Downey closes due to losses

Federal regulators have shut down Newport Beach-based Downey Savings & Loan Assn., citing the thrift’s massive losses over the past year from millions of dollars in bad loans.

Downey posted losses off $547 million for the first nine months of 2008. The thrift had a heavy concentration of nontraditional mortgages, including payment option adjustable rate mortgages.

Many of those mortgages are now in default.

The Office of Thrift Supervision took over Downey’s Newport Beach offices on Jamboree Road late Friday. The federal regulator also took over Pomona-based PFF Bank & Trust the same day.

“The closing of these two thrifts once again demonstrates the tremendous impact of the housing market distress on the state of California,” said John Reich, director of the Office of Thrift Supervision, in a statement announcing the seizure.

U.S. Bank Corp. has taken over the banking operations of both Downey and PFF Bank & Trust in a deal brokered by the Federal Deposit and Insurance Corp.

As part of the deal, U.S. Bank will receive about $12.8 billion of assets and assume about $11.3 billion of liabilities, including $9.7 billion in deposits from Downey. U.S. Bank has agreed to assume the first $1.5 billion of expected losses on the assets of Downey.

“This transaction will also allow us to work closely with approximately 35,000 homeowners through the FDIC loan modification program in an effort to provide solutions for these potentially troubled borrowers to stay in their homes,” said Richard Davis, chief executive of U.S. Bancorp, the parent company of U.S. Bank, said in a written statement.

Downey announced last month that it would shut down its Newport Beach-based wholesale loan department and cut about 200 positions companywide.

The department accounted for about 80% of Downey’s loan production.

Founded in 1957 by mortgage banker Gerald McQuarrie and home builder Maurice McAlister, Downey Financial Corp., the parent company of Downey Savings & Loan, offered quick loans to people and businesses with good credit.

The lender began offering adjustable-rate mortgages to borrowers with less-than-perfect credit in the late 1990s. Downey offered low introductory payments to the borrowers.

Many of Downey’s troubled mortgages were negative amortization loans, which have high default rates.

The loans allowed borrowers to make small payments while their loan balances grew.

Shares in Downey closed Friday at 18 cents. The savings and loan has 175 branches and 2,199 employees.

BRIANNA BAILEY may be reached at (714) 966-4625 or at [email protected].