Daily Briefing Weekend Edition

IndyMac Reverse Loans in Limbo

By Brad Finkelstein

Among the things placed in limbo by the failure and government takeover of IndyMac Bank FSB here is the reverse mortgage business the parent company was planning to build its future around and the sale of the retail mortgage origination branches it had closed.

A research report by Friedman Billings Ramsey, said the failure, the second largest by asset size in American history, could be the costliest.

The existing record is $5.4 billion for American Savings and Loan in 1984, said the report. The FDIC estimates a cost of $4 billion to $8 billion to the insurance fund by the time it resolves IndyMac, FBR noted.

The FDIC will pay 50% of the amount above the insured deposit limit to those depositors who had accounts over $100,000.

Now concern shifts to other banking institutions, which are major players in the mortgage business and are having problems.

Boston-based Aite Group analyst Eva Weber said, "While it is difficult to accurately predict which, if any, other banks may follow IndyMac's failure, it should be no surprise that institutions heavily entrenched in the mortgage market are feeling pressure. Indeed, those institutions dealing significantly in nontraditional mortgage products that may be lacking in documentation and resulting from lighter underwriting practices are likely suffering losses from the housing market downturn. The good news is that regulators appear to be preparing for various scenarios in an effort to be proactive."

Among those signs, she said, is regulators opening the discount window to help Fannie Mae and Freddie Mac. The Federal Reserve Board's recent revisions to the Home Owners Equity and Protection Act are another sign they are being proactive.

Still, people must "wait and see how everything plays out," said Ms. Weber.

Days prior to the takeover, IndyMac had shuttered its forward mortgage banking operations. It then entered into an agreement to sell 60 retail mortgage branches to Prospect Mortgage, Northbrook, Ill.

As of press time, neither the FDIC nor Prospect had returned a telephone call seeking to clarify where the deal stood.

But what some observers are calling the biggest prize and possibly key attraction for a buyer of IndyMac is its reverse mortgage business, Financial Freedom.

Financial Freedom is the nation's largest lender of the Home Equity Conversion Mortgage, according to data from the Department of Housing and Urban Development.

In the week prior to the takeover, IndyMac received a regulatory warning that the thrift-holding company was no longer "well capitalized." This affected its liquidity because it could no longer accept brokered deposits. It also forced it to come up with a business plan acceptable to regulators.

Under the new business plan, Financial Freedom, the mortgage servicing business and the retail banking branches were supposed to be the lynchpins of IndyMac going forward.

The Office of Thrift Supervision placed "the immediate cause" of the failure on a run on deposits it said was caused by the public release of a letter to regulators by Sen. Charles Schumer, D.-N.Y.

In the 11 days after that letter was released, depositors took out $1.3 billion from IndyMac Bank.

OTS director John Reich said, "This institution failed today due to a liquidity crisis. Although this institution was already in distress, I am troubled by any interference in the regulatory process."

The Federal Home Loan Bank of San Francisco said it has $10.1 billion in outstanding advances to IndyMac, which are protected by a perfected security interest in $21.6 billion of mortgage loans and mortgage-backed securities. This takes precedence over the FDIC's claims on the thrift's assets. "Subject to the terms of its agreements with IndyMac Bank, the Federal Home Loan Bank of San Francisco will work with the FDIC in its administration of the assets and liabilities of the new institution," the FHLB of San Francisco said in a statement.

Fitch has downgraded parent company's long-term issuer default ratings from CC to C, while the thrift's long-term and short-term ratings were cut to D.

The rating agency said it thinks uninsured depositors could receive even more funds as they have priority over unsecured creditors of IndyMac. But those holding "non-deposit obligations" and preferred shareholders will have minimal to no recovery.