Business - Money 101

NEWPORT BEACH, Calif. (AP) ― Federal regulators on Friday shut down two big thrifts based in Southern California, saying they fell victim to the acute distress in the housing market in that state.

The failures of Downey Savings and Loan Association, based in Newport Beach, and PFF Bank & Trust of Pomona brought the number of U.S. bank failures this year to 22.

Customers will automatically become depositors of U.S. Bank and their accounts will continue to be insured by the FDIC, which says that depositors will be able to access their money over the weekend by writing checks or using ATM or debit cards.

The Federal Deposit Insurance Corp. was appointed receiver of the two thrifts. U.S. Bank, based in Minneapolis, is acquiring all the deposits and nearly all the assets of both. The combined 213 branches of the two will reopen as branches of U.S. Bank under their normal business hours, including those with Saturday hours.

Downey, the 23rd-largest U.S. savings and loan, had assets of $12.8 billion and deposits of $9.7 billion as of Sept. 30. PFF, the 38th-largest, had assets of $3.7 billion and $2.4 billion in deposits.

At the same time, the FDIC and U.S. Bank signed a loss-sharing agreement calling for the bank to assume the first $1.6 billion of losses on the thrifts' mortgages and loans, while the FDIC will share in any losses beyond that.

Also under the deal, U.S. Bank agreed to put into effect for the thrifts a mortgage modification plan similar to that launched by the FDIC for another big collapsed savings and loan, IndyMac Bank of Pasadena, Calif., which was seized in July with about $32 billion in assets. Under the IndyMac plan -- also used as a model for a new program by mortgage finance companies Fannie Mae and Freddie Mac -- struggling home borrowers pay interest rates of about 3 percent for five years. Rates are reduced so that borrowers aren't paying more than 38 percent of their pretax income on housing.

The Office of Thrift Supervision, the federal regulator for the two California thrifts, said they both suffered mounting losses since last year. Downey's business focused on nontraditional, high-risk home mortgages such as payment-option and adjustable-rate loans.

The Treasury Department agency recently boosted the minimum capital requirements for the parent, Downey Financial Corp., as the company struggled with the slumping mortgage market. Downey was hit hard by rising mortgage defaults, especially in its option adjustable-rate mortgage holdings. Option ARMs allow customers to choose a different payment option each month -- including a payment that is smaller than the interest due on the loan.

Option ARMs have been among the worst-performing loans during the downturn in the real estate market.

PFF, established in 1892, had a large concentration of housing construction loans hit hard by the deteriorating real estate market on the West Coast, the thrift agency said.

"The closing of these two thrifts once again demonstrates the tremendous impact of the housing market distress on the state of California," said John Reich, director of the Office of Thrift Supervision, in a statement. This year, four of the five failures of institutions regulated by the agency -- and all the ones of significant size -- had major concentrations in housing finance business in California, he said.

The FDIC estimated that the resolution of Downey will cost the federal deposit insurance fund about $1.4 billion, while that of PFF will cost an estimated $700 million.

Regular deposit accounts are now insured up to $250,000 as part of the financial rescue law enacted in early October.

The 22 bank failures so far this year compare with three for all of 2007 and are far more than in the previous five years combined. It's expected that many more banks won't survive the next year of economic tumult. The pressures of tumbling home prices, rising mortgage foreclosures and tighter credit have been battering many banks, large and small, nationwide.

The FDIC estimates that through 2013 there will be about $40 billion in losses to the deposit insurance fund, including an $8.9 billion loss from the failure of IndyMac Bank. The FDIC is raising insurance premiums paid by banks and thrifts to replenish its fund, which now stands at around $45.2 billion, below the minimum target level set by Congress and the lowest level since 2003.

On Friday, the FDIC formally approved a program to guarantee as much as $1.4 trillion in U.S. banks' debt for more than three years as part of the government's financial rescue plan. Under the program, meant to thaw the freeze in bank-to-bank lending, the FDIC will provide temporary insurance for loans between banks – except for those for 30 days or less -- guaranteeing the new debt in the event of payment default by the borrowing bank.

Of the roughly 8,500 federally insured banks and thrifts, the FDIC had 117 on its confidential internal list of troubled institutions as of June 30, a five-year high.

Customers who have questions about changes in bank ownership can call the FDIC toll-free -- the number is 1-800-930-5169 for Downey Savings depositors, and 1-800-930-6827 for PFF Bank customers. The phone numbers will be operational until 9 p.m.; on Saturday from 8 a.m. to 6 p.m.; and on Sunday from noon until 6 p.m., and next week from 8 a.m. to 8 p.m., or go to the FDIC's Web site.

(© 2009 CBS Broadcasting Inc. All Rights Reserved. This material may not be published, broadcast, rewritten, or redistributed. The Associated Press contributed to this report.)