IndyMac
IndyMac, a contraction of Independent National Mortgage Corporation, was an American bank based in California that failed in 2008 and was seized by the United States Federal Deposit Insurance 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, and the second largest failure of a regulated thrift at that time. "Mac" is an established contraction for "Mortgage Corporation", usually associated with government sponsored entities such as "Freddie Mac" and "Farmer Mac". Indymac, however, had always been a private corporation with no relationship to the government.
It was heavily involved in Alt-A mortgages and reverse mortgages which in part resulted in its dramatic rise and has been suggested as the cause for its demise, as a large number of these questionable loans failed during the U.S. subprime mortgage crisis of 2007–2009.
The FDIC put the assets up for auction and the bulk of the business was sold to IMB HoldCo LLC who turned this into OneWest Bank. The FDIC kept some of the assets and liabilities that it could not sell in a holding entity known as IndyMac Federal Bank, which would be slowly wound down.
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 run by Mike Perry, who remained its CEO until the downfall of the bank in July 2008.Growth and acquisitions
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
IndyMac's aggressive growth strategy, use of Alt-A and other nontraditional loan products, insufficient underwriting, credit concentrations in residential real estate in the California and Florida markets, and heavy reliance on costly funds borrowed from the Federal Home Loan Bank and from brokered deposits, led to its demise when the mortgage market declined in 2007.
IndyMac often made loans without verification of the borrower's income or assets, and to borrowers with poor credit histories. Appraisals obtained by IndyMac on underlying collateral were often questionable as well. As an Alt-A lender, IndyMac's business model was to offer loan products to fit the borrower's needs, using an extensive array of risky option-adjustable-rate-mortgages, subprime loans, 80/20 loans, and other nontraditional products. Ultimately, loans were made to many borrowers who simply could not afford to make their payments. The thrift remained profitable only as long as it was able to sell those loans in the secondary mortgage market. IndyMac resisted efforts to regulate its involvement in those loans or tighten their issuing criteria: see the comment by Ruthann Melbourne, Chief Risk Officer, to the regulating agencies.
Turning point
May 12, 2008, in a small note in the "Capital" section of what would become its last 10-Q released before receivership, IndyMac revealed—but did not admit—that it was no longer a well-capitalized institution and that it was headed for insolvency.IndyMac reported that during April 2008, Moody's and Standard & Poor's downgraded the ratings on a significant number of Mortgage-backed security 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 that if its regulators found its capital position to have fallen below “well capitalized” to “adequately capitalized” 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. This statement was comparable to those adopted by other Southern California banks that were experiencing liquidity problems, such as Pomona First Federal and Vineyard Bank.
Senator Charles Schumer 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 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.
IndyMac had suffered its third-consecutive quarterly loss. The bank 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".
IndyMac 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. The company still had not secured a significant capital infusion nor found a ready buyer.
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 it did not reveal some of that $47 million it claimed it had as of March 31, 2008 was actually a fiction.
Collapse
When home prices declined in the latter half of 2007 and the secondary mortgage market collapsed, IndyMac was forced to hold $10.7 billion of loans it could not sell in the secondary market. Its reduced liquidity was further exacerbated in late June 2008 when account holders withdrew $1.55 billion or about 7.5% of IndyMac's deposits. This “run” on the thrift followed the public release of a letter from Senator Charles Schumer to the FDIC and OTS. The letter outlined the Senator's concerns with IndyMac. While the run was a contributing factor in the timing of IndyMac's demise, the underlying cause of the failure was the unsafe and unsound manner in which the thrift was operated.On June 26, 2008, Senator Charles Schumer, a member of the Senate Banking Committee, chairman of Congress' Joint Economic Committee and the third-ranking Democrat in the Senate, released several letters he had sent to regulators, which warned 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”. Some worried depositors began to withdraw money.
On July 7, 2008, IndyMac announced on the company blog that it had failed to raise capital since its May 12 quarterly earnings report and had been notified by bank and thrift regulators that IndyMac Bank was no longer deemed “well-capitalized”.
On the same day, IndyMac also announced the closure of both its retail lending and wholesale divisions, halted new loan submissions, and cut 3,800 jobs.
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, the FDIC put IndyMac Bank into conservatorship. A bridge bank, IndyMac Federal Bank, FSB, was established to assume control of IndyMac Bank's assets, its secured liabilities, and its insured deposit accounts. The FDIC announced plans to open IndyMac Federal Bank, FSB on Monday July 14, 2008. Until then, depositors would have to 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. Yet, even with the pending sale of Indymac to IMB Management Holdings, an estimated 10,000 uninsured depositors of Indymac are still at a loss of over $270 million. In response, Congress increased the FDIC insurance limit to $250,000 for any bank that failed since January 1, 2008, as part of the Dodd-Frank Act, including retroactive payments to depositors for any amount up to the new limit not already covered by dividend distributions or the old $100,000 limit.
With $32 billion 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 and Loan Association of Stockton, California. due to large losses in mortgage-backed securities.
IndyMac Bancorp filed for Chapter 7 bankruptcy on July 31, 2008.