Downey Financial Defaults Keep on Rising

March 17, 2008 No Comments »

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Downey Financial released select financial data for the 13 months ended February 29, 2008, revealing a steep rise in bad loans as non-performing assets topped 10 percent.

The Orange County, CA-based savings and loan said NPAs as a percentage of total assets climbed to 10.93 percent, up from 9.14 percent a month earlier and more than ten times the 0.88 percent rate a year earlier.

In fact, NPAs have risen sequentially for the past 13 months, according to the data released today.

Of the NPAs, which are generally defined as severely delinquent (90+ days in arrears), 4.30 percent were made up of performing troubled debt restructurings.

These so-called TDRs represent Downey’s borrower retention program, in which mortgage rates and loan programs were modified to help keep borrowers current.

Downey began performing TDRs in July, with just 0.04 percent of assets modified, but that rate quickly rose to over one percent in October and tripled in December.

Beginning in the third quarter, the mortgage lender contacted borrowers whose loans were current and gave them the opportunity to modify their existing loans into 5-year or 1-year adjustable-rate mortgages that didn’t allow negative amortization after it became clear that most borrowers who held option-arms were likely making only the minimum payment.

This wasn’t an issue when home prices marched higher because appreciation outpaced negative amortization, but as prices slumped, many borrowers found their minimum mortgage payment option disappear, creating a dilemma for the bank.

Initially, Downey didn’t consider the loan modifications TDRs, but their independent accounting firm KPMG noted that they should be as interest rates were lowered without formal underwriting that validated such a change.

Downey said these loans will be removed from both non-accrual status and non-performing assets after six consecutive months of successful payment history and noted that as of February 29, 92 percent of these types of modified loans had made all payments due.

Shares of Downey were off 7 cents, or 0.37%, to $19.07, far below their 52-week high of $74.85.

(photo: dimi3)

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