Week of Horror for Doral

Puerto Rico-based mortgage lender Doral Financial(DRL Quote) has had a week to forget.

Heading into the close of trading Friday, shares of the bank were getting crushed, falling $6.34, or 24%, to $20.05. For the week, the bank, which is one of Puerto Rico's biggest mortgage originators, has plummeted 48%.

The selling in Doral has accelerated throughout the week, following a series of analyst downgrades because of concern about the bank's aggressive use of derivatives to hedge its mortgage portfolio against interest rate fluctuations. The downgrades were prompted by a series of disclosures in the bank's 2004 annual report, which revealed that Doral has been making more aggressive valuation assumptions than previously believed.

Another nail in Doral's coffin came Friday when the credit rating agency Standard & Poor's lowered its outlook for the bank's long-term debt to negative from stable. S&P revised its outlook, which is often the precursor to a credit downgrade, after expressing "concern over the sustainability of the company's business model'' and noting the potential "for lower quality earnings.''

The Friday crushing of Doral stock got so bad that the bank even put out a statement saying it "knows of no relevant events or material information causing the unusual activity'' in its shares other than the S&P warning.

It appears the selling in Doral is simply a case of institutional investors losing faith in a stock that had been one of the top performers in the financial sector for nearly two years.

The stock, which was trading around $49 a share at the beginning of the year, had risen 172% since the beginning of 2003, a period that coincided with the mortgage refinancing boom and an era of historically low interest rates. Early in the bank's run in February 2003, TheStreet.com spotlighted the stock as a potential mortgage play.