FreeDIYkits Loan Modification Blog

By PETER LATTMAN And RUTH SIMON

A group of billionaires, hedge-fund managers and ex-Goldman Sachs executives are building a banking empire in California—with assistance from Uncle Sam.

Exactly a year ago these investors acquired the assets of collapsed mortgage lender IndyMac Bank from the federal government for about $1.5 billion and renamed it OneWest Bank. Earlier this month, OneWest purchased First Federal Bank of California, a failed Los Angeles-based lender.

With the purchase, Pasadena, Calif.-based OneWest more than doubled its branches to 72 and increased its total assets by a third to $24 billion, making it the largest bank based in Southern California.

The OneWest ownership roster reads like an excerpt of the Forbes 400. It includes J.C. Flowers & Co., an investment firm run by former Goldman Sachs Group Inc. banker J. Christopher Flowers; Paulson & Co., the large hedge fund; MSD Capital, which invests the fortune of computer mogul Michael Dell; and a fund controlled by famed speculator George Soros.

How successful OneWest’s owners are with the venture—both financially and in the public eye—will influence whether the government welcomes more private capital into the banking system.

Federal regulators, struggling with a rash of failures, can save money by lining up a ready buyer when a bank fails. But the Federal Deposit Insurance Corp. has been wary of private-equity investors, given their reputation for loading companies with debt and selling businesses quickly.

Of the 140 banks closed by the government this year, private investors have acquired only two outright—IndyMac and Florida’s BankUnited. Private equity investors argue that they should play a bigger role, as their funds’ billions in unspent capital could bolster the banking system.

Part of the test will be how well OneWest works with financially troubled homeowners, especially under the Obama administration’s loan-modification programs.

OneWest is already generating hefty profits. For the six months ended Sept. 30th, it posted net operating income of about $700 million, according to filings with the FDIC. In 2007 IndyMac, saddled by troubled mortgages, posted a $614 million loss.

During the FDIC’s roughly eight-month control of IndyMac before selling it, the agency cleansed the bank of some of its bad loans through asset sales and write-downs, shrinking it by about 27%, according to filings. It also reduced the bank’s headcount by about 45%.

The FDIC also agreed to share in losses with the ownership group in both the IndyMac and First Federal deals.

OneWest’s improved performance allowed it to bid aggressively for First Federal. The owners didn’t invest additional money to acquire the bank’s assets; rather, the money came from cash on OneWest’s balance sheet.

OneWest paid $401 million, or a 6.6% premium, for First Federal’s assets, according to FDIC documents. That makes it among the first FDIC-arranged deals in which a premium was paid for a failed bank’s assets—many are sold at a discount to their assets.

An FDIC spokesman says the agency doesn’t comment on open and operating institutions.

Mr. Mnuchin, 47 years old, says the bank wants to grow to between 100 to 150 branches. He says the owners enjoy owning the bank privately because they don’t have to focus on short-term quarterly results, but acknowledges that cashing out through a sale or initial public offering is possible down the road.

One area of focus is loan modifications. When the FDIC sold IndyMac to OneWest, the new owners pledged to continue the agency’s loan-modification program for which IndyMac had served as a testing ground.

Since it took over the IndyMac portfolio, OneWest has reworked nearly 13,000 troubled loans under the FDIC program. Through November, it had also begun trial modifications, the first step toward reworking loans under an Obama administration program, for 19,623 borrowers, or 18% of its borrowers estimated by the government to be eligible for the program.

FDIC Chairwoman Sheila Bair has taken a personal interest in OneWest. In July the FDIC hosted a number of private-equity investors to discuss bank investing. During the meeting, Ms. Bair approached Mr. Mnuchin and asked him how the modifications were progressing, according to people familiar with the exchange.

The bank has come under criticism for its loan modification practices. In a decision issued Nov. 19, a New York state court judge barred a foreclosure action and ordered the cancellation of a borrower’s loan because of OneWest’s conduct in the case.

Judge Jeffrey Spinner called OneWest’s actions “harsh, repugnant, shocking and repulsive” and said that it was “made clear to the Court that plaintiff had no good faith intention whatsoever of resolving this matter in any manner other than [foreclosure].” In addition, Judge Skinner questioned the bank’s estimate of the amount owed by the borrower.

Mr. Mnuchin says OneWest disagrees with the judge’s ruling and is appealing. “In the case of that loan, we do not own it but service it on behalf of a third-party investor.”

“We’re in a difficult economic environment and very sympathetic to the problems many homeowners face, but under the government’s program there’s not a solution in every case,” said Mr. Mnuchin, a 17-year Goldman Sachs veteran. As a large servicer of loans held by other investors, OneWest can be bound by underlying servicing agreements that sometimes prohibit loan modifications.

Mr. Mnuchin has real estate issues of a different sort. He’s moved to California, and a broker is showing his Manhattan duplex apartment at 740 Park Avenue, one of New York’s most prestigious addresses. It’s listed at $37.5 million.

Out in Los Angeles, Mr. Mnuchin has initiated the creation of the not-yet-announced OneWest Foundation, which will be seeded with $10 million to support neighborhood activities. And on Dec. 18, just as First Federal branches reopened as OneWest locations, Mr. Mnuchin attended a Christmas toy drive at a youth center with Governor Arnold Schwarzenegger.

His new home also allows Mr. Mnuchin to enjoy the fruits of another investment: Dune Entertainment, an affiliate of his New York-based investment fund, Dune Capital Management, which he still co-heads. Dune has a film financing deal with Fox Filmed Entertainment, a unit of News Corp., which owns this newspaper.

He recently attended the Hollywood premiere of “Avatar,” the science-fiction thriller in which Dune has a stake.

“I do not normally go to movie premieres,” said Mr. Mnuchin. “But given our investment, I went to ‘Avatar.’ It was spectacular.”

Write to Peter Lattman at peter.lattman@wsj.com and Ruth Simon at ruth.simon@wsj.com