The real story at Downey

Downey Savings & Loan has been in a world of hurt for some months now - the result of issuing too many exotic mortgages and facing too many delinquencies - but the backstory is not what you might expect. As nicely reported by Forbes writer Peter Beller, Downey Chairman Maurice (Mac) McAlister had strict lending rules that "weeded out speculators and excommunicated dodgy appraisers and mortgage brokers." McAlister always insisted on high credit scores and sizable down payments from borrowers. Borrowers who took negative amortization loans were never allowed to let the loan value exceed 88 percent of the property value.

Under McAlister, Downey sailed through the s&l crisis of the late 1980s. As the housing boom took off in the late 1990s, larger, laxer banks jumped in, stealing away borrowers who wanted traditional 30-year, fixed-rate mortgages. McAlister turned to adjustable-rate loans, which carried twice the profit margin but made a few concessions to lure customers when interest rates were rising.

So what happened?

He'd miscalculated. The real estate run-up had carried values so high, especially in southern California, that when home prices crashed, they quickly tore through the bank's fat equity cushion. As delinquent loans soared, Downey started going after customers, filing at least 31 suits since Jan. 1, accusing borrowers and brokers of lying on loan applications and appraisers of inflating home values. McAlister resigned from the board in July. His stake in the bank, worth $400 million a year ago, is now $12 million.

Downey stock is now trading at $2.31. The 52-week high: $52.75.