Downey Still Faces More Credit Pressure

Analysts at Friedman Billings Ramsey here have upgraded their rating on Downey Financial Corp. to "market perform" from "underperform," even as they lowered their price target on the company's shares to $13.

The lower price target, which was in line with the company's share price early last week, reflects "our expectations for continued rising credit losses and pressures on capital levels," FBR said in a report.

Downey recorded a first-quarter loss of $8.89 per share, sharply higher than analysts had estimated. The weakening of the California housing market was a key factor behind an unusually steep increase in credit costs. The loss reduced Downey's core capital to 8.4% from 10.2% in the fourth quarter, FBR said. "The big problem with any residential lender is trying to predict cumulative loses on their loan portfolio," FBR said. The analysts calculate that Downey is currently trading at a ratio which implies a 32% default rate and a 50% loss severity rate. (c) 2008 Mortgage Servicing News and SourceMedia, Inc. All Rights Reserved. http://www.mortgageservicingnews.com/ http://www.sourcemedia.com/

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