Struggling Mortgage Lender Taken Over by Regulators
Saturday, July 12, 2008
Federal regulators yesterday took over struggling mortgage lender IndyMac Bank, the second-largest failure ever of a U.S. financial institution.
IndyMac, which staggered this week under a run on deposits, will reopen on Monday under federal control as IndyMac Federal Bank FSB. Insured deposits there are safe. Regulators estimated that the IndyMac failure will cost the federal bank insurance fund between $4 billion and $8 billion.
IndyMac, one of the nation's largest lenders, got caught in the mortgage meltdown that has led to a global credit crisis. Over the past nine months as borrowers defaulted, it has suffered significant losses and initiated a series of layoffs, including one this week that shrunk its workforce to 3,400 from 7,200.
The Pasadena, Calif., company, which had $32 billion in assets as of March 31, ranks as the largest thrift ever to fail and the second-largest U.S. financial institution ever to collapse, after Continental Illinois National Bank and Trust Co. in 1984.
But John M. Reich, director of the Office of Thrift Supervision, said IndyMac's failure was a "unique" incident that "does not signal a direction for the industry as a whole."
In a call with reporters yesterday, Reich blamed the lender's demise on a deposit run that came after Sen. Charles E. Schumer (D-N.Y.) sent a letter to regulators on June 26 questioning IndyMac's viability.
Customers withdrew $1.3 billion in the 11 business days following that letter, or more than $100 million a day on average, Reich said. The run stymied efforts to sell the institution by spooking potential investors, federal officials said.
"When a member of the United States Senate makes such a public statement, it doesn't take much to frighten the depositors of an institution," Reich said. "It was an unprecedented act on the senator's part and the result speaks for itself."
IndyMac, which is not related to mortgage giants Freddie Mac or Fannie Mae, thrived during the housing boom. It made Alt-A mortgages, which cater to borrowers who provide less documentation about income or employment than traditional loans require.
Schumer dismissed accusation that he might be to blame, instead comparing the thrift to Countrywide Financial, the nation's largest mortgage lender before it was hobbled by subprime loans and bought out by Bank of America.
"IndyMac's troubles, just like Countrywide's, were caused by practices that began and persisted over the last several years, not by anything that happened in the last few days," Schumer said in a statement. "If OTS had done its job as regulator and not let IndyMac's poor and loose lending practices continue, we wouldn't be where we are today. Instead of pointing false fingers of blame, OTS should start doing its job to prevent future IndyMacs."
The lender's only retail branches are in California, where at 3 p.m., IndyMac shut the doors to its main branch in Pasadena three hours early, according to the Los Angeles Times. Stunned customers were told to read a two-page notice that had been taped to the glass doors.
One woman leaned against the locked doors, pleading with a bank teller inside. "Please, please, I want to take out a portion."
Another customer, Georgi Arnold of El Monte, had come to the bank to deposit $230 into her checking account but wasn't allowed in. "I am livid," Arnold, 32, told the Times. "I'm glad I closed my savings account already."
Arnold said she had "a few thousand dollars" in the bank. "Best believe first thing come Monday I'll be drawing out all my money and closing my account because this is ridiculous," she said. "I'll go elsewhere."
The Federal Deposit Insurance Corp. will take over the institution while it decides whether to sell it or break up its assets. The FDIC insures deposits up to $100,000 per depositor per institution, plus more in some circumstances. Depositors with larger accounts may receive back just a portion of their money.
No matter what led to IndyMac's failure, many predict there is more trouble ahead. "The more important question is how many [other] institutions are going to fail in 2008," said Thomas P. Vartanian, former general counsel of the Federal Home Loan Bank Board, the predecessor to the OTS, and now a D.C. lawyer. "It is the trend line that tells you something, not necessarily individual failures."
"There will be other banks that will run into problems like IndyMac," said Zoltan Pozsar, a senior economist at Moody's Economy.com. "The economy is weakening, the quality of banks' loan books are worsening."