Regular Housing Wire readers will likely remember that we’ve been calling out option ARMs as the next core problem area in mortgage banking — data we published in October of last year was just the lastest example of insider knowledge leaking out in this area.
The pending option ARM crisis appears to be here, officially, a little bit early. Downey Financial Corp., an option-ARM specialist based in Southern California, said today that delinquencies ratcheted up above 10 percent of total assets at the bank during February. The graph on the right provides an alarming look at recorded non-performing assets at Downey, which should be distringuished from the more-commonly reported delinquency numbers at most institutions. Deliquencies are usually recorded when a borrower is 30+ days in arrears; non-performing assets usually refer to loans that are more severely delinquent — most often, 90+ days in arrears and including loans in default. Downey Financial began aggressively modifying loans ahead of forced recapitalization in July, and was forced by its auditors in January to report debt restructurings in this area as part of overall non-performing assets as well. The numbers for February — 4.30 percent in so-called “troubled debt restructurings” and another 6.63 percent in “other non-performing assets” — show that Downey is facing a wave of troubled borrowers that is growing faster than its ability to restructure potentially troubled debt. The “all other” NPA category jumped 108 basis points between January and February alone, a troubling trend that has picked up steam in recent months. Likely driving the increase in NPAs is forced recapitalization among many borrowers — once the loan accrues enough interest and home prices fall to a point where the effective LTV reaches 125 percent, most option ARMS immediately convert to a fully-amortized payment schedule. The result is a significant payment shock that has little to do with prevailing LIBOR rates. Along with increasing NPAs, Downey also saw loan production fall off a cliff in February, as well. Total origination on residential one-to-four unit properties was just $75.7 million, down from $127.4 million one month earlier and off dramatically from the $211.7 in production volume recorded one year earlier. Investors clearly weren’t pleased with the news, which comes amid greater concern about the financial markets, fueled by a fire sale of Bear Stearns to JPMorgan Chase & Co. The company’s stock had fallen roughly 5 percent in morning trading on the New York Stock Exchange, to $18.25, when this story was published. Disclosure: The author owned no positions in any publicly-traded firms mentioned in this story when it was originally published. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.