrust Mortgage Corporation.

CenTrust Mortgage?

Based in Deerfield Beach, Florida, CenTrust Mortgage quietly originated about $1.6 billion last year, mainly in fixed-rate loans, says CEO George Gundersen. Fifty-seven retail and correspondent lending offices cover 32 states. Additionally, CenTrust services $2.8 billion in loans. Estimated annual profits at the mortgage subsidiary, according to The Wall Street Journal, are $20 million.

Often a profitable mortgage company is in the corporate shadow of a failed thrift. "Typically the mortgage subsidiaries are doing reasonably well," explains Victor Cholewicki, managing director at Hamilton, Carter, Smith & Co., Inc., Alexandria, Virginia. "These assets are not tainted," he adds. "Development loans got the parent into trouble." Hamilton, Carter, Smith brokers some of the servicing portfolios and mortgage companies under the care of the Resolution Trust Corporation (RTC).

When a parent gets taken over by regulators, subsidiaries are put under government supervision until new owners can be found. Mortgage Banking talked with several mortgage companies that have gone through the process to see how they survived and found fresh capital.


Commonly held beliefs about servicing portfolios deteriorating due to demoralized personnel may not be true, according to those closest to the process. Rather than becoming lackadaisical, workers are "looking to stay on with the new ownership," Cholewicki explains. Thus, employees realize they need to keep up normal operating standards.

"Employees perceived [the time in receivership] as a challenge," Gundersen says, "and they saw the potential of the company." He adds that overall worker turnover dropped 15 percent from normal levels during that time, despite the uncertainties that accompany a firm on the auction block. Similar experiences are reported by other firms. A little more than a year after the parent thrift was taken over, 16 offers for CentTrust Mortgage--including one from the mortgage company's managers -- were brought to the RTC. In February 1991, Seattle's McNamara Investment Corporation announced it had purchased CenTrust Mortgage for $32.7 million. However, it has not yet been announced that a closing has actually occurred.

CenTrust is just one of many mortgage company sales that the RTC is pursuing. At last count, 37 mortgage companies were being offered by the government, says Ralph Yearwood, a vice president at Smith Barney, Harris Upham & Co., Inc., in New York. Smith Barney is the RTC's financial adviser on sales of more than $100 million.

Yearwood adds that servicing portfolios held by these mortgage subsidiaries range in size from $300 million to $11 billion. RTC intends to sell all the subsidiaries as going concerns, he says.

"We let the market decide how [a mortgage subsidiary] will be sold," says Ed Mahaney, assistant director of conservatorship operations at the RTC.

RTC prefers selling larger companies as "a going concern," notes Mahaney. However, buyer preference generally determines deal structures. For instance, Lomas Mortgage USA was the top bidder last year for the $4.5 billion servicing portfolio held by Dallas-based Bright Banc. Because Lomas already had servicing capability, it simply purchased the Bright portfolio from the RTC.

All of the 37 firms will be sold this year, and "the vast majority will be sold as a going concern," Yearwood notes, rather than as bulk servicing packages. RTC's goal, he adds, "is to get these companies back into the private sector as quickly as possible."

Executives at CenTrust Mortgage and other thrift subsidiaries whose parents went into RTC conservatorship generally have positive comments about the process. CenTrust had "record production" last year, Gundersen notes, even though during seven months of that time it was under RTC supervision.

"Disruption was kept to a minimum," says Gundersen. However, he notes, the process of being resold by the RTC is "not the fastest system in the world." Nor is it an easy process. Some employees become disgruntled and leave. And working with the RTC can be difficult. Firings and lawsuits are not unheard of in these situations.

RTC officials declined to comment to Mortgage Banking on their efforts to sell mortgage companies. One industry executive offered that the agency is "sensitive to any real or imagined criticism." As a case in point, the RTC reportedly doesn't allow mortgage subsidiaries to put in their offering memorandums the number of months that their parent has been in receivership.

But participants we talked to had few bad words about the RTC. Houston-based Commonwealth United Mortgage Senior Vice President Buck Bibb says the sales process "worked very well for us. There's nothing I would seriously criticize."

Formerly Commonwealth Mortgage Company of America LP, it was sold as a production unit to Hyperion Partners LP. Forty-five branch offices, banking and shipping, secondary marketing and compliance departments make up most of the assets sold to Hyperion, which owns Houston's United Savings Association of the Southwest, chaired by Lewis Ranieri.

In a separate deal announced last December, Houston entrepreneur James Tang and a group of Hong Kong investors, whose bid was accepted by the RTC, are now negotiating a transaction for $7.2 billion of Commonwealth Mortgage of America's servicing portfolio.

Getting along with the RTC

Bibb adds that the six-month period beginning with the acceptance of the bid to the closing of the sale were difficult. "We were in limbo," he says, trying to simultaneiously run a normal mortgage business, complete the sale and stay on the RTC's good side.

A working relationship with the RTC is spearheaded by the managing agent placed by the agency to oversee a mortgage subsidiary. One company that recently went through the process explained that the RTC begins by putting its own people on the board of a mortgage subsidiary. A mortgage executive for this company cautions that the RTC won't go for aggressive operations. He says the RTC allows mortgage subsidiaries to continue operations in a "controlled environment" with "prudent risk management to preserve asset value."

CenTrust's Gundersen feels "very fortunate" that RTC people who were "very knowledgeable about mortgage banking" performed the agency's oversight of CenTrust.

He explained at the first meeting with his new board that "this is not an insolvency situation. It's profitable. You will have to manage it differently than you're used to." Gundersen believed his talk produced results. Although the agency initially had three people looking over the subsidiary to see if its financial statements were accurate and its operations prudent, during the next few months, the RTC saw that the company was running smoothly and the RTC staff was reduced to zero.

But RTC managers have teeth. Reportedly the agency let one Texas mortgage subsidiary CEO go when he ran the company contrary to the managing director's guidelines. However, the eventual buyers put that person back at the helm.

Although RTC officials "have not been overpowering dictators," says Gundersen, some strict guidelines are set. For instance, a mortgage company's expansion plans usually are put on hold when supervised by the RTC. Bibb notes that Commonwealth couldn't expand its branch office network or give normal employee merit reviews.

But, he adds that slow market conditions during the more than one-and-a-half years spent in receivership meant that neither of those restrictions were onerous. Commonwealth "maintained a nationwide retail and correspondent lending network" during that time, as well as "a significant level of production," Bibb says.

Because the agency spent most of its time watching t he parent thrift, it "let us run our business as before," requring only weekly meetings, says Bibb. "We generally found that the RTC was very accommodating to the needs and problems" of Commonwealth, adds Bibb. "As long as you're not a [financial] burden on the RTC," Gundersen says, the mortgage subsidiary tends to be left to pursue its business.

Still, purchases of bulk servicing often are nixed. Because the agency is the nation's largest owner of servicing today, with approximately $100 billion in single-family loans, industry experts suggest the RTC isn't interested in adding to that level and, therefore, doesn't want to see mortgage companies adding to their portfolios.

Warehousing woes

One way the RTC controls mortgage subsidiaries is through the access it allows them to warehouse credit lines. Often the parent thrift provided this important credit, although that's not always the case.

CenTrust Mortgage had relied on its parent for warehouse credit and had to move quickly to replace the lines. Just four weeks after coming under RTC supervision, CenTrust had found 13 banks willing to approve $325 million in credit, Gundersen says. He needed only $250 million. But, he said, the ability to find money was "a testimony to what [the banks] thought of the strength" of CenTrust Mortgage.

However, it then took two months for the banks and the RTC t work out an agreement on representations and warranties. But eventually CenTrust Mortgage "got a better rate" on warehouse credit than its parent had offered, says Gundersen. Whereas it had been paying prime plus two points for credit from CenTrust Bank, the mortgage subsidiary now pays below prime plus one.

RTC's Mahaney says that if mortgage subsidiaries can get credit based on their own financial strength, the agency will allow them to have that line. But the RTC "won't back credit" by entering into agreements with outside warehouse lenders on behalf of the mortgage firms they supervise.

Ft. Worth's Foster Mortgage Corporation found itself without credit lines after its parent, Houston-based Benjamin Franklin Federal Savings Association, went into receivership. Although Foster had a "significant profit" in 1989, accordint to Ben Franklin's Executive Vice President Eddie Corbitt, "business activity stopped" with the loss of credit.

"It seemed like forever," adds Foster's Executive Vice President Wayne Kroll, looking back on the 19 months Foster was under RTC supervision. "It was a very lenghty and trying process."

While under the RTC, Foster's servicing portfolio ran off from $8.2 billion to $7.6 billion. However, the RTC exercised no on-premises control, preferring simply to look at monthly financial statements.

During the time, Foster Mortgage still was "breaking even despite no growth," note Kroll. In fact, the subsidiary also was helping bolster the parent thrift's financials.

Foster was sold as a servicing company--not a portfolio. Corbitt adds that marketing the employees, physical plant and portfolio as one entity was the RTC's idea. Baton Rouge-based United Companies Financial Corporation purchased Foster Mortgage, with $7.5 billion in servicing, for around $94 million.

United announced plans to build Foster into one of the top 15 mortgage servicing firms in the nation. Foster plans to purchase $2 billion in servicing this year, without relying on United Companies for capital or credit.

Success stories

As might be expected, companies that have successfully gone through the process and found new ownership generally are the most positive about the RTC system. Commonwealth United's Bibb's primary satisfaction was that 98 percent of the production group's 730 employees kept their jobs after the ownership change.

But it's not always that way. Some thrift subsidiaries are sold as packages of servicing, because that makes up most of their value as an asset.

In February, the RTC "terminated the lending operation" at ComFed Savings Bank in Lowell, Massachusetts, says Executive Vice President Raymond Lagace. Since it has no originations capability, the mortgage business now is being marketed to potential purchasers both as a separate company and a $3.6 billion servicing package, most of which fits agency guidelines.

Brokers selling mortgage firms come up with a list of potential bidders similar to what they would suggest on a non-RTC deal, says Hamilton, Carter, Smith's Cholewicki. "We're not looling for any special types of buyers," he adds, beyond wanting someone with the resources to close a sale.

Smith Barney's Yearwood notes that many buyers are from outside the mortgage business. This "provides much-needed capital" to the industry, while offering a company the means of entering mortgage banking. "It's an attractive way to purchase an ongoing concern," he adds. "A lot [of firms for sale] have extremely capable management," as well as low-cost servicing and a "viable loan origination operation," says Yearwood.

To illustrate that, the group pursuing CenTrust Mortgage are investors. And United Companies--which has purchased Foster Mortgage--has a $1 billion "B-paper" portfolio that they will trnasfer to Foster for servicing.

But some mortgage lenders say even a well-managed company has a chance of sparking a buyer's interest just in the servicing asset. Buyers may get rid of a thrift's origination system or consolidate it into the purchaser's ongoing business. Yet, being profitable helps a firm's prospects for staying in business as an originator, servicer--or both. Although the current price of servicing largely determines a mortgage company's value, buyers will look at the cost basis of those loans to see if the delivery system is consistently adding value, says one mortgage executive.

CenTrust Mortgage also had an "arms-length relationship with our parent," Gundersen notes. He found director's and officer's insurance to be the largest new expense for CenTrust after the thrift went into receivership.

Sale process

It took about a year and a half each for Foster and Commonwealth to obtain new ownership after their parent S&Ls were taken over by the government. Because "you can only hold that production operation together so long," Commonwealth executives agreed with the RTC to sell the delivery system first, in a separate deal from the servicing.

Since Commonwealth originations totaled about $2.5 billion annually, the RTC was eager to get out of any liability for potential risk management losses on the pipeline, say company officials.

Closing took place last July, about six months after signing a sales agreement with Ranieri. With offices from New Jersey to Oregon, Commonwealth offered "one of the best--if not the best--origination networks in the country," adds Cholewicki, who brokered the sale.

Cholewicki claims sales "go relatively smoothly" if buyers submit bids that closely match the standard RTC contract. Generally the time it takes to close reflects how much a winning bid varies from RTC-approved structures. "There's less flexibility than in a private transaction," Cholewicki notes. He explains that changes require approval from higher levels in the RTC, which takes time. Six months seems to be a realistic period to expect from the time a winning bid is named to signing a final sales agreement.

Some risk is taken on by the RTC in order to sell mortgage companies in the form of representations and waranties. Two-year indemnification for VA no-bids and a five-year window for spotting origination defects are offered. Participants agree that sales wouldn't go through without these assurances. Cholewicki adds that prices are "now firming" for RTC assets, although brokers note that government-owned product sells at a discount to other servicing.

Historic opportunities?

Some savvy investors are seeing opportunities. Some of them remember that firms paid 200 to 210 basis points for servicing in the mid-1980s. Companies such as Fireman's Fund Mortgage Corporation, Farmington Hills, Michigan; GMAC Mortgage Corporation, Elkins Park, Illinois; and Owens-Illinois jumped in the business then--only to see falling interest rates over the next few years cause their portfolios to run off due to refinancings. Mortgage firms today are selling at lower prices due to decreased value in servicing assets, leading some to wonder if opportunity is knocking.

Brokers package information on the companies or portfolios and solicit bids over a four- to six-week period, says Smith Barney's Yearwood. Parties involved in the transaction include the RTC, their advisers, Smith Barney or Hamilton, Carter, Smith and the brokerage firm marketing that asset. During the negotiating process, the mortgage companies take the role of simply supplying information about themselves.

Mortgage subsidiaries report varying amounts of input regarding which firm brokers them and who the final buyer is. Some lenders report that the RTC was somewhat receptive to input; however, Gundersen says CenTrust had "no input" in determining the final buyer. "The RTC is [simply] looking for best execution," he claims.

All mortgage subsidiaries note that no accounting gimmicks are used by brokers to make the firms look better. "You can't hide the facts," says Bibb. He adds that after a winning bid was submitted, the contract negotiation stage was "a long and laborious process." However, Bibb believes the RTC has refined the system since Commonwealth's sale last summer based on his observances of companies RTC has sold since then.

As RTC's Mahaney examines the single-family servicing portfolio that the agency has acquired, he says, "We're more than halfway through this thing." According to Mahaney, $80 billion in servicing rights have been sold, and he adds that new servicing portfolios now are being acquired more slowly than before.

Keeping employees happy

Communicating between management and employees during the "long, drawn-out process" is crucial, adds Bibb. He concentrated on "keeping the staff focused" on funding loans to "maintain a consistent level of business."

In addition to encouraging workers to perform at their normal standards, managers must also keep employees abreast of the progress of the sale. Foster's Kroll agrees that "keeping the employees informed" is essential. Foster Mortgage would inform workers when certain steps were taking place--such as talking with investment bankers, or the start of bidding. Foster also held weekly meetings, in addition to ad hoc gatherings, in which a manager would "call the troops together and update them," says Corbitt.

Commonwealth's sales manager, Phil Turkus, spent a lot of time on the road with regional managers, making sure they were up-to-date concerning the firm's sale.

CenTrust Mortgage also "really stepped up communications" with workers, Gundersen notes. Meetings held in the home office were videotaped and sent to branches. Written material also was sent to employees' homes.

And "Customer appreciation receptions" last spring assured key Realtors that the firm would stay in their market. "I don't know how many hands I shook," Gundersen says. But he recalls that 1,400 people showed up at just five of the Illinois meetings and remarks, "My hand was worn out." Finally, "comfort letters" were sent to investors, letting them know where matters stood for CenTrust.

Just rewards

For a mortgage company that has made it throught the RTC maze, survival is sweet. Long after CenTrust Bank's art collection is sold, George Gundersen will be putting families around the nation in homes.

Like other managers, Gundersen isn't anxious about new ownership, because his operating strategy has been proven profitable. But he isn't completely relaxed, either. "Everything is subject to change" once a new owner comes in, Gundersen admits.

More optimism is evident at Commonwealth, which has already closed its sale. Now a mortgage banking division within United Savings, Commonwealth's closing "was largely invisible to employees," Bibb says.

Some pleasant changes are apparent, though, as more offices and employees are being added. Bibb says that "1991 looks exceptional to us." In addition to the expansion, he cites "new and expanded contracts with Fannie and Freddie" and "a quite large warehouse" as positive developments. He also expects selling securities on Wall Street to be easier.

Profitable mortgage subsidiaries are finding themselves able to come out from the burden of their parent's receivership with a new lease on life. And participants say the RTC is getting better at the process. If practice makes perfect, the government is certain to become more adept at selling mortgages subsidiaries than it is at marketing Rubens masterpieces or mutton serving dishes.

Howard Schneider is a freelance writer, based in Ojai, California, spealizing in real estate issues.
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Title Annotation:new management for subsidiaries of thrift banks under receivership
Author:Schneider, Howard
Publication:Mortgage Banking
Article Type:Cover Story
Date:May 1, 1991
Previous Article:A new venture.
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