Downey Financial Corp. reported a loss of $108.8 million, or $3.90 per share, for the fourth quarter as the option ARM specialist continues to feel the impact of the housing crunch, especially in California. The quarterly loss compares to net income of $52.1 million, or $1.87 per share, in the fourth quarter of 2006; MarketWatch reports that the earnings badly missed analysts' expectations of a $.06/share loss. "We are clearly disappointed with our results," said Rick McGill, Downey's president. "The continued weakening of the housing market and its uncertain future have unfavorably impacted our borrowers and the value of their loan collateral. As a result, single family loan delinquencies, as well as losses from foreclosures, rose significantly during 2007 and led to the large increase to the allowance for loan losses." Downey absorbed a $274.4 million hit to income in the fourth quarter, driven primarily by a $218.4 million provision for future credit losses. Total allowance for credit losses ended the quarter at $349 million, net of $12.2 million in charge-off activity. Loan production totalled just $618 million in Q4, down 53.9 percent from $1.34 billion a year ago, Downey said. Downey noted that it had modified $322 million of loans associated with its portfolio retention program, designed to get performing but high-risk borrowers out of existing payment-option ARMs and into fixed-rate loans. Downey holds $7.5 billion of mortgages subject to negative amortization, equal to 69 percent of its single-family residential loan portfolio held for investment. Downey was recently forced by its auditors to report loan modifications to its performing borrowers as part of its non-performing assets, which bumped reported NPAs to 7.8 percent of loans during the fourth quarter. Disclosure: The author held no positions in DSL when this post was originally published.