Amit Chokshi_

Downey Financial's Problems Run Deep

Thanks for the comments but I don't think DSL institutional investors really do know what they own. It's very difficult to get under the hood of financials, just look at FMT for example, lot of lost money there for institutions and the Ford-led investor group walked away once doing their own due diligence.

Same can be said for some of the sharpest guys around like Tom Brown and David Einhorn who ran into problems with some of their holdings in the financial sector. I'll give the benefit of the doubt to Brown and Einhorn because they are really elite investors based on their long-term records, but I've known plenty of analysts on the buyside for institutional funds that are just flat out weak, my opinion is the same for most sellside analysts as well.

Still Short Downey Financial Despite Jump on Earnings

I didn't see an issue with their loan loss reserve, their loan portfolio was $13B in Q1 2007 where as it was $13.9B, they're reserving a slightly higher percentage for the smaller loan portfolio despite the actual absolute value being smaller compared to FY 2006.

I don't see the LTV info in the 8-k but it will probably be disclosed in the 10Q but not by age, maybe just as they do in the 10-K on a rolling annual basis. About 85% of their prime loans are in NegAm while I think it's about the same for the most part with their subprime loans too. The average maturity will is prob aroun 20-24 months, I do remember on the 10-K the LTV went up from 73% (orig level) to 76% or so for all loans that were utilizing NegAm.

DSL caps the NegAm at 110 of the original loan so I think that's where a bullish viewpoint is made. You have a deposit business that is a good franchise in SoCal and the NegAm is capped. I think this may be a potentially weak assumption though because the "safeness" of the 110 cap implies that the home value is static so say your mortgate is $80k for a $100k home, the DSL cap means your max LTV is 88% assuming the price of your home is static. If your house value drops 2% and is worth $98k, the NegAm cap would still be 110% of the original mortgage but LTV would be 90% if it reaches the $88k cap. It's like with low P/E stocks where the E drops off in the future. Nobody can predict housing values but I'm pretty certain that the downcycle in southern Cal real estate should catch up in terms of home values.