Lax Lending Standards Led to IndyMac’s Downfall

[Mr Rex]

I suspect that upward adjustments in the interest rates of ARMs had a thing or two to do with the collapse. Of course, declining housing values certainly greased the slide.

What's new? Does anyone associated with residential lending have a long-term view of things?

Any lender offering ARMs was betting on the market always incresing.

 

[Scott Kibler]

It's just a little tought for me to lay this at the feet of management, when these are the feds bank and they were playing the game that the feds made rules for. Does it make sense to try to apply traditional lending standards and logic to subsidized institutions? It's a big poker game, where no one in the "industry" is playing with his own chips.

The problem is nobody at the helm looks at the long term. Our ecomonic system is totally based on the short term; the quarter, the year. There is every incentive to maximize profits for today at the expense of possible or even likely scenarios five, ten years out.

The mortgage industry is a prime example. Anybody with a smattering of economic sence knows the business cycle will eventually turn. Unfortunately companies conservatively building a lower income/higher quality portfolio or socking away earnings gets clobbered in the market during the boom side of the cycle. CEO thus gets fired. Better to drive
full speed and make hay while you can. Assuming no criminal activity, management makes a ton of cash and can be ultimately terminated as a very rich man/woman.

GM and the giant SUV is another great example. What kind of hybrid/electric/fuel cell tech would they have come up with over the past 15 years with more resources allocated that direction? Of course they couldn't. The competition would have buried them during the cheap gas era.

Government's job, IMO, is to take that long view prohibited by market forces to create programs, incentives, whatever, to prod private enterprise in doing those thing beneficial to the future.

Of course given short term of elected officials and the constant pressure to continual campaign, government has a hard time with the long view too.

 

[Thomas N. Morgan]

As someone recently said, "In the US, profits are privatized. Losses are socialized".

 

[Non Sequitur]

Another take on what IMB did wrong:

http://forum.ml-implode.com/viewtopic.php?t=78284

 

[Riick]

Lifestyle and patriotic related talking points loose their relevance in the face of economic difficulties affecting the majority of the voting public. Watch what happens over the next four years or so.

1930's lifestyle dreams were massively downsized -a chicken in every pot. (ooops, that was Hoover).
But patriotism / nationalism <though they're surely not exactly the same thing> ... grew big time; and this was the time of Despots [Stalin, Roosevelt, Churchill, Mussolini, to name just a few].
Hard times - are the times of "the man on the white horse" leading the people out of despair and into the new era.
(( "The man-on-a-white-horse typically labels himself as a champion of the common man. Non-supporters label him as the opiate of the masses."))
BTW... notice which Candidate fills the bill?
.
.

 

[Greg Bell]

We still have many brick streets around here.Thanks to a depression and some socialist programs that liberals love and enjoy.I am practicing my brick laying for my future utopia..

 

[Vernon Martin]

I recently had lunch with a friend of an IndyMac commercial appraiser. His friend told him that at the end, IndyMac had a one billion dollar construction loan portfolio, 50% of which was in default.

 

[Tim The Enchanter]

at the end, IndyMac had a one billion dollar construction loan portfolio, 50% of which was in default.

Several years ago I used to do appraisal of homes that were proposed, and some that were half built. These were all high dollar, custom homes. Would seem to me to be high risk loans.

One in particular was high up in the Beverly Hills PO, had all curved walls. I don't think there was a straight wall in the place. When I inspected it, there was a 7,000 SF framed out and plywooded structure on a steep downhill, and some extra caissons further downhill. Construction appeared to have stalled some time ago by the appearance of the wood.

Short story long, I went back a few months ago when I was in the area, and it was completed. Looked at the DBS web site and it took them 10+ years from the first permit action to the Certificate of Occupancy. And they still had a permit open for a pool.

I didn't think to check if it was the same owner all that time. Practically had to drag the plans out of him at some buzz me in the door office in the jewelry district in downtown L.A. Hopefully they completed their dream house and pool by now. m2:

 

[Vernon Martin]

NY Post article this morning

Per reporter Teri Buhl:

"The federal investigation into mortgage fraud at IndyMac Federal Bank has expanded into the company's Homebuilder Division, according to a bank executive interviewed by the FBI and FDIC.

Investigators have seized 2005-06 construction loan audit reports from the files of the Homebuilder Division, the executive told The Post, and later questioned him and other workers about the reports, he said.

The recently renamed Homebuilder Division, which lent money on commercial and residential construction projects until stopped lending at the end of 2007, had a staggering 52 percent of its $1.3 billion in loans classified as non-performing as of March 31, according to a government filing.

Based on the question asked by investigators, one focus of the probe appears to center on whether or not the appraisal inspectors inflated real-estate development project values and whether IndyMac loan officers gave independent appraisers false information.

"They asked about how we verify appraisal values," said the executive, who spoke on the condition of anonymity.

"I explained the lack of risk controls in place for that group, such as loan officers who were allowed to pick their own appraisers instead of using a third party to assign an independent appraiser - which is a typical industry practice," he said.

A federal grand jury in Los Angeles is investigating IndyMac and two other large subprime mortgage lenders - Countrywide Financial and New Century Financial, according to a report in The Los Angeles Times. "

 

[Terrel L. Shields]

they couldn't. The competition would have buried them during the cheap gas era.

Too true and exactly why we have no high gas mileage autos....

They asked about how we verify appraisal values," said the executive, who spoke on the condition of anonymity.

"I explained the lack of risk controls in place for that group, such as loan officers who were allowed to pick their own appraisers

If allowed to pick their own appraisers when they have an interest in preserving their jobs, they should have picked the best appraisers. Instead they were picking them to support deals they knew were "wormy" in the first place and hoping the market would bail them out down the road.