Downey Financial Looks Poised to Fail

November 12, 2008 No Comments »

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Since the beginning of the year, 19 banks have failed, and it’s almost a certainty that figure will rise before the year is up.

The question remains whether mortgage lender Downey Financial will be on that infamous failed bank list, though we may find out sooner rather than later.

Late Monday, the Newport Beach, CA-based bank warned it could be placed in receivership for failing to satisfy minimum capital requirements set forth by its regulator.

While it barely met minimum capital ratios at the end of the third quarter, doing so by year-end seems increasingly unlikely, putting the bank at serious risk unless it is able to raise much needed capital.

“In the current economic environment, there is a significant risk that the Bank will not be able to raise sufficient additional capital to ensure compliance with the capital requirements of the Bank Consent Order by year-end,” the bank said in the filing.

“The circumstances described above, raise substantial doubt concerning the ability of the Holding Company and the Bank to continue as going concerns for a reasonable period of time.”

As part of that consent order, Downey was also told to come up with a capital augmentation plan, an asset reduction plan, and refrain from resuming option arm or stated income loan programs.

In mid-October, the bank was forced to close its wholesale lending department, which historically provided about 80 percent of its single-family loan originations, and reduced its retail presence as well.

Shares of Downey tanked Tuesday, falling nearly a dollar to a mere 46 cents, before slipping slightly further Wednesday.

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