Two lending institutions bite the dust

Federal regulators pulled the plug on both Newport Beach-based Downey Savings & Loan Assn. and PFF Bank & Trust of Pomona on Friday, placing the blame on the state of the California housing market.

For those who are counting, that makes 22 such bank failures this year in the U.S. The Associated Press reports:

"The closing of these two thrifts once again demonstrates the tremendous impact of the housing market distress on the state of California," said John Reich, director of the Office of Thrift Supervision, in a statement. This year, four of the five failures of institutions regulated by the agency -- and all the ones of significant size -- had major concentrations in housing finance business in California, he said.

In July, another big savings and loan, IndyMac Bank based in Pasadena, Calif., failed and was seized by regulators with about $32 billion in assets.

The FDIC estimated that the resolution of Downey will cost the federal deposit insurance fund about $1.4 billion, while that of PFF will cost an estimated $700 million.

Yes, $1.4 billion. The woes relate to those adjustable-rate mortgages with flexible payment options, monthly rate adjustments and low minimum payments for the first few years. The AP continued: "Option ARMs have been among the worst-performing loans during the downturn in the real estate market."

Bad for the borrower and bad for the bank.

-- Lauren Beale

Thoughts? Comments?

Photo: Lori Shepler / Los Angeles Times

Comments

[CompaJD]

I think we all knew Downey Savings was going to fail.
The question is what are the going to do with all their assets.

[MyLessThanPrimeBeef]

How many will fail next year?

I think it's time for 2009 predictions.

If I remember correctly, many here 12 months ago correctly predicted this year's disasters.

[Steve]

It is their own fault, let them rot in hell.

[Michael Snyder]

Fro whatever comfort it brings; Downey & PFF are in good international company. From www.bloomberg.com this morning:

" Nov. 23 (Bloomberg) -- Amlak Finance PJSC and Tamweel PJSC, Dubai’s two-largest mortgage lenders, will be taken over by a government-owned bank as the global financial crisis squeezed their access to credit and slowed the regional property market.

Amlak and Tamweel, whose stocks have fallen more than 80 percent this year, will “merge under” Abu Dhabi’s state- owned Real Estate Bank, the United Arab Emirates’ Ministry of Finance said late yesterday in a statement. The transaction has the “blessing” of Dubai ruler Sheikh Mohammed bin Rashid al- Maktoum. No terms were disclosed, though the deal will be based on “international best practices,” the statement said.

“It seems to be a direct federal intervention to support the struggling entities,” said Dubai-based Raj Madha, senior banking analyst at EFG-Hermes Holding SAE, the largest Arab investment bank by market value. “The move will provide substantial federal support to these lenders and access to cheap funding.”

Dubai residential property prices have surged fourfold in the last five years, fueled by borrowing, high oil prices and as foreigners were for the first time allowed to own property in the emirate. That bubble now appears to be bursting. Dubai and Abu Dhabi house prices fell for the first time in October, after credit markets seized up, banks tightened mortgage criteria and developers started to scale back projects, according to HSBC Holdings Plc."

It seems we really haven't lost our position as world leaders. The real question is how are we leading? Right now it seems as if the "Pied Piper" of excessive executive compensation has lead the world's economy right over the cliff. Here I thought only lemmings did that.

For the last few years everybody's been inflating their own bubble. remember $212 a barrel oil? What about gold at $1,600 or million dollar starter homes in So. Cal? What the markets were really pricing was their own hot air. Now winter's here and along with it the cold reality of a world wide depression.

Oil at $50 is good news to everybody who's not holding contracts for $100+. The collapse of the ethanol/grain bubble means those of us who don't starve before next summer will once again be able to afford a meal. Copper's lost almost 50% of its' value since spring so maybe these fools will stop stealing live wires. All in all a good thing.

"But, but my portfolio!" you say. I say, "Your portfolio is adjusting to sustainable levels." I'm sorry if you invested during the "Bush bubble".

There's been endless hyperbole in this venue concerning the "affordability" of housing. I'd respectfully submit the costs of housing is of little concern when there's no food on the table. Wall St. is "suffering" because it sucked every dime off of Main St. and put it into its' pockets. Now they're desperately looking for more money and where do they go? Right back to the very folks they've been bleeding dry for decades via our tax bill. Somehow I don't see a learning curve here.

In a nutshell; food chains, all food chains build from the bottom up. Economic chains are no different. The laws of conservation of mass/energy are universal. That means if you're not contributing (goods & services) you're depleting the entire system. This means the entire unregulated financial derivatives market if a financial black hole sucking the very life's blood out of the world's economic production.

Call me crazy, but until we as a people care for the "least" of us; our "greatest" will remain in crisis and must eventually fail.

[J-Man]

"PFF" may have once stood for "Pomona First Federal," but the headquarters of the bank is (was?) in Rancho Cucamonga, not Pomona.

[E]

The downturn is a problem for Option ARMs?

LOL

Option ARMs were a problem in themselves. Toxic loans at their finest that contributed to the inflation of the market.

And BTW Downey. The bubble bloggers already knew you were toast. It had nothing to do with the state of the housing market. It was the loans you wrote.

Period.

[whoscounting]

Bad loans by bad banks for overpriced homes appraised by very optimistic bank paid appraisers causing bank failures who would have thought it would come to this

Too bad nobody was in charge, or we could demand some accountability. Remember when fraud and theft was against the law?

Maybe allowing all the banks to merge wasn't such a good idea? Maybe Paulson is just another greedy moron. maybe the depression will wipe the slate clean, maybe a 26 thousand dollar cottage will be worth 26 thousand dollars. Maybe the Okies will come from Michigan this time

[Rob]

Whoa, now there a big surprise !

: )

[Lou]

"Option ARMs have been among the worst-performing loans during the downturn in the real estate market."

Seriously, I'm no Warren Buffet but was that really that hard to figure out?

[Eddie]

I am saddened to see Downey savings fail. I have been banking htere since the 80"s when i lived in Downey.

I wish more people had seen beyond their greed and had not offered these loans. i have been yelling for years that we where doomed when you make loans people can not afford. they could get in low but always said, we will either re-fi later or sell. well here we are paying the price for all the greed in this country.

[StillaLATimesreader]

I would suggest to add to this blog today's article from LA Times about the recent trend of "prime" mortgages

http://www.latimes.com/business/la-fi-prime24-2008nov24,0,6174050.story

[LA-renter]

Paulson's on the LAT Business website announcing more federal spending with more federal debt. Why, this time? to provide more debt opportunities to consumers.

There'll be no end to the present insanity until the whole national economy collapses... I honestly think we're headed that way... really.

[Brad Neal]

Michael Snyder: another excellent post.