Downey Financial Corp. (DSL)

anchak (< 20) Submitted: 6/17/08 11:03 PM : Start Price: $4.33 DSL Score: 7.41

Additions today 6/18/2008
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Downey as I estimated ( based on their recent 8K filings - showing growth in NPAs) will probably end up at around 20% of assets. That about 2.5BN+ in NPAs..... about $500 MM short fron Net tangible Capital +LLR ( ie Texas ration>100%).

Depending on what % age of Loss computation you use Downey needs about $500MM-$1 BN additional capital

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This is my initial pitch...when I last picked Downey on 5/27/2008


Downey in my view could be the most important bellweather stock.Why? For one they are a plain vanilla Consumer Mortgage Loan company. Their entire asset book of $10BN+ comprises of Residential real estate loans primarily in California with biggest exposure to LA and San Diego.

I will not detail too much on the Bear side initially....lets see if there's anything positive

Bull ( Not exactly - we are talking about last straws here)
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(1) They have a relatively high Loan Loss Reserve - well why would that be positive , well in their case may very well act like a lifevest and maintain bouyancy. Its 5%+ of assets - and that's a lot for a pure residential portfolio. Notice that they have about 12% NPA ( of which about 8% is ture - rest are performing TDRs)..... also like about $200M in OREOs .....Net net I think about 15%-20 real $&%* stuff - by their acceleration count for 2008.

Assuming a 40-50% default rate ie incidence of people on whom you'll actually recognise a loss not just non-accrual and a LGD ( Loss given default - ie final disposition of 40%-50% ( Look at the rising trend also there).....


Appx Math Net Loss = 20%*50%*50% = 5% of TOTAL assets

Thus my logic says they'll up their Loss Reserves as the performance degrades - however, if these number hold in the ballpark - they'll have interest income from both their performing assets (80%) and their Modifications (TDRs) ...but bottomline will be abysmal.

The charge recognition shows that they are not in denial and trying to do something about it.

(2) TDRs: 0.5 BN in modifications and growing...this is good , if done right ...essentially is breathing space...works from the borrower as well as lender perspective.





BEAR
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(1) There's a very simple one : They have done the riskiest product possible. Neg-Am, Interest Only Option ARMS - a lot of it , it seems. $6BN with possibly >10% underwater valuation. Just this, if they had to take a Mark-to-Market would probably be enough to wipe them out. However, they are not required as long as the cash keeps coming in.

(2) Hence their life-line is on the Liability side. $1BN of FHLB advance maturing this year - they have to roll this over - I do not think they are in a position to repay. They can barely service the interest. And obviously their depositors also have to keep faith.

(3) There are also a myriad of other factors - Huge Monoline exposure ( FGIC and RMIC) - about $500MM as well as high OREO book ($200MM) - which they have to Mark-to-Market and if it keeps growing , they'll bleed more and more.

If by some govt intervention or something they survive, a lot will tell. If they go down - then the blokes with construction exposure - have had it.

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