Downey Savings to dismantle one loan division, ax 200 jobs
Struggling Downey Savings said it would eliminate one of its loan departments, cutting 200 jobs, as it scales back the operations most responsible for recent losses.
The savings and loan, which has suffered from a massive number of defaults on its adjustable-rate mortgage loans, will no longer offer loans through outside brokers and will cut back on loans it originates itself at its branch offices.
“We have determined that a wholesale lending channel is no longer a necessary component of the plan,” Downey Chief Executive Charles R. Rinehart said in a statement.
The company declined to provide information beyond its press release, including the total number of employees remaining in its loan departments.
Rinehart said the move was a way to keep more capital in the company after the U.S. Office of Thrift Supervision this summer ordered Downey to increase its capital.
Downey shares gained 14 cents, or 6.8%, to close at $2.20. It shares have fallen 93% this year, and the company reported a loss of $218.9 million, or $7.86 a share, in its most recent earnings report, for the second quarter ended June 30.
Downey has been trying to build up its cash on hand by borrowing from the Federal Home Loan Banks. By the end of June, Downey had borrowed $1.5 billion from the FHLB. That amounted to about 12% of the company’s total assets. By August, Downey had borrowed $2.8 billion from the FHLB, nearly maxing out its credit line.
The company also has sold some of its real estate and is trying to sell its Newport Beach headquarters, which it hopes to then lease back from the buyer.
By shutting down one of its loan departments, Downey over time will lower the number of loans it has on its books, known as shrinking the balance sheet.
Washington Mutual Inc. stopped making wholesale loans shortly before it was forced into a sale, and last week Citigroup Inc. cut 500 jobs related to wholesale lending.
Banks, already stung by the high number of foreclosures nationwide, are nervous about issuing new loans while home prices continue to fall.
“They don’t want to be doing a loan today that is going to be a defaulted asset later,” said Jeff Lazerson, president of Mortgage Grader, an online mortgage clearinghouse based in Laguna Niguel. “They don’t want to loan until we hit the bottom of the housing market.”
Downey’s portfolio of “nonperforming assets” -- loans that are in default -- shot up to about 14.7% of total assets in August, the latest month for which the company has made figures available, from less than 3% of assets a year earlier. The trend is moving slowly downward, though. In June the number was 15.5%.
“It’s a lot late, but from their perspective it’s kind of a desperate rush to safety,” said Martin Weiss, CEO of the Weiss Group, a financial advisor in Florida. “They had this hot potato that they were juggling all this time, and now suddenly they realized they better drop it.”
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