This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
TheStreet Open House

Regulators Close Downey, Other Banks

Downey's failure was not a surprise, because it had a high level of nonperforming option-ARMs. The immediate catalyst for its collapse was a 68% drop in the holding company's share price, to 46 cents, on Nov. 11. That followed Downey's expression of doubt about its prospects in its third quarter report to regulators. This may have led to a run on deposits, although, of course, none of the regulatory press releases made any mention of liquidity concerns.

As we have been discussing all through the mortgage crisis, the option-ARMs, which, believe it or not, were still being offered by large banks and thrifts until recently, were among the riskiest of the loans that defined the run-up in the U.S. housing market.

Option-ARMs are residential mortgage loans that feature several monthly payment choices for borrowers, including an option to pay no principal and even pay less than the previous month's accrued interest. When the lowest option payment is made, the unpaid interest is tacked onto the loan's principal balance, while the lender books the unpaid interest as revenue. This increase in a loan balance is called "negative amortization."

When offering these loans, which would typically garner higher commissions for loan officers and mortgage brokers, a commonly used argument was that option-ARMs were appropriate for "sophisticated borrowers." Many of these sophisticated borrowers were tempted by teaser ads that directed attention to teaser rates and the lowest payment options, without mentioning in a clear way how easily a borrower could be hurt by an increasing loan balance, especially if home prices failed.

2 of 5

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
DOW 17,279.74 +13.75 0.08%
S&P 500 2,010.40 -0.96 -0.05%
NASDAQ 4,579.7890 -13.6380 -0.30%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs