Financial Corp. of America, which is facing potentially heavy deposit outflows at its savings and loan subsidiary, raised $1 billion in cash and got a commitment for $1 billion more under the terms of an unusual agreement reached yesterday with the Federal Home Loan Mortgage Corp.
The transaction is the largest of its kind ever arranged by Freddie Mac and represents the first time the agency has provided an S&L with cash immediately upon reaching such an agreement.
In addition, officials of the Federal National Mortgage Association (Fannie Mae) said Financial Corp. will complete a swap of $1 billion in home loans for a like amount of mortgage-backed securities from that agency on Tuesday. Financial Corp. will be able to use these mortgage-backed securities more easily and efficiently than it could use individual home loans to raise cash, either by selling them or using them as collateral for loans.
Analysts said the agreements give FCA cash quickly, which not only provides a cushion to meet deposit outflows at its American Savings and Loan Association -- the largest S&L in the nation -- but also gives depositors increased confidence in the company. The agreements also make certain portions of the company's portfolio easier to convert to cash, if needed.
The directors of Freddie Mac, who approved their unusual agreement with the company, are also the directors of the Federal Home Loan Bank Board, which governs S&Ls. The bank board has worked closely with Financial Corp. and played a key role in replacing its controversial chief executive. Charles W. Knapp, with longtime industry executive William J. Popejoy, analysts said. Popejoy is a former president of Freddie Mac.
Meanwhile, in Los Angeles, Financial Corp. declared its regular quarterly dividend of 17 cents per share on its common stock, 15 cents per share on its 6 percent serial preferred stock and $1.80 per share on its floating-rate preferred Series A stock. Analysts said maintaining the quarterly dividend in the midst of concerns about investor and depositor confidence was "cosmetic," since it costs the company only about $12 million, not considered to be a significant sum given the company's $32.7 billion in assets.
Analysts said cutting the dividend might have sent further shock waves through an already-nervous group of depositors and investors. FCA stock closed down 1/4 to 5 1/8 yesterday, and was the third-most-active stock traded on the New York Stock Exchange.
Since the Securities and Exchange Commission disputed accounting techniques used by Financial Corp. and forced the company to change its second-quarter profit of $31.1 million into a $107.5 million loss, there has been increasing speculation that institutions with large deposits were transferring their funds to other banks and S&Ls. In July, Financial Corp. had a net deposit loss of $582 million
FCA was the nation's fastest growing savings and loan until Federal Home Loan Bank Board concerns about the pace of its growth were disclosed. During the first half of the year, the company grew from $22.7 billion in assets to $32.7 billion, a change greater than the assets of all but four other S&Ls.
The agreement between FCA and Freddie Mac involves a swap at a future date of $2 billion in Financial Corp. mortgages for a like amount of "PCs," or participation certificates, issued by Freddie Mac. Once it receives them, Financial Corp. can use these PCs as collateral for loans, or sell them to raise cash more easily than it could convert individual mortgages into cash.
The unprecedented aspect of the arrangement is that it provides Financial Corp. with $1 billion in cash almost immediately and with another $1 billion in the near future, instead of making the company wait several months until Freddie Mac has done the preliminary work.
This was accomplished through a repurchase agreement, or "repo," in which Financial Corp. takes the $2 billion in cash from Freddie Mac now and simultaneously agrees to purchase the PCs from Freddie Mac at a later time.
This technique is used frequently between S&Ls, since it benefits both the institution that needs cash and its counterpart, which earns a fee for taking part in the transaction. Yesterday was the first time Freddie Mac has ever entered into a repurchase agreement in connection with a swap of mortgage loans for PCs.
Freddie Mac is a publicly chartered corporation whose stock is owned by S&Ls across the nation and is held in trust by the Federal Home Loan Bank System. Fannie Mae, originally established as a government agency, is now stockholder-owned and privately managed, but it also retains federal ties.