Joe Friday

Downey Financial's Problems Run Deep

great post.

worth noting that their balance sheet is much probably much weaker than they are prepared to admit. As per their last 10Q, they had about 12.5B in loans held for investment. Of those, 76% were negative amortization, and 19% were interest only. 95% of their loans did not have any principal repayments.
As you point out, many of their loans are ARMs and most have not yet reset.
They have a great majority of their loans in California, which is the worst performing state in the country.
Their loans represent about 77% loan to value, according to their last 10Q, but that was based on original values at the time of the loans, and appraised values for lending purposes.
On any foreclosed loans, they will have very significant costs to realize, including real estate commisions, legals, repairs, and foregone interest. These costs would likely represent, on average, between 7-10% of realized values.

So, if we take a real estate market that is off by, conservatively 5-10%, add costs to liquidate of 7-10%, add in loans to value on inflated appraisals at 77%, we have a recipe for disaster.

Their total equity (before this quarters losses) is 1.4B. That represents only 11.5% of their loan portfolio. This company is in deep trouble. The loan loss reserve issue will be a huge one for the auditors when it comes time to signing off on their books for the 10K.
The truly remarkable thing about this company, is that there has not yet been a run on the bank.