Downey Raises the Possibility of Seizure

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Downey Financial Corp. warned regulators could soon seize it, saying there is "substantial doubt" the company and its thrift will "continue as going concerns for a reasonable period of time."

The Newport Beach, Calif., mortgage lender, which posted its fifth straight quarterly loss last month, said in a regulatory filing late Monday that it faces pressing capital needs. On Sept. 5 it entered an agreement with the Office of Thrift Supervision to raise capital by yearend or devise an alternative strategy — namely, finding a buyer.

However, both buyers and investors have shied away from Downey. It has been on the hunt for one or the other since July, without success.

"I can't imagine anyone, at this point in this environment, buying them," Joe Garrett, a banking consultant with Garrett, Watts & Co. in Berkeley, Calif., said in an interview Tuesday. "There is a real fear factor for buyers and investors."

If that seems harsh, read Downey's Securities and Exchange Commission filing.

"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 yearend," according to the filing. Regulators could intervene, including "placing the bank into receivership."

If that happened, "it is highly likely that this will lead to a complete loss of all value of the holding company's ownership interest in the bank," the filing said.

Downey is the last remaining major player in option adjustable-rate mortgages. The option ARM graveyard already is populated by Wachovia Corp., which has agreed to sell itself to Wells Fargo & Co.; Countrywide Financial Corp., which sold itself to Bank of America Corp.; Washington Mutual Inc.'s banking operation, which was sold to JPMorgan Chase & Co.; and IndyMac Bancorp Inc., which was seized by regulators.

Downey, which had roughly $12.8 billion in assets at the end of last quarter, would be the third-largest institution to fail this year after. The two largest were also thrifts: Wamu on Sept. 25 and IndyMac on July 11

Downey's Tier 1 capital ratio was 7.48% at Sept. 30 — above the 7% minimum the OTS set for the company — but it continues to bleed money.

"Based on the bank's current and projected levels of capital, the bank anticipates that it will not be able to satisfy" the capital requirements without a cash infusion, the company said in the filing.

Investors fled Downey on Tuesday. Its shares, already down more than 90% on the year, plunged 69% Tuesday, to close at $.45.

"In terms of the stock, it looks like they have a problem they can't fix," Gary Gordon, an analyst at Portales Partners LLC, said in an interview Tuesday.

Downey would not discuss the filing for this story.

Last month the company said its third-quarter loss more than tripled from a year earlier, to $81.1 million, or $2.89 a share.

Downey has been hobbled by soaring default rates on option ARMs in California. As of Sept. 30 it held about $2 billion of bad home loans, or 15.66% of its assets, nearly double the level at the start of this year and five times the level of a year earlier.

The third-quarter credit-loss provision soared 60% from a year earlier, to $130 million, and its chargeoffs rose tenfold, to $97.6 million. In its filing Monday, Downey blamed "an increase in loss severity from the continuing decline in housing values that provide the underlying collateral for our loans."

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