In a terse statement filed Monday evening with the Securities and Exchange Commission, Downey Financial Corp. (DSL: 2.06 -14.52%) said that president Frederic McGill’s employment had been “terminated.”

The company did not provide a reason for his firing; calls to the company’s press representatives Monday night were not immediately returned.

The most likely culprit, however, would seem to be spiraling bad mortgage debt tied to negatively amortizing mortgages. Non-performing assets continue to mount at Downey, with the option ARM specialist reporting recently that non-performing assets had reached 14.3 percent of total assets in May, up from 13.24 percent of the bank’s $13.15 billion in total assets by the end of April.

Roughly 65 percent of Downey’s mortgage assets come in the form of option ARMs, with the thrift reserving $546.7 million at the end of Q1 against a balance of NPAs that appears set to break the $2 billion threshold in the next few months.

Downey reported a loss of $247.7 million in the first quarter, primarily due to rising credit losses.

The news of an executive shake-up at Downey comes as Wachovia Corp. (WB: 6.06 -3.96%) moved on Monday to eliminate option ARMs from its mortgage product offerings; the North Carolina-based bank, which holds $121 billion in so-called pay-option adjustable-rate mortgages, also said it would waive prepayment penalties for existing borrowers looking to refinance out of the loans.

Shares of Downey Finanial closed down more than 7 percent Monday on the New York Stock Exchange, at $2.77; the company’s stock has been pummeled over the past year, falling from a previous share price of over $60 just one year earlier.

Disclosure: The author held no positions in DSL or WB when this story was originally published. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.