Downey Financial: Year End Review

Downey Financial (DSL) was down 52% for 2007 from the time that I initiated coverage on March 15, 2007 (red S indicates blog posts where "sell" was reiterated).

In my first Downey post I pointed out how Downey had put together a mortgage portfolio with multiple layers of risk including: limited verification of borrower income or assets; concentration in California; concentration in bubble years; use of mortgage brokers; negatively-amortizing Option-ARM loans.

On April 1, when people were still convinced that problems were limited to "subprime," I noted:

"M&T Bank (MTB) - which is partially owned by Warren Buffett - is being forced to markdown and repurchase its Alt-A loans. Does anyone think that a bank owned by Buffett does worse underwriting than Downey? What does this imply about the value of Downey's portfolio of Alt-A loans?"

On April 12, I reported on an interesting conversation I had with an Arizona real estate agent:

I asked, "Did you ever have any garbage paper you couldn't push through Downey?" He just laughed.

It is amazing that we both set out, for different reasons and at different times, to find the loosest mortgage lender and independently found Downey.

This April 22 comparison of Downey and New Century (NEWC.PK) illustrated that Downey's portfolio was, in some ways, riskier than a subprime lender's.

On June 12, I found out that hedge funds viewed Downey as a good buy. I pointed out that stated income loans made questionable economic sense for normal borrowers.

During the first week of every month, I release my Survey of Downey Financial Defaults and Trustee's Sales (see October and November). This has proven to be a great leading indicator of the Thirteen Month Selected Financial Data report that Downey releases mid-month.

I'll have the December survey posted in the next few days.

Here are the rest of my Downey-tagged posts. I still own Downey puts.

Comments

[alex s gabor]

Nice call!

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