*IndyMac taken over

Federal regulators seized the troubled mortgage lender in what will become one of the largest bank failures in U.S. history. Falling home prices and rising forclosures were the cause of death. The Office of Thrift Supervision, which transferred IndyMac's operations to the Federal Deposit Insurance Corp., said it did not believe the Pasadena-based company could meet its depositors' demands. IndyMac will be run by the FDIC and reopen Monday. Most banking services continue over the weekend, with the exception of online and telephone services.. (Bank regulators typically try to take over a financial institution on a Friday so it can prepare over the weekend to reopen for business). Deposits up to $100,000 are insured by the government. In an unusual statement, the Office of Thrift Supervision said "the immediate cause" of the failure was NY Sen. Charles Schumer, who raised all kinds of concerns about IndyMac’s solvency. "Although this institution was already in distress, I am troubled by any interference in the regulatory process," said OTS Director John Reich. (WSJ, Reuters, LAT)

Earlier this week, the company made a last-minute ditch to raise capital and cut operating costs by laying off more than half its workforce. But the stock price fell below $1 a share and no investors were coming forward to put more money into what was becoming a failing company. Money was also coming out. In short order, IndyMac was unable to continue operating. We've seen plenty of lending institutions fail during the mortgage crisis, but this is the biggest case of a federally insured institution that's taken over. What’s ironic is that IndyMac was actually started by Angelo Mozilo and David Loeb, the guys who started Countrywide. IndyMac began as an offshoot of Countrywide in 1985 – it was called Countrywide Mortgage Investment.

Its main business was providing what they call Alt A loans – sometimes called Alternative documentation loans. These loans fall somewhere between subprime and prime, and are designed for people who have a decent but not great credit history - and no steady income (and often no verification of income). IndyMac had been very sensitive about being tied to the subprime situation. But the mortgage mess has been unfolding in a sort of bottom-up way, so perhaps it was inevitable that the Alt A loans would be the next group to fall. In a way, these loans faced the same fate as the subprimes. You had lenders offering crazy terms – things like no downpayments and teaser rates – so that they could keep up loan volume. When the teaser rates expire, the borrowers are stuck with paying a mortgage they can’t afford. The other big problem was that borrowers would use these crazy loans to refinance and get more cash, so their payments were extended even further.

*Updated post

3:52 PM Friday, July 11 2008 • Link
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