Mortgage woes hit Downey Savings & Loan
When banks were failing in the 1980s, federal regulators turned to Downey Savings & Loan, a quietly successful, conservative Orange County institution, for help.
Butterfield Savings & Loan of Costa Mesa was one of hundreds of thrifts that fell apart after growing too fast and playing too loose in a newly deregulated market. When it crashed, it crashed hard. And the Federal Home Loan Bank Board appointed Downey executives to run Butterfield, hoping that it would help calm panicking customers and investors.
More than two decades later, Downey may now be the one that needs help.
Downey's portfolio is laden with the kinds of risky mortgage loans that helped trigger the collapse of Countrywide Financial Corp. of Calabasas and IndyMac Bank of Pasadena. Investors have turned on the bank, sending shares of parent company Downey Financial Corp. down 91% this year. The stock rose 21 cents Wednesday to $2.73.
When the Newport Beach-based company reports its second-quarter earnings, expected today, analysts will be watching closely for clues to Downey's ability to survive the mortgage banking meltdown.
"If the earnings are even more of a disaster than what we've seen so far this year, there will be a big question mark over Downey's future," said Bert Ely, a financial institutions consultant in Virginia who follows Downey.
The dollar value of so-called nonperforming assets, which are mainly loans that are going unpaid and are a key measure of potential trouble, has grown dramatically to more than 14% of Downey's assets, from less than 2% a year ago. Most banks typically have fewer than 1% of their assets tied up in bad loans.
Downey executives and board members did not return repeated calls for comment.
Downey was founded in 1957 by a mortgage banker, Gerald H. McQuarrie, and a home builder, Maurice McAlister, with the idea of providing loans quickly to businesses and home buyers who had good credit. McQuarrie died in 1992, but McAlister remains as the chairman of the board and holds a 20% stake in the company.
The company went public in 1971 and maintained its core business of offering loans and keeping most of them, even as banks such as Countrywide and IndyMac expanded exponentially by bundling loans into securities and selling them to investors.
Eventually Downey grew to an institution with $12.8 billion in assets and 174 branches, all but five of them in California.
