Babette Heimbuch joined FirstFed Financial Corp. more than 25 years ago, just about the time the thrift made its first option adjustable-rate mortgage loan.

She was there as FirstFed grew into one of the nation's largest so-called option ARM lenders. And she is there today as chief executive as FirstFed is the last one standing among all the big lenders of those risky loans.

Since souring option ARMs have taken down a number of big lenders, the big question looms: Will FirstFed, a savings and loan founded in Santa Monica on the eve of the Great Depression, be next?

"We'd be fools not to be nervous," said Heimbuch, a thin-framed woman with a shock of orange hair. "But all we can do now is work really hard to fix the problems that we have."

With 38 branches across Los Angeles and assets of $6.8 billion, FirstFed is L.A.'s fifth largest depository institution. Much of its growth, however, has come on the back of the variable-rate loans that have been defaulting in large numbers in the past two years.

FirstFed, the parent of First Federal Bank of California, has endured nearly $300 million in losses in just the past two quarters while its loan-loss provision has ballooned to more than $300 million. Nonperforming assets now stand in excess of 8 percent of total assets even half that amount would be considered high.

In January, regulators placed the thrift under a cease-and-desist order over concerns that its capital supply was rapidly depleting. Even its auditor expressed doubt about its ability to survive.

Yet the institution is still around, and executives, who admit that the work can be draining, said they expect it to stay that way.

"The risk in this portfolio was not Armageddon," said James Giraldin, FirstFed's chief operating officer. "It was pain and suffering, but not Armageddon."

The company has already taken difficult and sometimes drastic steps to stay afloat.

Management instituted a massive and, to date, successful loan modification program beginning in 2007, well before most other lenders saw the need. The company halted its lending and reduced staff levels by nearly one-quarter through layoffs and attrition. Top executives took a 10 percent pay cut.

The company also up and moved from its longtime Santa Monica headquarters to a decidedly less expensive building a stone's throw from the Loyola Marymount University campus.

Option ARMs played a major role in precipitating many of the largest casualties of the housing bust think IndyMac Bank, Downey Savings & Loan, Washington Mutual, BankUnited, Countrywide, Wachovia and FirstFed executives hope their efforts can help them become the one option ARM lender to avoid that fate.


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