November 26, 2008 / 1:25 AM / 10 years ago

Downey Financial files for Chapter 7 bankruptcy

NEW YORK (Reuters) - Downey Financial Corp DWNFQ.PK, a large provider of mortgages that proved risky, on Tuesday filed for bankruptcy protection, four days after federal regulators seized its banking operations.

The Newport Beach, California-based company plans to liquidate under Chapter 7 of the U.S. bankruptcy code, according to a filing with the U.S. bankruptcy court in Delaware. The filing was expected.

Downey specialized in “option” adjustable-rate mortgages, which let borrowers pay less than the interest and principal due each month. The loans are among the worst-performing in the nation’s housing downturn, and have left many borrowers owing more than their homes are worth.

On Friday, federal regulators shut down Downey’s thrift unit, Downey Savings & Loan, and the Federal Deposit Insurance Corp was named receiver. US Bancorp (USB.N), one of the 10 largest U.S. banks, took over Downey’s branches, its $9.7 billion of deposits and most of its $12.8 billion of assets.

According to the bankruptcy filing, Downey has between $10 million and $50 million of assets, and between $100 million and $500 million of liabilities.

Twenty-two U.S. lenders have failed this year. The FDIC on Tuesday said the number of “problem” banks and thrifts totaled 171 in the third quarter, up from 117 in the second quarter, and the highest number since 1995.

Reporting by Jonathan Stempel; Editing by Christian Wiessner

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