Downey pulls back further from mortgage business

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From Times staff writer William Heisel:

Downey Financial Corp., once a big provider of adjustable-rate mortgages, shrank back further from the home loan business today.

The Newport Beach-based parent of Downey Savings & Loan said it would eliminate its wholesale lending unit, meaning loans originated through brokers.

The company said it would cut back on in-house lending as well.

The moves will slash 200 jobs and could help Downey hold on to more of its cash at a time when it is under pressure from the U.S. Office of Thrift Supervision to raise more capital.

‘Balance sheet shrinking is a classic way for a bank to strengthen itself,’ said banking consultant Bert Ely in Alexandria, Va.

Charles Rinehart, an S&L industry veteran who took over as Downey’s chief executive last month, is trying to keep the company afloat after it suffered massive losses on its adjustable-rate mortgages.

But pulling back from lending obviously isn’t a growth strategy. And Downey ‘still has to deal with the residual problem of the future credit losses on loans it made in the past,’ Ely noted.

Downey’s ARMs included the now-infamous pay-option loans, which allowed homeowners to make such small monthly payments that their loan balances rose.

The firm’s nonperforming assets shot up from less than 3% of total assets in August 2007 to about 14.7% by the end of August, the latest data available. The trend is slowly moving downward, though. In June the number was 15.5%.

Downey’s shares rose 14 cents to $2.20 today