Shares of Newport Beach-based thrift operator Downey Financial Corp. rose as much as 10% on Tuesday, a day after reporting a $248 million first-quarter loss.
Downey’s stock had settled by the close of New York trading, ending up about 1% with a market value of nearly $400 million.
Despite the big quarterly loss, Arlington, Va.-based investment bank Friedman, Billings, Ramsey & Co. upgraded Downey from “underperform” to “market perform.”
Some investors could be betting the worst may be over for the mortgage lender as it attempts to maneuver itself to better footing.
Option adjustable-rate loans that reset at higher rates now make up 65% of Downey’s $13 billion portfolio, down from 81% a year earlier.
Downey said it is doing what it can to avoid taking homes from borrowers who cannot pay and has renegotiated terms with many.
The company also is working to unload foreclosed homes as quickly as possible.
“In the current quarter, we sold 67 homes, approximately 61% of which occurred in March,” President Rick McGill said. “At the end of the current quarter, about 23% of our inventory of unsold homes was either in escrow to be sold or in negotiation to be sold.”
Downey has also tightened credit by requiring better credit histories and more invested cash by borrowers.
The company’s board said it would suspend dividend payments to preserve cash.
“Although it was a difficult decision, our board of directors believes the suspension of future dividends is in Downey’s best interest,” said Maurice McAlister, Downey’s chairman, cofounder and 20% shareholder.
Downey’s first-quarter loss was affected by a $236 million increase in loan loss provisions, which stood at about $1 million a year ago.
It also had a $111 million charge due to tax accounting changes.
Net interest income fell $41 million from a year earlier, or 33%, to $89 million.
The company also said it paid $23 million in expenses to handle houses it took back in foreclosure.
