SEVERANCE AGREEMENT AND GENERAL RELEASE


     This  Severance  Agreement and General  Release  ("Agreement")  is made and
entered into this 20th day of  November,  1998,  by and among  Downey  Financial
Corp., a Delaware  corporation  ("DFC"),  Downey  Savings and Loan  Association,
F.A., a federally  chartered savings  association and wholly owned subsidiary of
DFC ("DSLA"), and James W. Lokey, an individual  ("Executive").  For purposes of
this Agreement,  DFC, DSLA and/or their  respective  subsidiaries and affiliates
may collectively be referred to as the "Company" as the context  requires.  This
Agreement is entered into with reference to the following:

                                    RECITALS

     A.  Executive  has served as Chief  Executive  Officer,  President and as a
director  of  DFC,  DSLA  and  certain  of  their  respective  subsidiaries  and
affiliates,  pursuant to that certain Employment Agreement between Executive and
the Company, dated February 6, 1998 (the "Employment Agreement");

     B. Executive has determined to resign all positions with the Company,  such
resignation  to be  effective  as of the  close  of the  Company's  business  on
November 20, 1998 (the "Effective Date");

     C. The Board of  Directors  of the Company,  after  careful  consideration,
believes that it is in the best interests of the Company and its stockholders to
accept  Executive's  resignation,  such  resignation  to be  effective as of the
Effective  Date, to terminate the Employment  Agreement as of the Effective Date
and to provide  Executive  with  certain  severance  benefits,  all as set forth
herein;

     D. As part of this Agreement and in consideration of certain accommodations
provided to Executive by the Company hereunder,  Executive has agreed to release
the  Company  and its  respective  directors,  officers,  employees,  agents and
assigns from all claims and causes of action that Executive may now or hereafter
have, whether known or unknown.

     NOW,  THEREFORE,  IN  CONSIDERATION  OF the foregoing  recitals,  which are
incorporated as an integral part of this  Agreement,  the mutual promises of the
parties and other good and valuable consideration the receipt and sufficiency of
which are hereby acknowledged, the parties hereto agree as follows:

     1.  RESIGNATION  OF EXECUTIVE.  Executive  hereby  irrevocably  resigns his
positions as director  and officer of the Company,  effective as of the close of
the Company's business on the Effective Date.


                                       1
<PAGE>


     2. SEVERANCE PAYMENT. In consideration for the Executive entering into this
Agreement, in addition to paying Executive's regular salary through November 30,
1998, the Company will continue to pay  Executive's  regular salary in the gross
amount of $25,000  per month,  less any  amounts  required to be deducted by the
Company  for federal and state  taxes or other  applicable  requirements,  for a
period of six (6) months (the "Severance Payment").

     3.  PRO-RATED 1998 ANNUAL  INCENTIVE PLAN PAYMENT.  On January 4, 1999, the
Company  shall  pay or  shall  cause to be paid to  Executive,  in cash or other
readily  available  funds,  the pro-rated  gross sum of One Hundred Thirty Seven
Thousand  Five  Hundred  Dollars  ($137,500)  less any  amounts  required  to be
deducted  by the  Company  for  federal  and  state  taxes or  other  applicable
requirements ("1998 Annual Incentive Plan Payment"). The parties acknowledge and
agree that upon payment of the 1998 Annual Incentive Plan Payment, Executive has
received  the full amount of incentive  compensation  owed to him for 1998 under
the Company's incentive  compensation program and the Employment Agreement,  and
that  Executive  is  not  entitled  to  any  additional  incentive  compensation
hereunder or thereunder.

     4. DEFERRED COMPENSATION PAYMENT. On January 4, 1999, the Company shall pay
or cause to be paid to Executive,  in cash or other readily available funds, the
sum of Eighty Three  Thousand  Seven Hundred Twenty Eight Dollars and Sixty Four
Cents ($83,728.64),  less any amounts required to be deducted by the Company for
federal  and  state  taxes  or  other  applicable  requirements,   which  amount
represents  the full amount of deferred  compensation,  inclusive of all accrued
interest that  Executive is entitled to receive under the terms of the Company's
Deferred  Compensation  Plan,  as  calculated  pursuant  to the  crediting  rate
methodology.

     5.  HEALTH/OTHER  BENEFITS.   Executive  shall  be  entitled  to  continued
participation  in all Company  health and other benefit  programs to which he is
currently  entitled  from the date  hereof  through  May 31,  1999.  Thereafter,
Executive  shall be  entitled  to receive  the  benefits to which he is entitled
pursuant  to the  Consolidated  Budget  Reconciliation  Act of 1985,  as amended
("COBRA"), which shall be provided in accordance with the terms of the Company's
health benefit plans.  No health or post employment  benefits,  other than those
provided  for under  COBRA and the  Employment  Agreement,  shall be provided to
Executive hereunder.


                                       2
<PAGE>


     6. ACCRUED VACATION PAY. On January 4, 1999, the Company shall pay or cause
to be paid to Executive,  in cash or other readily  available  funds, the sum of
Twenty  Three  Thousand  Five  Hundred  and Nine  Dollars  and  sixty  one cents
($23,509.61),  less any  amounts  required  to be  deducted  by the  Company for
federal  and  state  taxes  or  other  applicable  requirements,   which  amount
represents  the full  amount of  accrued  but  unused  vacation  pay owed by the
Company to Executive through November 30, 1998.

     7. MUTUAL GENERAL  RELEASE.  In further  consideration  of the promises and
agreements made hereunder,  Executive agrees unconditionally and forever, except
for any rights under this  Agreement,  to release and  discharge the Company and
its  respective  subsidiaries,   affiliates,   officers,  directors,  employees,
representatives,  attorneys and agents,  and the Company agrees  unconditionally
and  forever  to  release  and  discharge  Executive  and  his  representatives,
attorneys,  agents and  assigns,  from any and all  claims,  actions,  causes of
action, demands, liabilities,  rights or damages of any kind or nature which any
of them may now have, or ever have, whether known or unknown, against the other,
including any claims,  causes of action or demands of any nature  arising out of
or in any way relating to Executive's  employment  with, or separation  from the
Company.

     This release  specifically  includes any claims for  discrimination  and/or
violation of any statutes,  rules,  regulations or ordinances,  whether federal,
state or local, including, but not limited to, Title VII of the Civil Rights Act
of 1964, as amended,  age claims under the Age  Discrimination in Employment Act
of 1967,  as  amended  by the Older  Workers  Benefits  Protection  Act of 1990,
Section 1981 of Title 42 of the United  States  Code,  and the  California  Fair
Employment and Housing Act.

     The parties further agree knowingly to waive the provisions and protections
of Section 1542 of the California Civil Code, which reads:

               A general  release  does not extend to claims  which the creditor
               does not  know or  suspect  to exist in his  favor at the time of
               executing  the  release,   which  if  known  by  him,  must  have
               materially affected his settlement with the debtor.

     Executive  represents  and  agrees  that,  prior to the  execution  of this
Agreement,  Executive  has had the  opportunity  to  discuss  the  terms of this
Agreement with legal counsel of his choosing.  Executive affirms that no promise
or inducement was made to cause him to enter into this Agreement, other than the
severance benefits described herein.  Executive further confirms that he has not
relied upon any other statement or  representation  by anyone other than what is
in this Agreement as a basis for his agreement.


                                       3
<PAGE>


     8. TRADE  SECRETS/CONFIDENTIALITY/SURRENDER  OF COMPANY PROPERTY. Except as
may be required by law,  regulation or court order, for a period of one (1) year
after  the  Effective   Date,   Executive  shall  not  divulge  any  proprietary
information  or trade  secrets of the  Company  and shall  otherwise  thereafter
respect  the  confidential  nature  of such  proprietary  information  and trade
secrets.  Executive  shall  surrender  all  Company  property on or prior to the
Effective Date.

     9. NEWS RELEASE.  The parties shall  cooperate in the preparation of a news
release   relating  to  the  Executive's   resignation   from  the  Company  for
dissemination on or prior to the Effective Date.

     10.  REIMBURSEMENT  OF BUSINESS  EXPENSES.  Executive  shall be entitled to
reimbursement of properly  submitted claims for business  expenses in accordance
with the Company's policies and practices through the Effective Date.

     11.  INDEMNIFICATION.  The Company shall indemnify  Executive in accordance
with the  indemnification  obligations  under the Company's  charter  documents,
including the respective certificate of incorporation, federal stock charter and
bylaws of DFC, DSLA or their respective subsidiaries or affiliates,  as the case
may be, and otherwise as is consistent  with  applicable law, in connection with
claims or causes of action  relating to or otherwise  arising in connection with
Executive's  service to the Company.  Upon  reasonable  notice from the Company,
Executive  shall make  himself  reasonably  available  to assist  and  otherwise
cooperate with the Company in connection with any litigation  matters  involving
the Company.

     12.  NON-DISPARAGEMENT.  The parties  hereby  agree that none of them shall
disparage  the  other in any  future  statements  or  communications  concerning
Executive and his employment with the Company or otherwise.

     13.  INQUIRIES BY THIRD  PARTIES.  The parties  hereby agree that they will
consult with one another with respect to appropriate responses to inquiries from
stock exchanges,  analysts, the press, customers,  governmental  authorities and
other third parties  regarding  Executive's  resignation  from the Company.  The
parties  further agree that,  except as required by law or  regulation,  none of
them will respond to such  inquiries or make other public  statements  regarding
these  matters  (other than the news  release  referred to in Section 11 hereof)
until such consultation has occurred.

     14.  ARBITRATION.  Any and all disputes or claims  arising out of or in any
way related to Executive's  employment with, or separation from the Company,  as
well as any and all  disputes or claims  arising out of or in any way related to
this Agreement,  including without  limitation,  fraud in the inducement of this
Agreement,  or  relating  to the  general  validity  or  enforceability  of this
Agreement,  shall be  submitted  to final  and  binding  arbitration  before  an
arbitrator of the American Arbitration Association in Orange County,  California
in accordance with the rules of that body governing


                                       4
<PAGE>


commercial  disputes,  and the prevailing  party shall be entitled to reasonable
costs and attorneys' fees.  Judgment on the award rendered by the arbitrator may
be entered in any court having jurisdiction thereof.

     15.  GOVERNING LAW. This Agreement shall be construed under the laws of the
State of California, both procedural and substantive,  except as may be required
under federal laws and  regulations  applicable to federally  chartered  savings
associations or their subsidiaries or affiliates.

     16. REVOCATION RIGHT.  Executive acknowledges that he has been advised that
he has twenty-one  (21) days to consider this Agreement and that he was informed
that he has the right to consult with counsel  regarding this agreement.  To the
extent that Executive has taken less than  twenty-one (21) days to consider this
Agreement,  Executive  acknowledges  that he has had sufficient time to consider
the Agreement and to consult with counsel and that he does not desire additional
time.  This  Agreement is revocable by Executive  for a period of seven (7) days
following Executive's  execution of this Agreement.  The revocation by Executive
of this Agreement must be in writing,  must specifically  revoke this Agreement,
and must be received by the Company  prior to the eighth (8th) day following the
execution of this  Agreement by Executive.  This  Agreement  becomes  effective,
enforceable  and  irrevocable  on the  eighth  (8th) day  following  Executive's
execution of the Agreement.

     17.  MISCELLANEOUS.  This Agreement sets forth the entire agreement between
Executive and the Company  relating to the subject  matter hereof and supersedes
all prior  oral or  written  agreements  relating  thereto,  including,  without
limitation,  the Employment Agreement.  This Agreement shall be binding upon all
parties'  respective  heirs,  representatives,  successors  and assigns.  If any
portion of this Agreement is found to be illegal or  unenforceable,  such action
shall not affect the validity or enforceability  of the remaining  paragraphs or
subparagraphs  of this Agreement.  No amendments to this Agreement will be valid
unless written and signed by Executive and an authorized  representative  of the
Company.  This  Agreement  may be executed in one or more  counterparts,  all of
which, taken together,  shall constitute one original document.  The undersigned
agree to the terms of this  Agreement  and  voluntarily  enter  into it with the
intent to be bound thereby.


                                       5
<PAGE>


     IN WITNESS WHEREOF,  the parties have executed this Agreement as of the day
and year first written above.

EXECUTIVE:                      DOWNEY FINANCIAL CORP.


/s/ James W. Lokey              By:       /s/ Donald E. Royer
---------------------                    -----------------------
    James W. Lokey                            Donald E. Royer
                                Executive Vice President and General Counsel
 
                                DOWNEY SAVINGS AND LOAN
                                ASSOCIATION, F.A.


                                By:       /s/ Donald E. Royer
                                         -----------------------
                                              Donald E. Royer
                                Executive Vice President and General Counsel



                                       6
<PAGE>