Downey’s stock takes sharp drop

Shares of Downey Financial Corp. tumbled 13% on Monday after a program that allows some homeowners to restructure debt boosted nonperforming loans to 7.8%.

The year-end figure would have been about 4.7% if Downey, with $13.5 billion in assets, hadn’t counted the modified loans as “troubled debt” on the advice of accountant KPMG, the lender said Monday.

The number of Americans who fell behind on mortgage payments reached a 20-year high in the third quarter last year as the housing recession deepened. Downey revised nonperforming asset figures starting in June, when it began reducing interest rates for customers with option-ARM loans, which let borrowers defer part of their monthly payments.

“Especially in the current housing market, there is a rebuttable presumption that if the interest rate is lowered in a loan” then it’s a troubled debt, Downey President Rick McGill said.

The Newport Beach-based owner of Downey Savings & Loan said $99 million in loans were reclassified as nonperforming as of Sept. 30, when the percentage rose to 2.9% from a previously reported 2.3%. The lender didn’t report the amount of nonperforming debt at the end of the year.

Downey’s stock was hammered on the news, losing $3.63 to $24.45, its biggest one-day drop since Nov. 1. The shares have slumped 65% in the last year, compared with the 28% decline of the KBW Banks index.

If the borrowers in the program make payments for six months, the loans will be removed from the nonperforming category, Downey said. About 95% of participants have made payments so far, Chief Financial Officer Brian Cote said.