Blown Mortgage

IndyMac bank, the second largest mortgage originator in 2007, (and latest victim of the market implosion) announced that there had been a run on investor deposits caused by Senator Schumer’s suggestion that the bank was on the brink of failure.  Most of the deposits are FDIC insured, but since the announcement that the bank was ceasing mortgage lending activity and laying off half of its staff, investors have hurried to withdraw funds in an attempt to protect their money.

This is how it goes - capital dries up, the company recognizes it can’t get out of the hole, cuts staff and operations, and it creates a panic.  It’s a self-fulfilling prophecy once the bank realizes there’s no end in sight to the loan losses and instability.  We’ve seen it time and time again in this mess.  New Century, Fremont, Countrywide, IndyMac.  They’re all victims to the same vicious cycle.  (Although I should be slapped for calling any of these greedstitutions victims.)

From Bloomberg:

IndyMac Bancorp Inc., the California- based lender that is firing half its employees, is facing “elevated levels of deposit withdrawals” after U.S. Senator Charles Schumer said the bank may be on the brink of failure.

Schumer’s comments about IndyMac’s reliance on deposits purchased from third parties are causing depositors to pull their money and causing added restrictions on the lender’s borrowings, IndyMac said in a filing today.

IndyMac dropped 32 cents to 39 cents at 10 a.m. in New York Stock Exchange composite trading. The firm, which had a market value of $3.4 billion in mid-2006, lost more than 95 percent in the past year. Schumer, the New York Democrat, last month sent letters to the Federal Deposit Insurance Corporation, the Office of Thrift Supervision, the Federal Housing Finance Board and the Federal Home Loan Bank of San Francisco, warning of a potential collapse of the lender.

“IndyMac was one of the banks that was using relatively weak underwriting standards on the basis that housing prices would continue to rise in value,” said Jason Arnold, an analyst at RBC Capital Markets in San Francisco, in an interview yesterday. “With prices coming down, that became the bottom card in the house of cards built by these lenders.”

The demise of IndyMac would be the biggest collapse of a U.S. mortgage lender since the bankruptcies of Fremont General Corp. and New Century Financial Corp. The company’s key asset is its Southern California retail bank network with 33 branches and $18 billion in deposits, mostly insured by the FDIC, Arnold said. IndyMac’s inability to find a buyer or attract capital, despite pressure from regulators, reflects continued concern over the declining value of its loans, he said.

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The bail out plan that Congress is hard at work trying to pass may not do much in terms of actually helping anyone.  Government estimates show that only 400,000 people could benefit from the new FHA-driven refinance/loan modifications while more than 3,000,000 folks are actually 60 days down (or late) on their mortgage.

This refrain is all-to-common in trying to solve the mortgage mess.  FHA Secure, remember that one?  How many folks are being helped there?  Not many.  Loan modifications?  You don’t see those coming through in huge numbers either.  The tough reality is that with so much money at stake, so much declining equity, so much debt, so little additional borrowing capacity there is very little room to actually do something that works.

Or maybe the answer is doing little is the best answer.

A great article from the New York Times on the plight of lawmakers whose ham-handed attempts at help continue to fall short of main-street needs.

Those stark numbers not only illustrate the challenges for the lawmakers trying to provide some relief to their constituents but also hint at what the next administration will be facing after the election. While the proposed program would help some homeowners, analysts say it would touch only a small fraction of those in trouble — the Congressional Budget Office estimates it would be used by 400,000 borrowers — and would do little to bolster the housing market.

“It’s not enough, even in the best of circumstances,” said Mark Zandi, chief economist of Moody’s Economy.com. The number of people who will be helped “is going to be overwhelmed by the three million that are headed toward default.”

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