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.
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.
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...