September 12, 2007
Via fax, regular mail, and EDGAR
Ms. Sharon M. Blume
Reviewing Accountant
Securities and Exchange Commission
Division of Corporation Finance (Mail Stop 4561)
100 "F" Street N.E.
Washington, D.C. 20549
Re: Downey Financial Corporation
Form 10-K for the Fiscal Year Ended December 31, 2006
Form 10-Q for the Fiscal Quarter Ended March 31, 2007 and June 30, 2007
File No. 1-13578
Ms. Blume:
This letter sets forth responses from Downey Financial Corp. (DFC) to comments in your letter dated August 28, 2007. Our responses are keyed to the comments in your letter.
DFC response: The mortgage-backed securities (MBS) on DFC’sConsolidated Balance Sheet represent a single security purchased by DFC in March 1991; it does not represent MBS retained in securitization transactions. Proceeds from principal payments on this single security are reflected in “Principal payments on loans held for investment and mortgage-backed securities available for sale” within cash flows from investing activities in DFC’sConsolidated Statements of Cash Flows in accordance with SFAS 95.
Regarding proceeds from the sale of loans sold as an MBS, we believe these proceeds are reflected correctly as cash flows from operating activities. under SFAS 95 and SFAS 102. These cash flows relate to sales of loans held for sale whereby DFC securitizes and sells loans in the capital markets as one integrated transaction. Specifically, these transactions typically involve creation of MBS by a government sponsored entity (GSE) from loans sold by, and delivered by, DFC to the GSE. While the GSE is obligated to provide DFC
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with the MBS in exchange for the sold loans, the GSE typically fulfills this commitment through delivery of the MBS directly to the third-party purchaser based on a forward sales commitment by DFC. The sales of both the loans and MBS are settled typically on a same-day basis such that DFC does not retain the MBS.
DFC response: As previously noted, the MBS caption on DFC’sConsolidated Balance Sheet does not represent MBS retained in the securitization process. Rather, this caption represents a discreet investment security purchased for investment purposes, which is accounted for and presented in DFC’sConsolidated Balance Sheet in accordance with SFAS 115, with cash flows included in investing activities in DFC’sConsolidated Statement of Cash Flows.
With regard to the disclosure on page 5, we wish to clarify that in all securitization transactions occurring during the periods included in our Form 10-K, the securitization and sale of the loans occurred on the same day, thereby making the disclosure on page 5 more theoretical than descriptive of actual accounting. However, management had maintained this disclosure to allow readers to understand management’s accounting in the event this situation occurred in the future. To address the comment by SEC staff and to better clarify DFC’s accounting for this situation, we intend to modify the disclosure in DFC’s future filings as follows:
“During the [years ended December 31, 2006, 2005, and 2004], all loans securitized by the Company were sold to third parties concurrent with the securitization process. However, in the future based on market conditions, we may exchange loans we originate for sale with government-sponsored agencies for mortgage-backed securities collateralized by these loans and retain these securities for a period of time prior to selling the securities in the capital markets. In this event, we will not record a gain or loss on the exchange on the date of securitization. However, during the period we retain the securities, we will carry the mortgage-backed securities as trading securities in our Consolidated Balance Sheet with changes in fair value included in our Consolidated Statement of Income in accordance with U.S. GAAP.”
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DFC response: Loans are transferred from held for sale to held for investment at the lower of cost or fair value. If there is an adjustment due to a decline in fair value, the loss is recorded in current earnings within the category of gains on sales of loans at the time of transfer. DFC’s future filings will be revised to include this accounting policy.
DFC response: In future filings, DFC will exclude the words “annual” and “quarterly” from paragraphs 2, 3 and 4 of our certifications and reference only the “report” on Form 10-K and Form 10Q. The certifications will be in the exact form as set forth in Item 601 (b) (31) of Regulation S-X, except as otherwise indicated in Commission Statements or staff interpretations.
In connection with our responses above, we acknowledge:
If you have any questions regarding DFC’s responses, feel free to contact me at (949) 509-4420.
Sincerely,
/s/ Brian E. Côté
Brian E. Côté
Executive Vice President & CFO
cc: Dave Irving, Staff Accountant, Securities and Exchange Commission
Dan Rosenthal, President & CEO, Downey Financial Corp.
Tom Prince, Executive Vice President & COO, Downey Financial Corp.
Jon MacDonald, Executive Vice President & General Counsel, Downey Financial Corp.
KPMG (Marc Macauley, Pat Kinesella, Russ Dysart)
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