Saturday, July 12, 2008


My former employer, Indymac Bank, was formally shut down last Friday afternoon by the Office of Thrift Supervision, its regulatory agency. Deposits up to $100,000 were insured by the FDIC; those over $100,000 (totalling up to $1 billion, I understand) are uninsured and are not going to be 100% recoverable by the depositors. The bank will reopen its doors under receivership as Indymac Federal Bank, and the government will now try to sell the bank as a whole unit to another set of investors, or if that fails, they will try to sell off the assets piece by piece.

I was laid off by Indymac January 31, 2008, nearly six months after the world collapsed for the bank. As a specialist in Alt-A mortgages, the loans it made were made to borrowers who were not asked to provide income documentation. Now, for the right borrower this might not have been a bad idea. Excellent credit, a low ratio of loan amount to appraised value, and a significant amount of cash reserves (borrower's bank balances after the loan is funded), and the risk can be managed. In truth, however, I saw these types of loans made to too many risky borrowers with iffy credit, questionable reserves, and at a high loan to value ratio. Furthermore, the income was only "stated" on the loan applications and not verified, and often the borrowers' true incomes were much lower than they were stated. Basically, every borrower who stated income higher than what they truly made committed mortgage fraud, and every broker who enabled it was similarly guilty, and when Indymac bought these loans or made them directly to the borrowers they were complicit in the fraud too.

On top of that, there was little scrutiny given to the overall real estate market, which topped out sometime in 2005 and began a slow decline in 2006. In the meantime, these loans were turned into mortgage-backed securities and sold to investors around the world, institutional ones mostly, who coughed up billions and billions for these risky securities that were rated much higher than they ought to have been by greedy Wall Street investment banks (such as Bear Stearns). These investment firms became increasingly skittish throughout 2006 and 2007, but the bank didn't pay much attention, and neither did its competitors.

In late July, buyers for these risky loans simply said, "No more." The outlet Indymac had to sell off their funded loans had vanished "like a fart in the wind" (thank you, Shawshank Redemption). The market for jumbo loans over $417,000 also evaporated, and Indymac had a ton of these since it did so much business in California, Florida and New York. The death of this market dragged down the real estate market something fierce; the bubble had indeed burst.

To preserve capital, Indymac laid off thousand of workers and discontinued making certain loans (like the construction loans I had been selling). I was brought back on as a consultant shortly after being let go (allowed to keep my generous severance package), to try to manage a portfolio of increasingly delinquent construction loans made to builders who could not finish the houses they were building, or simply couldn't sell them. I was foreclosing on the builders to whom I'd made loans. And that I could not handle, and decided to find another job. Bank of America to the rescue.

Titus Levi wrote to me today:
I still think we really do have a liquidity crisis, or some kind of crunch bearing down on us in the wake of some really lame behavior in your industry. You know that biz way better than I do, but I think we haven’t really figured out what’s going on, or how bad it is. Termites are in the walls. It’s not pretty. And I think it’s going to get quite a bit worse in through the rest of the year. On the upside, lots of folks will be able to afford houses who had been shut out of the market. Prices will fall to more sane levels. The good comes with the bad.
Foreclosures are up, banks own more real estate. Interest rates are a little higher now and lenders are making it harder to get loans. Most lenders are requiring income documentation in all cases, and are reducing the loan to value ratios in declining markets for the foreseeable future sometimes even requiring two separate appraisals for high-end properties.
This is smart(er) lending. I'm starting to feel just the slightest inklings of customers adjusting to the new reality, but some still think they can get 5% loans for free at 95% of their home's value.

I used to marvel at the numbers of new cars in my company parking lot: BMWs, Lexus, Infinitis, Escalades, Benzes, Jags, and nice pickups. I'd think, "Man, this company is making a lot of people a lot of money." Including me. It was a fantastic ride, and I have no regrets. I'm just sad that so many of my friends are out of work now, people who worked hard and believed they were doing what was right to make the company money so that they could feed their families more easily.

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