Look at this amazing quote from the Downey Financial Corp. (DSL) quarterly report (10-Q, March 31, 2008):

"A higher incidence of delinquency is expected when the minimum payments reset on our adjustable rate loans subject to negative amortization or interest only payments, whereby the interest rate is fixed for the first three to five years. For example, as of March 31, 2008, there were $976 million of loans subject to negative amortization or with interest only payments within our loans held for investment that have not been modified but had first time payment recasts since December 31, 2006, of which 36.1% were delinquent 30 or more days at March 31, 2008."

I first predicted this on April 4, 2007:

"More and more of the option ARM borrowers are going to be hitting the negative amortization 110% cap. ... When the option ARMs recast and the payments skyrocket, the delinquency rate is going to skyrocket."

Downey is down 80% since then.

Colin Peterson

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This article has 2 comments:

  • May 08 08:46 AM
    Wait till these Option ARMs start to kick-in for WaMu and Countrywide. You ain't seen nuttin' yet!!!

    Wells Fargo is one of the very few national lenders that never did Option ARMs; they don't have one on their books. Wachovia picked-up a mess of them when they bought Great Western. Talk about bad timing.....
  • May 08 11:23 AM
    This is a horrible bank in a lot of trouble. As crazy as this market is regarding negative news, as the banks have all been going nuts the past month and a half this one has not.

    I shorted DSL about two months ago and while most banks are up 20-50% since then this one is down about 40%. This stock can not even be helped by a crazy irrational market. How much worse can it get for them.
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