UPDATE 2-Downey posts huge Q2 loss, CEO exits; to seek options

(Recasts, adds details, analyst comments, share movement)

By Sweta Singh

BANGALORE, July 24 (Reuters) - Downey Financial Corp (DSL.N: Quote, Profile, Research, Stock Buzz) reported a loss for the fourth straight quarter, replaced its chief executive and said it was exploring strategic alternatives, sending its shares tumbling as much as 29 percent.

The California savings and loans said Chief Executive Daniel Rosenthal, 55, retired and it appointed Thomas Prince as interim CEO.

Downey also said Maurice McAlister, 83, its founder and largest shareholder, will retire as chairman after 51 years at the company. He was replaced by Michael Bozarth, an independent director.

"We now believe that the continued rising credit losses at a high pace due to further housing market deterioration in California will put the company's operations at risk," analyst Paul Miller of Friedman, Billings Ramsey said.

Downey said its board has formed a special committee to explore options for the company and retained Sandler O'Neill Partners LP as financial adviser.

Analyst Miller said finding a buyer may be extremely difficult, given the uncertainties in estimating the company's liability exposure on its option adjustable-rate mortgage (ARM) book.

Downey was one of the biggest providers of options adjustable-rate mortgages, which let borrowers pay less than the monthly payments due and add it to principal.