City bank endures bad-loan crewcut

The Baltimore Sun

If there's one thing we know about the mortgage crisis, it's that it keeps turning policymakers and bankers into liars.

In June, Treasury Secretary Henry M. Paulson Jr. said mortgage problems "will not affect the economy overall." Merrill Lynch boss E. Stanley O'Neal said the mortgage mess was "reasonably well contained" the same month.

Paulson's now trying to assemble a huge mortgage bailout fund. Merrill Lynch just announced one of the biggest Wall Street losses ever, which was caused largely by mortgage time bombs and was five times as big as O'Neal predicted three weeks ago.

So don't blame First Mariner Bancorp shareholders if they look squinty-eyed at CEO Edwin F. Hale Sr. when he says the banking company will "continue to work through the current challenges and position ourselves for improving performance in 2008."

Despite signs of progress, it's far from clear that Hale won't have to eat crow, too. First Mariner has identified its own toxic mortgages and started getting rid of them, but the cleanup isn't done and another spill isn't out of the question.

At stake are millions in stock value, the third-biggest Maryland-based banking company and the power base for Hale's influence over Canton's revival, the Baltimore Area Convention and Visitors Association and the push for a new sports arena.

Shareholders didn't buy First Mariner because they wanted to own a bunch of houses in Northern Virginia, but that's what they got. The bank has already repossessed dozens of homes backing up loans of $22 million, officials told me, and another $9 million or so are heading toward foreclosure.

All the mortgages were bought by First Mariner's star-crossed office in Fairfax, Va., and resold to suckers in New York.

They were "alternative-A" loans, not as sound as prime but supposedly better than subprime. But Bear Stearns, avid buyer of dodgy mortgages across the country, wasn't a complete sucker: It made First Mariner promise to buy back the paper if homeowners missed payments in the first three months of the mortgage.

Incredibly, about 1 in 10 homeowners borrowing through the Fairfax office last year did just that. To date the bank has had to swallow $42 million in mortgages it once thought were sent to New York forever, officials said last week, after disclosing yet another quarterly loss.

Hale warns darkly of payback for possible fraud by mortgage brokers or homeowners. "If we can get a measure of revenge and money back, you can be assured that we're pursuing it very aggressively," he said in an interview.

Revenge is probably just as important as money for Hale, who once balked at giving campaign money to Baltimore County Executive James T. Smith Jr. because he presided as a judge in Hale's divorce case.

In any case the money is unlikely to amount to more than a few million. More important is how much of a soaking First Mariner will take in its role as reluctant landlord and whether new, unidentified problems will arise.

All or almost all the repurchases from Bear Stearns are done, bank officials say. The last notes from the Fairfax office got sold earlier this year, and the three-month window for borrowers to miss payments and Bear Stearns to FedEx loans back to Baltimore has pretty much closed.

The near-term question is how bad a haircut First Mariner will take on the soured loans it already had to repurchase.

Company officials say 57 percent are on homes in Northern Virginia, where the market is sinking. Others are in Massachusetts, Michigan, North Carolina and other places, with no state accounting for more than 6 percent of the total.

The bank has already written off $9 million of the $42 million Fairfax portfolio, and it's probably nowhere near finished. Worst case, it'll have to write off another $13 million - taking about a 50 percent total crewcut, said Matthew Schultheis, who follows the company for Ferris, Baker Watts. That'll mean plenty more earnings pain to come.

But even if that happens, Schultheis thinks First Mariner will recover. Only after an additional $13 million in losses on top of his worst case would regulators start to move in, he says, "and that strikes us as extremely unlikely." He thinks losses will be limited and rates the stock a speculative "buy."

"I'm getting beat up" on the rating, he says. "It's hard for me to say when it's going to resolve itself, but I think when it does, shareholders who buy at these levels will be rewarded. But it's going to take stomach."

But what about the rest of the portfolio? The bank has another $800 million in loans on the books, including maybe $100 million in second mortgages and home-equity lines of credit.

Almost all are in Maryland, where First Mariner knows the turf and dealt with borrowers firsthand, unlike in Virginia. Hale's competitors who stayed close to home haven't been hurt as badly by mortgage trauma, and First Mariner has had to buy back hardly any Maryland-originated first mortgages, officials said.

But the housing market may not have run out of surprises. First Mariner also has a few problem commercial loans. Its portfolio would be challenged by a Maryland downturn, which looks increasingly likely.

Hale thinks federal spending, a thriving medical industry and incoming defense jobs will keep the state above water.

"Nothing is bulletproof," he said in an interview. "However, I think that we stand a better chance of getting through this than most other economies."

If he's wrong, First Mariner stock, which has fallen from $18 to $8, is still too expensive.

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