Fannie, Freddie, and Indy

No, this is not Indiana Jones fan fiction.

This morning I’d like to take a few minutes to talk about Fannie Mae, Freddie Mac, and IndyMac. Let’s start with a little background. Fannie and Freddie are federally chartered entities that buy mortgages from the banks and mortgage companies that write them. The original mortgage holder gets (most of) their money right away instead of waiting 30 years, so they have the money to lend to somebody else in a neighborhood like yours.

IndyMac is — was — a bank and “mortgage specialist”. They began as a subsidiary of Countrywide Mortgage, and it was designed to deal in “jumbo mortgages” too big for Fannie and Freddie to buy. CNN explains:

Its specialty was so-called Alt-A loans, those for which home buyers were asked to produce little or no evidence of income or assets other than the house they were buying.

While home prices climbed, Alt-A loans posed few problems for IndyMac. If a buyer wasn’t able to afford his payments, the bank got title to a home worth more than the amount owed. The bank was also able to find investors eager to buy pools of those mortgages that had been pulled together into securities backed by the future payments.

But when the housing bubble burst and prices began to fall, losses at IndyMac began to rise.

Yesterday, the FDIC took control of them. Like Bear Stearns, IndyMac unraveled very rapidly. They are now the 3rd biggest bank failure in American history, with $32 billion — $32 thousand million — in assets. About 10,000 people had deposits that exceed the FDIC insurance level of $100,000. For reference, there hasn’t been this big a bank failure since 1984, when George W. Bush’s dad was merely the Vice-President. The ensuing carnage may cost the FDIC between $4 billion and $8 billion.

The good news is that it isn’t taxpayer dollars. The money that the FDIC will use to pay the Joe and Jane Averages who put their paychecks in that bank and expect to pay their bills from that bank comes from premiums they charge banks, and interest off the bits of the national debt they own. And better yet, not a dime goes to the executives that put IndyMac in this mess. In fact, the FDIC has already fired the CEO.

Fannie and Freddie shouldn’t have anything to do with this mess, but they do. They do not because they actually purchased any of IndyMac’s bad loans, but because they purchased questionable loans from just about everybody. And that has many people worried. If Jim Cramer is right that almost every bank in the United States has solvency concerns, how can Freddie and Fannie not be a concern? Jim has made a whole lot of money owning large blocks of stock in small banks, so I am inclined to think he’s not nuts on this one. Some people think that Fannie and Freddie are part of the problem, and need some serious tough love to be part of the solution. Others argue — and have the figures to back themselves up — that it really isn’t that bad, and stop yelling about it.

IndyMac is gone. If you have deposits there, give the branch a call Monday morning. If you are expecting a mortgage through them, call a new mortgage broker.

As for Fannie and Freddie, they will live on. The question is what sort of intervention if any will be required.