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Fall of IndyMac Bank Corp.

Fall of IndyMac Bank Corp.
by

L O

on 7 March 2013

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Transcript of Fall of IndyMac Bank Corp.

Indy Mac
Takes a Tumble By:
Daniel Brannigan
Mark Couto
Brian Ivey
Arleny Ortiz
Jonathon Paulino
Madelyn Tavarez History Before the Crash: Initially Founded in 1985 as Countrywide Mortgage Investment
It was established to centralize countrywide loans that were too large to be sold to Fannie Mae or Freddie Mac
Became an independent company in 1997 and was then called IndyMac Mortgage Holdings Inc. IndyMac
Makes Some
Important Mergers: SGV Bancorp -2000
This was the first Federal Loan and Savings Association of San Gabriel Valley
IndyMac now becomes known as IndyMac Bank
This allows it to become the 7th largest bank at
the time Financial Freedom Company - 2004
This company was in the business of creating and servicing reverse mortgage loans
IndyMac Bank now took on those services New York Mortgage Company - 2007 This was an East Coast mortgage bank Barrington Capital Corporation -2007 This was a West Coast mortgage bank Within the Financial Industry:

Specialized in Alt-A loans
Alt-A is a type of U.S. mortgage given to borrowers who usually had clean credit scores and more investment properties, but showed less than full documentation
Alt-A Mortgage is considered to be riskier than prime mortgage but less risky than subprime mortgage The Effects of the Gramm-Leach Bliley Act of 1999: This act allowed IndyMac Mortgage Holdings Inc. and SGV Bancorp to merge, allowing IndyMac to become both an investment firm and commercial bank
Under the act:
- Firms could become brokerages, investment banks, and insurance companies
- Counter-acted the Glass Steagall Act Events That Led to It's Collapse: IndyMac was not directly involved with subprime lending which is considered to be the riskiest type of lending but it specialized in two other risky services So When the Housing Crisis Occured... Investors began to pull out there money
Borrowers began to default on their Alt-A loans
IndyMac was left with little funding for new loans
Without any funding, it also could not pay borrowers cash for reverse mortgages
Within 11 days of the crash, $1.3 billion was withdrawn
Withdrawals caused liquidity crisis
IndyMac stock prices dropped
Eventually brought upon its collapse! 1.Alt-A Loans These loans did not require borrowers to show proof of income
Also did not require borrowers to have proper documentation
Were associated with high-debt income ratios 2. Reverse Mortgages This type of mortgage allowed homeowners to borrow money against the value of their home
The mortgage did not have to be repaid until the borrower was dead or sold the house Securization and Falling Home Prices
Contribute to the
Collapse: Securization of Alt-A Loans Housing Prices Plummet During the housing boom, if many people defaulted on mortgages then IndyMac would pool the mortgages together and sell them to investors who were eager to buy mortgage-backed securities
But -with housing prices at an all time low, no one was interested in buying mortgage back securities During the housing boom, houses and real-estate were in high demand so Alt-A loans did not seem risky
At this point in time, if anyone defaulted on a loan the bank would foreclose the asset which provided them with a higher return
When the housing bubble burst, housing prices dropped and IndyMac realized it needed to ask for collateral before giving out loans Richard Koon Kenneth Shellem The Major
Players Involved: CEO of IndyMac Bank Scott Van Dellen Chief Lending Officer Chief Compliance Officer Unethical and Criminal Activities: People unable to meet the loan requirements were still given loans and then unable to afford them
IndyMac would then take their homes and more often, than not these homes were worth more than the value of the loans
As a result -all of the three major players, were charged with negligence in approval of loans The FDIC Saves the Day: On July 11,2008 the OTS closed down the doors of IndyMac Bancorp Inc.
The FDIC immediately came in and took control of all the assets
In 3 days, IndyMac Federal Bank opened its doors
It insured all of its customers up to $100,000
The FDIC then held an auction for the sale of IndyMac Federal Bank in which it was sold to One West
The sale was completed on March 19, 2009 Government Bailout was Completely Necessary! Benefits Outweigh the Costs of Financial cost of $8 billion
Thousands of employees were fired
Americans now faced higher taxes
Disturbance in the equilibrium of the economy Though there was still strong insecurity, this helped customers and investors feel much better about their assets Helped consumer incentive
Allowed IndyMac Bank to be sold to new owner - One West Without government intervention IndyMac Bank would have completely failed Government Intervention: Moral Hazard and Systemic Risk A moral hazard is the situation in which a party will have the tendency to take risks because the costs will not be felt by them A systemic risk is the risk of the collapse of an entire financial system -not just one individual entity Past Regulation: OTS failed to keep tight observation over IndyMac Bank and allowed them to continue their loose lending practices
OTS failed to make down-grades in the PCA capital status given that IndyMac Bank was deemed to be well-capitalized
Had no restrictions on acceptance, renewal, or roll over of brokered deposits Steps to a More Secure Future: Better liquidity planning
Monitor deposit outflows
Plan for potential PCA downgrades
Regulators should be proactive
Implementation of strict overlook
Full transcript