Newport Beach-based Downey Financial Corp. saw its assets grow and mortgage activity pick up in August, reversing a several month decline that began last spring, the savings and loan operator reported Friday.
Downey also took the unusual step of responding to media reports and questions about its increase in option adjustable rate mortgage loans, or also known as option ARMs.
“We haven’t typically done this but we decided to do this since there were a lot of questions and concerns,” said Thomas Prince, Downey’s chief financial officer.
Downey is seeing investor concerns about negative amortization on its option ARMs, where borrowers pick which type of payment to make, including a credit card-style minimum payment. Interest beyond the minimum payment gets tacked on to the loan.
An estimated 88% of Downey’s mortgages are option ARMs, the thrift said Friday. Prince said these loans at origination had a weighted loan-to-value ratio of 69%.
The maximum home loan Downey will make is 90% of the property’s appraised value, he said. And any loan above 80% of appraised value requires private mortgage insurance, according to Prince.
Home values for mortgages on Downey’s books would have to fall roughly 24% before the thrift would begin to worry, Prince said.
“We don’t see that happening at this time,” he said.
Downey said $12.8 billion of its mortgages were subject to negative amortization, of which $89 million, or 0.7%, represented the negative amortization included in the loan balance.
The thrift counted $16.5 billion in assets as of Aug. 31, a reversal of a trend of shrinking assets reported since April when it had $16.9 billion.
Downey reported $16.4 billion in assets in July and just short of $16.8 billion in May.
The thrift did about $1.3 billion in mortgages in August, up from roughly $1.2 billion in July, but still below the nearly $1.4 billion in June. It sold about $656.4 million in mortgages as bonds to Wall Street investors in the month, down from $817 million in July and $1 billion in June.
