Downey Financial warned this morning that it expects to report an operating loss of $23 million for the third quarter, driven primarily by an increase in loan loss reserves. The thrift, which has $14.4 billion in assets, cited "the continued weakening in the housing market" in discussing its expected results for the quarter. Downey will take an approximate $82 million provision for credit losses, which it said will increase the allowance for loan losses to approximately $144 million (1.22 percent of loans held for investment). The bank will also absorb a $9 million valuation reduction to real estate held for development, reflecting declines in the value of single family home lots in which the company is a joint venture partner. From the press release:
Daniel D. Rosenthal, President and Chief Executive Officer, commented, "We are clearly disappointed with our third quarter results. The continued weakening and uncertainty relative to the housing market, coupled with the third-quarter disruption in the secondary mortgage markets, unfavorably impacted our borrowers and the value of their loan collateral. This has been particularly true in certain geographic areas such as the greater Sacramento and Stockton areas of Northern California and San Diego County. As a result, single family loan delinquencies, as well as losses from foreclosures, rose significantly during the third quarter and led to this quarter's large increase to the allowance for losses." Mr. Rosenthal further stated that, "In response to recent trends and events, we have further tightened our lending guidelines, activated a loan modification group to work with borrowers on a proactive basis, and provided the necessary resources to dispose of homes acquired through foreclosure on a timely basis. Finally, despite this quarter's unfavorable results, Downey remains well positioned to continue funding quality loans because of our strong capital position and stable source of funds from our retail branch franchise."
The change in strategy is striking for Downey Financial and marks a reversal from earlier positioning; in the recent past the company has been subject to speculation that it was not establishing enough in loss reserves relative to its portfolio exposure. Downey is a specialist in negative amortization loans, and the majority of its loan portfolio sits in this area.