Downey Faces Accounting Issue on Modifications

Downey Financial Corp. will have to treat home loan modifications as a "troubled debt restructuring" under accounting rules as the result of an interpretation change by its auditors, KPMG, the company said.

The change involves loans that were current and where the new interest rate was no less than those offered to new borrowers. But because Downey did not re-underwrite the loans, the troubled debt restructuring classification was triggered, according to the KPMG interpretation of accounting rules.

Downey implemented the loan modification program early in the third quarter to reduce potential "payment shock" for borrowers facing upward resets of their monthly payment on payment-option adjustable-rate mortgages. Participants were refinanced into five-year hybrid ARMs or ARMs that adjust annually but do not involve negative amortization.

Downey says that 95% of the affected borrowers have remained current on their payments since the program was implemented. But because the loans are being treated as troubled debt restructurings, the balance of the loans have to be added to Downey's nonperforming assets.

The loans will not come off the NPA status until payments have been timely for six consecutive months.

Analysts at Credit Suisse estimate that because of the troubled debt restructuring treatment, Downey's NPAs accounted for 4.7% of the company's assets at the end of 2007, up from Credit Suisse's previous forecast of 4.3%.

Credit Suisse said Downey is likely to have to set aside additional reserves for the troubled debt restructurings, reflecting the difference between the modified rates paid by the borrowers. (c) 2008 Mortgage Servicing News and SourceMedia, Inc. All Rights Reserved. http://www.mortgageservicingnews.com/ http://www.sourcemedia.com/

Next in News ►