Go to the Web site of Newport Beach-based savings and loan operator Downey Financial Corp. and you’ll see a banner ad for a time-tested lure for deposits: a free set of “French white” CorningWare.
Wait a second, and the banner ad changes to one that’s more telling of the issues bearing down on Downey. “Bank-Owned Properties at Bargain Prices,” the next ad reads.
Click on it and you can search some 650 homes Downey has taken ownership of after borrowers weren’t able to pay their mortgages.
Most,about 560,are in California. Orange County has about 25. Riverside and San Bernardino counties have about 100 combined. The majority of the houses have asking prices of less than $500,000.
The mortgage downturn that started in 2007 has turned Downey into a caretaker and seller of foreclosed homes. It’s the flipside of the housing boom that just a couple of years ago fueled Downey, which specialized in mortgages with initial low rates that rose after a few years.
Downey is one of California’s largest thrifts with $13 billion in assets. The company had a recent market value of $60 million, down from $2 billion in 2006.
Beyond the Web link to Downey’s foreclosed homes, little is known of the company’s strategy. The thrift operator doesn’t hold conference calls and seldom gives interviews, including for this story.
Chairman Maurice L. McAlister owns 20% of Downey and holds sway over the company.
The foreclosed homes are a burden on a company whose main business is to lend.
In the first quarter, Downey said it saw $23 million in added expenses to handle homes it took back from borrowers.
“In the first quarter, we sold 67 homes,” said then-president Rick McGill, who stepped down in June. “At the end of the quarter, about 23% of our inventory of unsold homes was either in escrow to be sold or in negotiation to be sold.”
McGill joined Downey last fall after serving as president of Whittier-based Quaker City Bancorp Inc. up to its 2004 acquisition by Banco Popular North America, part of Puerto Rico’s Popular Inc.
Some company watchers think McGill was hired to limit damage from the mortgage downturn and eventually take over as chief executive.
McGill, Downey’s third president in less than four years, lasted eight months.
Downey is known for executive turnover. Those familiar with the company attribute that to Chairman McAllister, who retired from day to day operations in 1973 and lives in Bullhead City, Ariz.
Downey’s chief executive post has seen at least eight different faces in the past 18 years. Current Chief Executive Dan Rosenthal, McAllister’s confidant and former son-in-law, has been a relative constant.
He ran the thrift from 1998 to 2004 and returned in late 2004.
Some are raising concerns.
Last week, Lehman Brothers lowered its rating on Downey’s shares and said it planned to stop following the company because of an uncertain outlook.
Downey “is overwhelmed” by bad mortgages, the investment bank said.
The company’s deposits and loan business “may or may not save it, but that is now beyond the scope of analysis,” Lehman said.
In May, Downey said 14% of its assets,the vast majority of them mortgages,were “non-performing,” up tenfold from a year earlier.
Some investors are betting Downey’s already decimated stock has further to fall. In June, more than half of the company’s shares were held by short sellers betting on a drop.
Downey’s stock “really fell off, it’s amazing,” said Amit Chokshi, managing member of Stamford, Conn.-based Kinnaras Capital Management LLC, a hedge fund manager.
Chokshi bet against the company more than a year ago when he suspected it’s lending eventually would crumble.
He calls Downey “highly leveraged.”
The thrift operator doesn’t have much debt. But it has about $10 billion in deposits, which customers could draw on at any time.
It has about $1.6 billion in cash and investments, plus about $11 billion in loans held as investments.
“It’s no different than a hedge fund,” Chokshi said. “They borrow at a low rate and lend long.”
