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Local lender (to us anyway) Downey Savings reported a loss of $23 million for the 3rd quarter recently ended. The loss is due to none-other than loan loss-related charges and the overall slow down in the housing market. From the American Banker story:
The company will take a $82 million provision for credit losses, while the value of its real estate held for development will fall by $9 million.
“The continued weakening and uncertainty relative to the housing market, coupled with the third-quarter disruption in the secondary mortgage markets, unfavorably impacted our borrowers and the value of their loan collateral,” the firm added.
This is an important development in many respects. Downey Savings is one of many regional portfolio lenders who specialize in the negative amortization pay option loans that have been very popular over the last few years. Downey, along with World Savings, Bank United and others, stepped “into the void” so to speak when institutional investors tightened the reigns on the underwriting guidelines for pay option ARMs. Many people touted these portfolio lenders as the banks that picked up the slack during the credit crunch.
While they may have taken on some excess capacity during the freeze, they are far from immune to shocks to the system; and their appetite for neg am loans may make them more susceptible to loan-loss charges moving forward. Remember, deferred interest accumulated by banks offering neg am loans is counted as real income on profit and loss sheets (amazingly); even if the underlying asset is decaying. This can leave them open to cash flow problems resultant from a lack of loan activity, loan-loss provision requirements and write downs in portfolio value.
We’ll keep an eye on these regional players and see how they fare as the crunch shakes out - with an eye to the pay option reset period scheduled for end of 2008 and in to 2009.
I don’t feel sorry for the lenders in the “game.” They just as much rolled the dice figuring that they would be making money on these neg am loans when it came to refi time…never bothering to really listen to the market and remember, just like the dot.com era, what goes up must come down…