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Downey Outlook Bleak

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Mortgage Daily

                                                 November 12, 2008

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

The Newport Beach, Calif.-based firm is operating under a consent order with the Office of Thrift Supervision to improve its capital position, a filing Monday with the Securities and Exchange Commission said. In September, OTS issued a cease-and-desist order against the former subprime lender.

Downey said it lacks a “well capitalized” standing “despite exceeding all ‘well capitalized’ regulatory ratios.”

Loan delinquency of at least 30 days was reported at 12.41 percent on Sept. 30, jumping from 11.21 percent on June 30.

During July, Frederic R. McGill, Downey’s president, was terminated. Later that month, Chief Executive Officer Daniel D. Rosenthal and Chairman Maurice L. McAlister stepped down. In August, deposit withdrawals surged then subsided.

Charles R. Rinehart was named CEO of Downey on Sept. 24.

Downey shut down its wholesale loan department and loan processing centers last month. Retail production was contracted out.

The thrift had an $81 million third-quarter loss — a vast improvement from the $219 million second-quarter loss but worse than the $23 million loss a year earlier.

The losses have pounded stockholder equity, which has plummeted by half over the past 12 months to $772 million on Sept. 30. OTS is requiring a equity injection.

“Notwithstanding that portion of the bank consent order requiring the raising of new equity and a capital infusion by no later than Dec. 31, 2008, bank regulators could take enforcement action before that date, which could include placing the bank into receivership.”

The Federal Deposit Insurance Corporation has been named receiver for 19 failed banks so far this year. Downey’s failure would be the 20th closing of a federally insured institution.

A seizure of Downey would impact $216 million in loan commitments.

“The circumstances described above, raise substantial doubt concerning the ability of the holding company and the bank to continue as going concerns for a reasonable period of time,” Downey stated.

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