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Fannie, Freddie, and Indy

July 12th, 2008
By BRIDGET MAGNUS

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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.



This entry was posted on Saturday, July 12th, 2008 at 11:03 am and is filed under Economy, Money/Finance. You can leave a response, or trackback from your own site.

Viewing 6 Comments

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    The concern about Indymac isn't that they failed, it's that the FDIC didn't sell off the assets to another bank as of yet. The way the entire system is set up, they should be able to sell most of the accounts and assets at a discount to a bank that is in good shape. The fact that they didn't suggests that either the assets have little (or unknown) worth or there is no bank that could afford to buy them. It is probably a combination of both.

    As more banks fail, if there are no groups that can buy their stuff then things are going to get really ugly.
    • ^
    • v
    It appears one of our favorite liberals had a big part in ruining this bank and the lives of the people that worked there.

    From the LA Times:

    IndyMac, which once employed 10,000, fell prey to a classic run on the bank, and regulators singled out Sen. Charles E. Schumer (D-N.Y.) as having helped to fuel massive withdrawals. On June 26, Schumer said in letters to the FDIC, the OTS and two other federal agencies that IndyMac might have "serious problems" with its loan holdings.

    "I am concerned that IndyMac's financial deterioration poses significant risks to both taxpayers and borrowers," he wrote. The bank "could face a failure if prescriptive measures are not taken quickly."

    That public warning prompted depositors to pull $1.3 billion out of accounts between June 27 and Thursday.

    Between Schumer causing runs on banks and Dodd/Rockefeller giving away national security secrets, it’s a wonder we still have a country left.
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    Was Schumer's letter make public by Schumer? If so, i would question his judgment about timing and consequences, even though $1.3 billion is not what caused Indy's collapse. The failure was caused by industry wide risk unconscious mortgage lending practices.
    Otherwise, this becomes a question of making it a crime to speak the truth.

    Re: " Dodd/Rockefeller giving away national security secrets", it's too bad that this government is so secretive about its dubious practices that giving away some of their secrets is the only way to have the well-informed public necessary to keep a democracy functioning.

    Some of us didn't bargain on having King George in the WH. We thought the Revolutionary War and the Constitution meant something.
    • ^
    • v
    Once again, if it was a classic bank run then a) the Fed would have backstopped them with liquidity and at the very least b) they would have been able to sell off everything to a different bank that would be hungrily waiting.

    Neither of these happened...the $1.3 billion was just the straw that broke the camel's back. Indeed Indymac had started to do really fishy things to stay afloat and that's partially why Schumer called them out on it. He was angry that the regulators weren't clamping down on behavior that was just running up the bill.
    • ^
    • v
    "The fact that they didn't suggests that either the assets have little (or unknown) worth or there is no bank that could afford to buy them. It is probably a combination of both."

    That's right.

    There is very little (or no) market for those Alt-A / low doc mortgages... Banks/other financial institutions don't know how to value them.... particularly when housing prices (the houses being the collateral behind the loans which the banks are buying) continue to drop. And all banks of any size have some sort of exposure in one way or another to these Alt-A mortgages and they don't need any more headaches.... No bank wants to take on the risk associated with these investments which just keep getting worse and causing problems for more and more lenders...
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    No one should blame Schumer for speaking the truth about an imminent bank failure. If he hadn't spoken up then my sense is that the way the market is going IndyMac would have failed in another month anyway.... as mikkel pointed out, Schumer's comments were the straw that broke the camels back.

    Though to be honest it wouldn't surprise me that Schumer probably already knew the back was already broken and the Fed was about to step in anyway.... I think it was a good idea that he prepared the public for the announcement so it wouldn't come as a complete surprise to the already roiling financial markets with regards to financial institutions.... Schumer's "preparation" probably kept the markets from overreacting when the announcement finally did come.
 
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