CBS Year End Review: Downey Financial (DSL)

Downey Financial was down 52% for 2007 from the time that I initiated coverage on March 15, 2007. (Red S indicates blog posts where "sell" was reiterated.)

In my first Downey post I pointed out how Downey had put together a mortgage portfolio with multiple layers of risk including: limited verification of borrower income or assets; concentration in California; concentration in bubble years; use of mortgage brokers; negatively-amortizing Option-ARM loans.

On April 1, when people were still convinced that problems were limited to "subprime," I noted:

"M&T Bank - which is partially owned by Warren Buffett - is being forced to markdown and repurchase its Alt-A loans. Does anyone think that a bank owned by Buffett does worse underwriting than Downey? What does this imply about the value of Downey's portfolio of Alt-A loans?"

On April 12, I reported on an interesting conversation I had with an Arizona real estate agent:

I asked, "Did you ever have any garbage paper you couldn't push through Downey?" He just laughed.

It is amazing that we both set out, for different reasons and at different times, to find the loosest mortgage lender and independently found Downey.

This April 22 comparison of Downey and New Century illustrated that Downey's portfolio was, in some ways, riskier than a subprime lender's.

On June 12, I found out that hedge funds viewed Downey as a good buy. I pointed out that stated income loans made questionable economic sense for normal borrowers.

During the first week of every month, I release my Survey of Downey Financial Defaults and Trustee's Sales (see October and November). This has proven to be a great leading indicator of the Thirteen Month Selected Financial Data report that Downey releases mid-month.

I'll have the December survey posted in the next few days.

Here are the rest of my Downey-tagged posts. I still own Downey puts.

CBS Year End Review: Standard Pacific

Standard Pacific is down 84% since I initiated coverage on March 30, 2007. (Red S indicates blog posts where "sell" is reiterated.)

In my first SPF post, I talked about how the assets on the balance sheet were greatly overvalued, and would require significant further writedowns. I also brought up the issue of the two layers of financial leverage thanks to the joint-venture deals.

Also, this observation proved to be an understatement:

And when land values fall, they fall hard. They are a bet on home prices and builder profit margins.

I grant that the old JV land, and the old land owned (if any), are undervalued on the books. But my suspicion is that the amount of that land is dwarfed by the way overpriced land.

On October 3, I questioned the reasoning behind a huge homebuilder rally sparked by Citigroup analyst Stephen Kim. Sure enough, that was not the bottom for the homebuilders.

This is an industry suffering from huge over-investment, and it needs a restructuring.

I am still short Standard Pacific, and I believe that their common stockholders will be wiped out within one year from today.