Downey shares sink on warning Lender’s shares sink below $1

Petruno is a Times staff writer.

The depressed stock of Newport Beach-based mortgage lender Downey Financial Corp. crumbled below $1 a share Tuesday after the company formally warned that it could be seized by regulators if it can’t get an infusion of capital by the end of the year.

Downey so far hasn’t seemed a likely candidate for government help because the Treasury is aiming its massive financial bailout at lenders that have the best prospects for survival.

And with investors souring again on banks in general -- an index of major financial stocks sank Tuesday to just above its 12-year low reached Oct. 27 -- the prospects for obtaining capital from private investors don’t appear promising either.

Downey’s stock tumbled 99 cents Tuesday to 46 cents a share. The stock is down 99% in the last year.


The bank was a big player in the market for so-called option ARMs -- risky adjustable-rate mortgages that gave borrowers the option to pay so little each month that their loan amounts grew. Heavy defaults on such mortgages are the cause of Downey’s problems.

In the company’s filing late Monday with the Securities and Exchange Commission, Downey noted that it had been ordered by regulators to maintain specific levels of capital, the bank’s financial cushion against losses.

The company said it satisfied those requirements at the end of the third quarter but wouldn’t meet them at the end of the fourth quarter, based on current projections.

“In the current economic environment,” Downey wrote in the filing, “there is a significant risk that the bank will not be able to raise sufficient additional capital to ensure compliance with the capital requirements of the bank consent order by year-end.”

In that event, regulators could further restrict Downey’s operations, impose fines on it or seize the bank and place it into a conservatorship or receivership.

Such actions could come even before the end of the year, the company said.

“If the bank is placed into a conservatorship or receivership,” the filing warns, “it is highly likely that this will lead to a complete loss of all value of the holding company’s ownership interest in the bank” -- meaning a wipeout of shareholders.

Thomas E. Prince, Downey’s senior executive vice president, declined to elaborate on the filing.