Bank regulators today shut the doors of IndyMac Bank and have transferred its assets to the FDIC. IndyMac had stopped lending activities earlier this week due to lack of capital and had seen a run on its deposits over the last couple of weeks due to concerns about its ability to survive.
IndyMac is the largest thrift ever to fail and the second largest financial institution in the U.S ever to do so.
What you may not know about IndyMac, is that it was founded by Angelo Mozilo and David Loeb, the same two geniuses who founded Countrywide and likewise ran it into the ground as well.
What’s important to note here:
The last major round of lender closings (Fall ’07) was primarily due to liquidity problems. Credit markets seized up at that time due to investor fears of exposure to subprime paper. Investors stopped buying mortgage securities and lenders were unable to sell their loans. No cash to continue operations – and therefore no choice but to shut down. Those failings were not due to actual realized losses at that time.
These were primarily mortgage bankers and not banking institutions.
The IndyMac failure is different because now we are seeing a major lender/banking institution failure due to actual losses. Rising defaults at IndyMac deteriorated it’s capital position. That called it’s survivability into question and depositors began a run on the bank – resulting in today’s shutdown.
In my opinion, the best thing that’s happened to the US housing market is Bank of America’s takeover of Countrywide. The takeover will in effect serve to hide the actual level of losses at the nation’s largest mortgage lender. If the magnitude of the actual losses at Countrywide were to become public, the resulting panic in the market would make what we’re experiencing now seem mild by comparison.
Are the failures of Countrywide and IndyMac indicative of systemic problems in the banking industry, and should we expect more of the same?
I don’t think so. What sets Chase Manhattan, Wells Fargo, BB&T (our primary lenders) apart is that they are well diversified banking institutions first, and mortgage lending is simply a component of what they do.
Countrywide and IndyMac were sales companies by design – and financial institutions by default. They had an overly aggressive high pressure sales culture with notoriously poor underwriting standards. If you can believe this, their underwriting departments reported to their sales managers! The end result doesn’t seem so surprising when you think about that one.
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Our office is doing several short sales right now with Indymac Bank. I worked for the RTC in the early 1990s and we closed dozens of small to very large S&Ls. The first couple of days are always edgy. But things start to move smoothly within a few days. Indmac Bank was doing a credible job in addressing short sales that we presented to them. I hope that the FDIC's takeover will permit the process to continue. If the old RTC model is used by the FDIC, the former Indymac Bank employees will be retained by the FDIC or its successor to perform exactly the same job functions as before the takeover. We shall see.