A federal thrift regulator bungled its oversight of Downey Savings & Loan, allowing the Newport Beach thrift to pile on billions of dollars in high-risk mortgages and eventually collapse, according to a government report.
The regulators from the beleaguered Office of Thrift Supervision also botched their oversight of Pomona-based PFF Bank & Trust, which collapsed along with Downey last fall, according to reports issued this week by the U.S. Treasury Department's inspector general.
The Obama administration proposed Wednesday that the OTS, which has long been criticized as weak and ineffectual, be abolished. As part of his overhaul of financial regulation, Obama recommended that savings and loans, which have been principally mortgage lenders, answer to the same regulators as full-service commercial banks that specialize in a range of loans to businesses as well as consumers.
"We've seen that structural deficiencies allow some companies to shop for the regulator of their choice," Obama said. "And that's why, as part of these reforms, we will dismantle the Office of Thrift Supervision and close loopholes that have allowed important institutions to cherry-pick among banking rules."
This week's reports are only the latest critical looks at failed thrifts supervised by the OTS. After the Federal Deposit Insurance Corp. spent $10.7 billion to back deposits at Pasadena's failed IndyMac Bank, the inspector general said in February that OTS examiners ignored repeated warning signs of trouble with exotic mortgages and allowed the thrift to backdate a cash infusion to make it seem stronger.
The Downey failure attracted special attention because it was a major purveyor of one of the riskiest types of home loans: the pay-option adjustable-rate mortgage, which allowed borrowers to pay so little that their loan balances went up instead of down. These option ARMs, often written without checking borrowers' earnings or assets, emerged as a major contributor to the nation's foreclosure crisis.
The inspector general said Downey's problems stemmed not only from issuing option ARM loans and subprime mortgages to people with bad credit but also from having inadequate systems to monitor risk and a high turnover among managers. Downey's executives frequently failed to respond to recommendations from the OTS, the report said.
