- May 25, 2002
- Professional Status
- Certified Residential Appraiser
Miller said Downey Financial Corp. was "the canary in the coal mine." The Newport Beach, Calif.-based S&L has specialized in making option ARMs since the 1980s and keeps them as investments. Option ARMs make up about three-quarters of Downey's loan portfolio, with most of the rest being similar loans that allow interest-only payments during the first five years but don't allow the loan balance to rise.
Miller thought Downey had shown prudence in cutting back on lending in 2006, when home prices stopped rising and competition intensified from option-ARM newcomers such as Countrywide and IndyMac Bancorp of Pasadena, Calif.
But a key indicator of loan troubles, the ratio of non-performing assets to total assets, shot up from 0.55 percent to 3.65 percent at Downey over the last year, with the dud loans on Downey's books growing by $80 million in November, Miller said. That number, disclosed last month, was larger than the entire amount of non-performers Downey had a year earlier.
The quality of option ARMs appears to have deteriorated quickly when Wall Street began buying them to create mortgage bonds in the middle of this decade, drawing IndyMac, Countrywide and others into the business, Miller said.