Downey Fails, Sold to US Bank by FDIC
The days of wondering about the future of Downey Financial Corp. (DSL) are over; in a deal that is tantamount to a bank failure, the Federal Deposit Insurance Corp. said late Friday that it had secured a deal with US Bancorp (USB) that will see the Minneapolis-based bank absorb the banking operations of both Downey and smaller Pomona-based PFF Bank & Trust. The deal immediately adds 213 combined branches to US Bank's footprint, along with $16.5 billion in total assets; Downey held $12.8 billion in assets and total deposits of $9.7 billion, while PFF Bank had total assets of $3.7 billion and total deposits of $2.4 billion, according to the FDIC. In a press statement, US Bank said the deal would include roughly $14.8 billion in liabilities, as well; US Bank did not acquire and assets or liabilities of either banks' respective holding companies. The FDIC will assume the first $1.6 billion of losses on certain assets, the banking regulator said on Friday, and will then share in any further losses. Further details on which assets were subject to the loss-share agreement were not disclosed, but the FDIC estimated that the two bank failures could cost the deposit insurance fund $2.1 billion -- $1.4 billion of that total coming from Downey. See the FDIC's announcement. In exchange for loss sharing, U.S. Bank agreed to implement a loan modification program similar to the one the FDIC announced in August at IndyMac Federal Bank, that will see the bank attempt interest write-offs and principal deferment for troubled borrowers. The IndyMac loan modification program has been touted by FDIC chairman Sheila Bair as a model for improved loss mitigation strategy, and involves proactively notifying borrowers of their modified payment amounts before qualifying them for the modification. US Bank said it expects the loan modification program to impact as many as 35,000 loans. Most of those are likely to be loans originated by Downey; the Newport Beach, Calif.-based lender dove headlong into payment-option adjustable-rate mortgages during the housing boom, and became the fourth-largest originator in the option ARM space. It had already begun aggressively seeking to modify mortgages ahead of any recast, reporting on its modification efforts monthly, although its success was limited by the sheer number of borrowers owing substantially more on their mortgage than their homes are worth. Of the bank’s $12.8 billion in total assets, $5.7 billion come in the form of option ARMs held in portfolio. Non-performing assets increased at Downey during the quarter by $44 million to over $2 billion, and represented nearly 16 percent of total assets, compared with 7.8 percent at year-end 2007 and 2.9 percent a year ago. The two banks represent the 21st and 22nd banks to fail in the nation this year, and the fourth and fifth banks to close in California, the FDIC said. HousingWire sources close to various government regulators have suggested this year that the FDIC is girding for a wave of bank failures that could number above 500 and reach into the 700s over the next few years. Write to Paul Jackson at email@example.com. Disclosure: The author held no relevant investment positions when this story was published. Indirect holdings may exist via mutual fund investments. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.