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The Mortgage Graveyard
Failed, closed and a c q u i r e d mortgage-related entities.

PFF Finished, Downey Dead

U.S. Bank acquired assets, deposit

November 24, 2008

By staff

The failure of two California-based thrifts will cost the government insurance funds more than $2 billion. Another institution will acquire the assets and deposits of both failed firms -- potentially creating a new No. 6 mortgage lender.

Downey Savings and Loan Association, F.A., and PFF Bank & Trust both failed on Friday, the Federal Deposit Insurance Corporation announced.

Downey, which saw residential production peak at $15 billion in 2004, warned earlier this month that it could be placed in receivership by bank regulators. Loan delinquency of at least 30 days was reported at 12.41 percent on Sept. 30, and the thrift had an $81 million third-quarter loss -- though that was a vast improvement from the $219 million second-quarter loss.

Downey had been operating under a consent order with the Office of Thrift Supervision to improve its capital position, while a cease-and-desist order was issued against the former subprime lender by the OTS in September. The three top executives exited in July.

In August, deposit withdrawals surged then subsided. Downey shut down its wholesale loan department and loan processing centers in October.

U.S. Bank, N.A., has acquired the banking operations of both failed institutions in a deal brokered by the FDIC. On Monday, 175 Downey branches and 38 PFF branches will reopen as branches of U.S. Bank -- which already has 353 California branches.

Downey had 2,260 employees as of June 30, while PFF had 760.

Minneapolis-based U.S. Bank will assume all of Downey's $9.7 billion in deposits and PFF's $2.4 billion in deposits.

All of Newport Beach, Calif.-based Downey's $12.8 billion in assets as of Sept. 30 -- including $11.0 billion in residential loans held-for-investment -- will be purchased by U.S. Bank. In addition, all of Pomona, Calif.-based PFF's $3.7 billion in assets as of Sept. 30, including $3.5 billion in net loans and leases as of June 30, will be acquired.

The FDIC has agreed to assume losses if U.S. Bank loses more than $1.6 billion on asset pools.

"The loss-sharing arrangement is expected to maximize returns on the assets covered by keeping them in the private sector," the FDIC state. "The agreement also is expected to minimize disruptions for loan customers as they will maintain a banking relationship."

U.S. Bank agreed to implement a loan modification program similar to the FDIC-managed program in place at IndyMac Federal Bank.

The FDIC estimated that the cost to the deposit insurance fund will be $1.4 billion for Downey and $0.7 billion for PFF.

Though Downey's quarterly mortgage production has declined to less than $1 billion recently, it could help U.S. Bank -- which reported $7.6 billion in third-quarter fundings -- surpass SunTrust Banks Inc., which reported $8.1 billion, and PHH Mortgage, which funded $7.9 billion. Moving ahead of those two entities would make U.S. Bancorp the sixth biggest U.S. residential lender, according to a third-quarter ranking.

Including Friday's failure of The Community Bank, 22 FDIC-insured institutions have failed this year.

Downey Outlook Bleak
Downey Financial Corp. warned that it might become No. 20.

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