Executives at the failed savings and loan of Newport Beach-based Downey Financial Corp. ignored government warnings about risky loans, ultimately leading to the thrift’s November failure, according to a report Tuesday.
The Treasury Department’s Office of Inspector General said Downey’s management was unresponsive to recommendations from the Office of Thrift Supervision about risky mortgages.
“The lack of quick response by Downey management and its unwillingness to adhere to OTS recommendations contributed to Downey’s lack of an adequate risk-monitoring system and ultimately, its failure,” the report said.
Regulators also shared blame for Downey’s collapse, according to the report.
“OTS should have been more forceful, at least by 2005, to limit such concentrations” of risky mortgages, the report said.
Regulators didn’t follow outlined enforcement actions in dealing with Downey, according to the report.
Downey, which had been in business for more than half a century, failed under the weight of adjustable-rate mortgages that offered borrowers initially low interest rates before resetting to higher, unaffordable levels.
Regulators seized the savings and loan on Nov. 21, with the Federal Deposit Insurance Corp. handing 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 at the time of its failure.
Parent company Downey Financial filed for bankruptcy protection soon after its thrift was taken over.
At the end of 2005, more than 90% of Downey’s home loans were made up of adjustable rate mortgages that let borrowers make credit card-style minimum payments. The result was loans that grew instead of being paid off.
“In the end, Downey could not recover from the massive losses it sustained on its risky nontraditional loan portfolio,” the report said.
Downey’s failure is estimated to have cost the government’s deposit insurance fund $1.4 billion.
