Another One Bites the Dust – When Will the Mortgage Crisis End?
IndyMac Bank is reported to have been placed into receivership by the FDIC. This is the second largest takover of a bank by federal regulators. It was a basic run on the bank – you know just like Bailey savings and loan in “Its a Wonderful Life” except there was nothing left in the bank at the end of business.
Bank runs begin when depositors lose confidence that the bank can produce their money on demand. More and more depositors withdraw from their accounts until the bank lacks the funds to operate or fund withdrawals. A bank never has all of the money deposited by account holders on hand. It loans the money, with interest, for others to use.
What caused a sudden lack of confidence in Indy Bank? According to a Bloomberg report here – “IndyMac came under fire last month from Schumer, the Democrat from New York, who said lax lending standards and deposits purchased from third parties left it on the brink of failure. During the 11 business days after Schumer explained his concerns in a June 26 letter, depositors withdrew more than $1.3 billion,”
There are few, if any institutions that could continue to operate if that rate of withdrawal continues. The WSJ reported that the Office of Thrift Supervision Director “Mr. Reich said Sen. Schumer gave the bank a “heart attack.”" Of course what is left unstated is the fact that IndyMac specialized in “liars loans” where the bank didn’t require borrowers to prove they could afford the loan and house they sought. So, it seems a combination of bad business practices, bad loans, and bad mouthing froma US Senator put it under.
This is all on top of the fact that Fannie Mae and Freddie Mac, two quasi-private corporations that guarantee and sell “securitized” conforming mortgages (as opposed to jumbo mortgages for VERY expensive homes), are coming under market scrutiny.
If these companies fall into trouble, according to the WSJ, and “they were unable to replace maturing debt for an extended period, they would have to stop buying mortgages and eventually sell home loans and securities they hold in their portfolios. That would be likely to send consumer mortgage interest rates soaring.”
Each company is reportedly seeking additional operating capital – either through conservation of capital or longer term debt financing. Freddie Mac is preparing al $3billion sale of debt, if the auction goes well, then Freddie Mac will have a repreive. These quasi-governmental entites are thought to have a guarantee of the US government, but that is actually not the case. There is no express guarantee. However, many believe the government could not permit the failure of the depression era Fannie Mae nor the 1968 competitor (also created by the government) Freddie Mac. If the government has to intervene it will make IndyMac and Bear Sterns seem like small potatoes.
If you enjoyed this post, please consider to leave a comment or subscribe to the feed and get future articles delivered to your feed reader.
Comments
No comments yet.
Leave a comment