Downey Financial Reports Higher Incidence of Delinquency When Minimum Payments Reset

Look at this amazing quote from the Downey Financial Corp. quarterly report (10-Q, March 31, 2008):

"A higher incidence of delinquency is expected when the minimum payments reset on our adjustable rate loans subject to negative amortization or interest only payments, whereby the interest rate is fixed for the first three to five years. For example, as of March 31, 2008, there were $976 million of loans subject to negative amortization or with interest only payments within our loans held for investment that have not been modified but had first time payment recasts since December 31, 2006, of which 36.1% were delinquent 30 or more days at March 31, 2008."

I first predicted this on April 4, 2007:

"More and more of the option ARM borrowers are going to be hitting the negative amortization 110% cap. ... When the option ARMs recast and the payments skyrocket, the delinquency rate is going to skyrocket."

Downey is down 80% since then.