Downey Financial Corp. said Tuesday that its profit fell 13.5% in the first quarter as the bank wrestled with rising interest rates and a slowing housing market.
Newport Beach-based Downey said its profit in the quarter was $44.8 million, down from $51.7 million a year ago. The bank’s interest income jumped 35% to $243 million.
The bank said it made fewer home loans in the period, increased its funds set aside for loan losses, lower income from loan servicing and higher administrative expenses.
Downey is a pioneer in the market for adjustable rate mortgages, which it’s been making since the 1980s.
“While our historic credit experience has been good, these loans do present greater credit risk in sustained periods of rising interest rates, as borrowers may see their loan payments increase significantly when their payments recast to fully-amortizing payments,” said Downey Chief Executive Daniel D. Rosenthal, in a statement. “In addition, credit risk increases if home values decline.”
Rosenthal said the company has been increasing the start rate on its adjustable rate mortgages. He said the move would help offset “an increased level of unsold homes and relatively flat home prices on a sequential month basis.”
On the plus side, Downey said it was seeing higher income from loan prepayment fees and investments.
Shares of Downey were down slightly to $68.15 Tuesday.
