Lax Lending Standards Led to IndyMac’s Downfall

[moh malekpour]

http://www.nytimes.com/2008/07/29/business/29indymac.html?pagewanted=1&_r=1&ref=business

This article sounds more like Obituary

PASADENA, Calif. — After his mortgage company nearly crashed a decade ago, Michael W. Perry set a new course. He bought a bank so the company, soon rechristened IndyMac Bank, would never run short of money again.

The financial world now knows how this story ended. Just before 3 p.m. on July 11, federal regulators arrived at Mr. Perry’s headquarters here and seized IndyMac, which was buckling under its burden of bad loans. The debacle, one of the biggest bank failures in American history, could cost the Federal Deposit Insurance Corporation as much as $8 billion. Shareholders have been all but wiped out.

The collapse of IndyMac, one of the nation’s largest mortgage lenders, was the most vivid example to date of the dangers now confronting the nation’s banks and their investors. Two more lenders, both of them relatively small, were taken over by the government last Friday, and many analysts believe more banks will fail as home prices weaken and loan defaults mount

 

[Terrel L. Shields]

Shareholders have been all but wiped out.

Hopefully Mr. Perry and his kinfolk who profited so well from the sacking of IndyMac will be wiped out and even better, sent to prison. I didn't realize that IndyMac was tied to Countrywide. Interesting...and explains a lot without saying a word.

What came next stunned IndyMac and its regulators. [Senator Chuck] Schumer wrote a letter to the Office of Thrift Supervision and F.D.I.C. questioning the bank’s viability. Reports of the letter created a run: In three days, customers withdrew $100 million.
....In the aftermath of the failure the O.T.S. and Mr. Schumer traded barbs about who was responsible. The O.T.S. director, John Reich, said Mr. Schumer’s remarks “undermined the public confidence ....” Mr. Schumer retorted that the Office of Thrift Supervision should have moved earlier to check “IndyMac’s poor and loose lending practices.”
Analysts said IndyMac would have gone under or been sold sooner or later, but added that Mr. Schumer’s remarks may have sped up the process by a few months.

 

[Fred]

Lax Lending Standards Led to IndyMac’s Downfall

Falling prices had something to do with it to. Rising prices cover a multitude of sins.

 

[Scott Kibler]

Falling prices had something to do with it to. Rising prices cover a multitude of sins.

Failing to adequately manage risk had everything to do with it. Did the management team at IndyMac figure there was zero chance of housing price declines?

 

[Fred]

Failing to adequately manage risk had everything to do with it. Did the management team at IndyMac figure there was zero chance of housing price declines?

Maybe. I think failing to price risk was an epidemic. But I still bet if real estate prices fall far enough and for long enough, it will take out every mortgage lender that Uncle S doesn't bail out. Of course, the expectation of bail out is what makes them play too close to the edge in the first place. Or in the case of Fannie, it is Congressional impetus that makes them take on too much risk - in the form of - we created you to make loans, now make loans.

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.

 

[Lee Lansford]

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?

 

[Mark to market]

Might add AVM use to the mix

 

[Joyce Potts]

Might add AVM use to the mix

Odd how no one's reporting on that, isn't it?

 

[Marcia Langley]

Lee,

My long term view is that there will be massive consolidation on all fronts. Financial institutions, banks, thrifts, credit unions, mortgage bankers, mortgage brokers, appraisal companies, builders, sales agents, and every other player will find that there can only be an extremely small number who can win. In order for there to be any winners at all, vast numbers will have to fail.

Laissez-faire at its best. The winners will be bouyed by global customers and will no longer be dependent on the American consumer so the middle class will continue to disappear.

I expect our society will replicate what has happened in other "old" civilizations and have the wealth consolidated into the hands of a very few and the masses will become proficient at making a living "outside the law."

The little guys who are lucky will find niches underneath the thumbs of the big winners.

 

[Scott Kibler]

The continued concentration of wealth in the hands of a few would take a major paradigm (can we still use that buzz word?) change in the American political landscape. Only the total disenfranchisement of the working and middle classes would keep the left/right politcal pendulum from occasionally swinging left and redistributing capital. 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.