Newport Beach-based Downey Savings and Loan Association’s seizure by regulators last month ended more than half a century in business.
The savings and loan prevailed through prior downturns by relying on conservative lending practices. But Downey’s undoing proved to be a recent move into adjustable-rate mortgages that ended up being too costly for borrowers and Downey itself.
On Nov. 21, the Federal Deposit Insurance Corp. handed over Downey’s deposits and branches to Minneapolis-based U.S. Bancorp.
Downey, which took its name from the Los Angeles County town were it was founded, was the largest thrift or bank based in Orange County, with assets of $12.8 billion and $9.7 billion in deposits.
It was the 21st bank or thrift taken over by regulators this year. No. 22 was Pomona-based PFF Bank & Trust, which also was shifted to U.S. Bancorp.
Shares of parent company Downey Financial Corp., which filed for bankruptcy protection last week, lost nearly all of their value during the past two years as the savings and loan wrestled with rising bad loans and higher costs from foreclosed homes.
Founded by Maurice “Mac” McAlister, 83, and the late Gerald H. McQuarrie, Downey got its start lending to soldiers returning from the Korean War and expanded to make loans for shopping centers and other commercial real estate projects.
Not Like Others
Unlike Brea-based Fremont General Corp., which filed for bankruptcy protection earlier this year, Downey didn’t make subprime loans to borrowers with poor credit.
McAlister, who owned 20% of Downey and kept a tight grip on it before retiring as chairman in July, insisted on high credit scores for borrowers and at least 20% down payments, according to a recent Forbes article.
He turned away appraisers and independent mortgage brokers he deemed unprincipled, according to Forbes.
Downey is believed to have gotten into adjustable-rate mortgages, which have low initial interest rates that later rise, as a way to compete with larger lenders, many of which lent to people with poor credit, little documentation and no down payments.
Some of the pressure to get into riskier loans came from Downey loan officers who were paid by commission and felt they couldn’t compete in a market being fueled by Wall Street’s hunger for loans sold as bonds.
At one point, about a third of Downey’s loan officers left for Maryland’s Chevy Chase Bank FSB.
The adjustable-rate loans also held appeal for Downey itself.
Under accounting rules, the thrift could count the full value of the loan even though minimal payments were being received.
Borrowers were attracted to the loans because of the low teaser rates. Many expected to refinance later. But when the housing bubble burst, falling home values and problems at mortgage lenders prevented many owners from doing that.
Ultimately Downey, which was at one point the fifth largest issuer of adjustable-rate loans, became overwhelmed with the loans.
Adjustable mortgages made up two-thirds of Downey’s loans, or $7 billion. In the end, Downey had an estimated $3 billion in bad loans.
Rivals Fall First
Larger rivals such as Calabasas-based Coun-trywide Financial Corp., which Bank of America Corp. has agreed to buy, already had been driven down by the loans, and many in the industry believed it was just a matter of time before Downey joined them.
Despite efforts to renegotiate terms with borrowers, the thrift fell short of having enough capital to cushion against its losses.
Analysts estimated Downey would have to raise $250 million to $300 million to meet the demand of the Office of Thrift Supervision.
The losses became especially strained with falling real estate prices that devalued Downey’s balance sheet and with the costs of maintaining and trying to sell the homes it foreclosed on.
Hopes of a revival were alive in September when Downey got a new chief executive, Charles Rinehart, and a possible shot at some of the government’s $700 billion bailout package.
But the government bypassed the struggling Downey in favor of what some called more viable financial institutions, including Westminster-based Saigon National Bank, which were seen as more likely candidates to use the money for loans instead of shoring up balance sheets.
Rinehart, former chief executive of H.F. Ahmanson & Co.’s Home Savings of America, which was sold to Seattle-based Washington Mutual Inc. along with its parent company in 1998, sold off some assets for cash.
After his efforts failed to raise enough money,despite selling off more than $100 million in real estate and putting its posh headquarters on the market,it was all over.
Other bidders reportedly were interested in taking over Downey and PFF, but regulators decided selling to U.S. Bancorp would be the least expensive route for the FDIC.
U.S. Bancorp will assume the first $1.6 billion in losses from the banks and will split anything beyond that with the FDIC.
In return, U.S. Bancorp gets a piece of the Western market it has wanted with Downey’s 145 branches in Arizona and California, including 34 in OC, and more than 2,200 employees.
McAlister, an elk hunter who lives in Bullhead City, Ariz., is believed to have seen his Downey stake,valued at about $300 million last year,dwindle to nothing.
