Downey S&L; to Sell Off $590 Million in Real Estate : Thrifts: The co-founder says the company will begin acting “more like a commercial bank than a thrift,” downplaying residential mortgage lending. New federal rules are blamed for the decision.

Capitulating to new federal rules governing thrift industry investments, Downey Savings & Loan Assn. said Monday that it will sell $590 million worth of real estate investments over the next five years.

And as it unloads its real estate holdings, Downey will begin acting “more like a commercial bank than a thrift,” stressing short-term commercial and consumer loans and downplaying residential mortgage lending, said Maurice L. McAlister, president and co-founder of the 33-year-old thrift.

Downey, with $4.1 billion in assets, has 47 branches in California. It is the fourth-largest S&L; headquartered in Orange County.

McAlister said Downey continues to meet all three of the new capital requirements imposed by the S&L; bailout measure last year.

He also said the S&L; will establish nearly $21 million in additional reserves for 1990. But the reserve won’t detract much from earnings because of tax benefits Downey will realize from its acquisition of insolvent Butterfield S&L; in Santa Ana, thrift officials said.

Of that new reserve, $12.7 million will be used to increase Downey’s general reserves to $39.1 million, while $8 million will be put in a special reserve for an adjustment in the book value of certain investment properties, McAlister said.

Despite the increased reserves, McAlister said Downey should report a profit this year, in part because of earnings it will realize from the sale of “a substantial amount” of the commercial and retail properties it holds for investment.

That property is carried on Downey’s books at a gross value of $590 million, McAlister said, but has a fair market value of $763 million.

McAlister also said Downey will report a profit for 1989. The thrift posted a $27-million profit for the first six months, followed by a $3.7-million loss for the third quarter because of a new accounting requirement that forced it to write down the value of a block of mortgage-backed securities it was holding for investment purposes.

The latest changes in the thrift’s operations, McAlister said in an interview, were prompted both by the tough new accounting rules thrifts must follow under terms of the federal S&L; bailout law and by what he called the obvious desire of Congress and federal regulatory agencies to do away with the thrift industry.

He predicted, however, that if other healthy S&Ls; follow Downey’s steps, the ultimate result will be a drying up of mortgage money, especially for lower cost homes. That, he said, could lead to a consumer backlash against the tight new regulations being forced on thrifts to try to cure the industry’s financial ailments.

“The basic message Downey is putting out is that it will be taking some hits now but has a lot of profit it can recoup by selling investment properties,” said industry analyst Bert Ely.

“It is a very wise move, especially the repositioning. Thrifts, as such, are not going to be around much longer,” Ely said.

Ely, however, dismisses McAlister’s claims that a mortgage lending shortage could develop.

“Thrifts used to be needed as an integrated source of housing finance,” he said. “But the system now lets banks, mortgage brokers and other lenders do the same things. There is no longer a need for thrifts because we don’t need specialized housing lenders any more than we need specialized auto lenders.”

McAlister said the decision to position Downey as a commercial bank was made because “Congress is now talking about doing away with the Office of Thrift Supervision, and we would wind up under the jurisdiction of a commercial banking regulator.”

“If the regulators are going to think like commercial bankers,” he said, “then we believe we will be better off acting as a commercial bank.”

That won’t mean much for deposit customers--except perhaps a slight lowering of the interest rates Downey will pay for deposits. But for loan customers it means that the S&L--which; now has more than 50% of its assets invested in residential mortgage loans--will begin emphasizing business and consumer loans and cutting back on its mortgage lending.

“And if others follow us,” he said, “then the home buyer is going to have a problem because there will be fewer loans out there. Thrifts now account for 45% of the home mortgage loans in California.”