UPDATE 1-Lender Downey to file for Chapter 7 bankruptcy

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Nov 24 (Reuters) - Downey Financial Corp DSL.N, the California lender crippled by mortgage losses, said it will file for bankruptcy protection, seeking liquidation, two days after its savings and loan subsidiary was seized by Federal authorities.

In a regulatory filing, Downey Financial said it plans to file for Chapter 7 bankruptcy protection with the Delaware District Court by no later than Nov. 26. The company expects the court to appoint a bankruptcy trustee, it said in the filing.

The company also said the New York Stock Exchange had stopped public trading of the company's stock following the recent developments.

Downey got into trouble by lending "option" adjustable-rate mortgages, which let borrowers pay less than the interest and principal due each month. Defaults on these loans soared amid the slump in housing markets.

Washington Mutual Inc (WAMUQ.PK) and IndyMac Bancorp Inc (IDMCQ.PK), the other big banks to fail this year, also had large option ARM operations.

Late Friday, U.S. banking regulators seized California banks Downey Savings and Loan and PFF Bank & Trust as the housing crisis claimed two more victims from the financial crisis.

U.S. Bancorp (USB.N) took over the two banks' branches, deposits, and most of their assets, the Federal Deposit Insurance Corp said.

Newport Beach, California-based Downey is the third largest bank to fail this year as plummeting housing prices and the slowing economy have triggered massive mortgage defaults.

Earlier this month, Downey had said its survival was in doubt because it may fail to raise enough capital to satisfy its regulators.

So far this year, 22 banks have failed. That already represents the most bank failures in the U.S. since 1993, when 50 banks failed.

In Chapter 7 bankruptcy, a company liquidates its assets to pay up its debt. The fund from the sold assets is distributed to the creditors to make the company free from any liability. (Reporting by Anurag Kotoky in Bangalore, Editing by Dinesh Nair) ((anurag.kotoky@thomsonreuters.com; within U.S. +1 646 223 8780; outside U.S. +91 80 4135 5800; Reuters Messaging: anurag.kotoky.thomsonreuters.com@reuters.net))