Downey Gets Cease-and-Desist from OTS

Troubles are continuing to mount at Newport Beach, Calif.-baed Downey Financial Corp. (DSL), with the Office of Thrift Supervision issuing a cease-and-desist order that represents regulators’ latest attempt to put the screws to the troubled option ARM specialist. A press release put out by the bank Friday didn’t refer to the order, but a series of filings with the Securities and Exchange Commission included the action by regulators, who had deemed that Downey had engaged in “unsafe and unsound practices.” For its part, Downey said the order “formalized certain measures previously announced by the company to enhance the bank’s financial strength,” and sought to reassure potentially nervous investors. “Our customers can rest assured that the orders do not restrict us from meeting their banking needs and providing the services and customer care they have come to expect,” said Michael Bozarth, Downey’s chairman. “Downey continues to serve its customers with its full range of lending and retail banking services.” Regulators are requiring Downey to meet and maintain a minimum tier one core capital ratio of 7 percent, and a minimum total risk-based capital ratio of 14 percent at each quarter end — a move sources tell HW is similar to actions being taken by the OTS on fellow option ARM heavy BankUnited Financial Corp. (BKUNA). Like the Florida-based bank, as well, Downey has seen its regulatory capital status downgraded to adequately capitalized; the change in capital status limits Downey’s use of brokered deposits. Regulators are also requiring the bank to raise fresh capital, and on Friday Downey said it had raised roughly $176 million, with a large chunk of that money coming from the sale of non-core real estate assets to a third party for cash proceeds of $110 million. Nonetheless, capital raised thus far is less than half of what regulators are requiring, suggesting more asset sales or other capital raising efforts are in the offing. Total non-performing assets at Downey crossed the $2 billion mark in July; more than $1.5 billion of this total was in the form of traditional non-performing assets. The rest was comprised of so-called “troubled debt restructuring” efforts by the bank to put at-risk option ARM borrowers into more traditional loans. Despite a huge surge in most financials Monday on the heels of a government bail-out for ailing mortgage giants Fannie Mae (FNM) and Freddie Mac (FRE), shares in Downey tanked and were at $2.37, off 23.55 percent, when this story was published. Disclosure: The author was long FRE and held no other relevant positions when this story was published; indirect holdings may exist via mutual fund investments, as well. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.