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IndyMac Bank
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IndyMac Federal Bank, FSB (Federal Savings Bank) is a bridge bank created to manage assets and liabilities of IndyMac Bank, FSB until they can be disposed of. "IndyMac" is a generally accepted contraction of the formal name Independent National Mortgage Corporation. Before its failure, IndyMac Bank was the largest savings and loan association in the Los Angeles area and the seventh largest mortgage originator in the United States.
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IndyMac Federal Bank, FSB (Federal Savings Bank) is a bridge bank created to manage assets and liabilities of IndyMac Bank, FSB until they can be disposed of. "IndyMac" is a generally accepted contraction of the formal name Independent National Mortgage Corporation. Before its failure, IndyMac Bank was the largest savings and loan association in the Los Angeles area and the seventh largest mortgage originator in the United States. The failure of IndyMac Bank on July 11, 2008, was the fourth largest bank failure in United States history, and the second largest failure of a regulated thrift. IndyMac Bank's parent corporation was IndyMac Bancorp until the FDIC seized IndyMac Bank .
History
IndyMac Bank was founded as Countrywide Mortgage Investment in 1985 by David S. Loeb and Angelo Mozilo as a means of collateralizing Countrywide Financial loans too big to be sold to Freddie Mac and Fannie Mae. In 1997, Countrywide spun off IndyMac as an independent company. "Mac" is an established contraction for "Mortgage Corporation", usually associated with Government sponsored entities such as "Freddie Mac" (Federal Home Loan Mortgage Corporation) and "Farmer Mac" (Federal Agricultural Mortgage Corporation). Indymac, however, had always been a private corporation with no relationship to the government.
In July 2000, IndyMac Mortgage Holdings, Inc. acquired SGV Bancorp, the parent of First Federal Savings and Loan Association of San Gabriel Valley. IndyMac changed its name to IndyMac Bank and became the ninth largest bank headquartered in California. IndyMac Bank, operating as a combined thrift and mortgage bank, provided lending for the purchase, development, and improvement of single-family housing. IndyMac Bank also issued secondary mortgages secured by such housing, and other forms of consumer credit.
IndyMac Bancorp, a holding company headquartered in Pasadena, California, eventually acquired:
- Financial Freedom, an originator and servicer of reverse mortgage loans, on July 16, 2004;
- New York Mortgage Company, an East Coast mortgage bank, on April 2, 2007;
- Barrington Capital Corporation, a West Coast mortgage bank, in September 2007.
Decline
According to the Office of Thrift Supervision (OTS), in the nine months before it went into receivership, IndyMac incurred significant losses, severely depleting capital and jeopardizing the institution’s continued viability. IndyMac’s mortgage banking operations focused on Alt-A single family mortgages, which the bank could not securitize and sell in late 2007 due to the decline in the secondary market for non-agency mortgage loans. IndyMac moved $10.7 billion of loans intended for sale to the category of “held for investment” in the fourth quarter of 2007.
In response to market conditions and OTS concerns, IndyMac changed its business plan in November 2007 to focus on originating mortgage loans qualifying for purchase by the government sponsored enterprises (agency-eligible loans). With limited prospects of maintaining adequate capitalization, IndyMac sought to obtain a significant capital infusion or to find a buyer.
May 12, 2008, in what would become its last 10-Q released before receivership, IndyMac reported that it had suffered its third-consecutive quarterly loss and was taking new measures to preserve capital, such as deferring interest payments on some preferred securities. Dividends on common shares had already been suspended for the first quarter of 2008, after being cut in half the previous quarter.
IndyMac reported that nonperforming loans totaled $1.85 billion as of March 31, increasing 40.56% from just the previous quarter. In the 10-Q filing, the company stated it expected "to have an even higher level of non-performing loans in the future due to the continued market disruption."
According to IndyMac's 10-Q, the bank's risk-based capital ratio had dropped to 10.26% as of March 31, from 10.81% the previous quarter. This ratio, which factors in asset quality and loan-loss reserve coverage, needs to be at least 10% for an institution to be considered well-capitalized under regulatory guidelines.
IndyMac reported that the bank's risk-based capital was only $47 million above the minimum required for this 10% mark. But perhaps more disturbingly, IndyMac reported that during April 2008, Moody's and Standard & Poor's downgraded the ratings on a significant number of Mortgage-backed security (MBS) bonds including $160 million of those issued by Indymac and which the bank retained in its MBS portfolio. Indymac concluded that these downgrades would have negatively impacted the Company's risk-based capital ratio as of June 30, 2008. Had these lowered ratings been in effect at March 31, 2008, Indymac concluded that the bank's capital ratio would have been 9.27% total risk-based.
Indymac warned in its 10-Q that if its regulator found its capital position to have fallen below "well capitalized" (minimum 10% risk-based capital ratio) to "adequately capitalized" (8-10% risk-based capital ratio) the bank might no longer be able to use brokered deposits as a source of funds. Indymac further warned that if its level of deposit liquidity was reduced in this way, the bank anticipated that it would reduce its assets and, most likely, curtail its lending activities. Senator Charles Schumer (D-NY) would later point out that brokered deposits made up more than 37 percent of Indymac's total deposits and ask the Federal Deposit Insurance Corporation (FDIC) whether it had considered ordering IndyMac to reduce its reliance on these deposits. With $18.9 billion in total deposits reported on March 31 , Senator Schumer would have been referring to a little over $7 billion in brokered deposits. While the breakout of maturities of these deposits is not known exactly, a simple averaging would have put the threat of brokered deposits loss to IndyMac at $500 million a month, had the regulator disallowed IndyMac from acquiring new brokered deposits on June 30.
The company still had not secured a significant capital infusion nor found a ready buyer.
Collapse
On June 26, 2008, several letters by Senator Charles Schumer (D-NY), a member of the Senate Banking Committee, chairman of Congress' Joint Economic Committee and the third-ranking Democrat in the Senate, were released. These opined that "The possible collapse of big mortgage lender IndyMac Bancorp Inc. poses significant financial risks to its borrowers and depositors, and regulators may not be ready to intervene to protect them".
The developing situation and these letters resulted in something of a bank run. IndyMac depositors, fearing the worst, sought to withdraw significant funds from the ailing bank. Regulators and others in the financial sector quickly criticized Senator Schumer for publicly releasing his letters, which they claimed further destabilized the bank. They added that the Federal Deposit Insurance Corporation (FDIC) and Office of Thrift Supervision (OTS) "do not comment on open and operating institutions", and "Dissemination of incomplete or erroneous information can erode public confidence, mislead depositors and investors, and cause unintended consequences, including depositor runs and panic stock trades. Rumors and innuendo cause damage to financial institutions that might not occur otherwise and these concerns drive our strict policy of privacy." so said John M. Reich, director of the OTS
However, Mr. Reich would later be forced to fire OTS western regional director, Darrel W. Dochow, for allowing IndyMac’s parent company to backdate an $18 million contribution in order to preserve the bank's status as a “well-capitalized” institution. Mr. Dochow allowed IndyMac Bank to receive $18 million from its parent company and book the money as if it had arrived by the end of the March 31 quarter when, in fact, it had arrived on May 9, only three days before IndyMac filed the 10-Q for that March 31 quarter. Had Mr. Dochow not allowed this irregular, retroactive contribution to capital, Indymac would have been forced to report that it's capital had already slipped below the minimum level that regulators require for classifying banks as well capitalized, thus putting $6.8 billion in brokered deposits - or 37 percent of Indymac's total deposits - at risk, as noted in the previous section.
The irregularity allowed by Mr. Dochow let IndyMac hide from publicity the fact that the threat to IndyMac's brokered deposits was not just a possible outcome but was a situation which had already begun - months before the disclosure of Senator Schumer's concerns about OTS and IndyMac. Investigators reported that similar officially approved backdating appears to have occurred at other financial institutions.
Mr. Dochow played a central role in the Savings and Loan crisis of the 1980s, overriding a recommendation by federal bank examiners in San Francisco to seize Lincoln Savings, the giant savings and loan owned by Charles Keating. Lincoln became one of the biggest institutions to collapse. Mr. Keating served four and a half years in prison before his fraud and racketeering convictions were overturned. He later pleaded guilty to more limited charges, and was sentenced to the time already served.
William K. Black, a senior bank regulator during the savings and loan crisis and the author of “The Best Way to Rob a Bank is to Own One,” said Mr. Dochow’s lenience highlighted the longstanding unwillingness of the Office of Thrift Supervision to take charge.
“The O.T.S. did nothing effective to regulate any of the specialized large nonprime lenders,” Mr. Black said. “So what you got was what the F.B.I. accurately described as early as 2004 as an epidemic of mortgage fraud.”
According to regulators, in the 11 days following Senator Schumer's disclosing his letters of alarm and concern, depositors withdrew $1.3 - $1.4 billion of IndyMac's reported $18.9 billion in deposits.
July 7, 2008 IndyMac announced on the company blog that it:
- Had failed to raise capital since its May 12, 2008 quarterly earnings report;
- Had been notified by bank/thrift regulators that IndyMac Bank was no longer deemed "well-capitalized";
- Must submit a new business plan.
In the face of these liquidity, capital and regulatory constraints, IndyMac announced the closure of both its retail lending and wholesale divisions, halted new loan submissions, and cut 3,800 jobs. The bank reported a sharp increase in the number of depositor withdrawals following its announcements in the wake of Senator Schumer's remarks on the bank's ability to survive the mortgage crisis.
On July 8, 2008, IndyMac announced the sale of its Retail Lending Group to Prospect Mortgage Company, LLC. That day, the bank's shares closed at $0.44 in trading on the New York Stock Exchange, a loss of over 99% from its high of $50 in 2006. Additionally, analyst Paul J. Miller Jr. cut his price target on IndyMac to $0 from $1, rating the company's share price "Underperform". On July 9, Standard & Poor's cut IndyMac's counterparty credit risk rating to "CCC", just a few steps above default, from "B", the fifth highest junk level, and said it may cut them again. The following day, the bank's shares reached a 52-week closing low of $0.31.
On July 11, 2008, citing liquidity concerns, IndyMac Bank was placed into conservatorship by the FDIC. A bridge bank, IndyMac Federal Bank, FSB, was established to assume control of IndyMac Bank's assets and secured liabilities (such as insured deposit accounts), and the bridge bank was put into conservatorship under the control of the FDIC. The FDIC announced plans to reopen IndyMac Federal Bank, FSB on Monday July 14, 2008. Until then, depositors would have access their insured deposits through ATMs, their existing checks, and their existing debit cards. Telephone and Internet account access would also be restored on Monday, when the bank reopened. The FDIC guarantees the funds of all insured accounts up to US$100,000, and has declared a special advance dividend to the roughly 10,000 depositors with funds in excess of the insured amount, guaranteeing 50% of any amounts in excess of $100,000.
With $32B in assets, IndyMac Bank is one of the largest bank failures in American history, after the 1984 failure of Continental Illinois National Bank, with $40 billion of assets, and the 1988 failure of American Savings & Loan Association of Stockton, California. due to large losses in mortgage-backed securities.
IndyMac Bancorp filed for Chapter 7 bankruptcy on August 1, 2008.
Fraud Investigation
On June 30, 2008, the Center for Responsible Lending, a Washington think tank, released a report compiling information from various lawsuits filed by customers and former employees of IndyMac Bank, and alleged that managers and supervisors were being pressured to approve loans or risk being fired. Before its collapse, IndyMac denied the allegations in the report.
On July 16, 2008, an unnamed US Government official said that the FBI is investigating IndyMac for possible fraud. While it is not clear if the investigation began before the bank was taken over by the FDIC, the investigation appears to be focused on the company itself, and not individuals within the company.
See also
External links
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