Indymac fails, lots of blame to go around
Indymac bancorp becomes the second largest bank to fail in the last twenty years. The company was forced into receivership last week after depositors made a run on the bank and pulled out over one billion dollars worth of deposits in the past week. The company which is based in Southern California was one of the largest independent mortgage companies in the country and had assets over twenty eight billion dollars.
Indymac was a company that was devestated by the down turn in home prices. As one of the largest lenders in the country with a balance sheet that carried Alt-A loans, over forty percent of which were made to home owners in California, Arizona and Florida, the company simply did not have the capital to offset the required writedowns on its balance sheet. The mortgage lender had attempted to raise capital this year but found no investors willing to invest into the company as home values continued to decline.
The company came under fire last week when Senator Schumer out of N.Y. raised questions over the companies financial health. This was the equivalent of yelling fire in a theatre as customers began a run on the bank. The office of the OTS has criticized the Senator for bringing the issue in front of the public and could end up costing the FDIC up to eight billion dollars for insurance claims. There is speculation that the document was leaked purposely as the Senator is allegedly tied into a number of hedge funds. The sad part is the government has done little to help to stem the free fall of housing prices and now could be responsible for pushing a lender and bank out of business. One is left to wonder where the countries leadership has gone to?
Countrywide Drops & Foreclosure Filings Rise At Record Paces
The bad news for the U.S. economy continues to come out in mass. On the eve of another meeting by the FOMC, the countries largest mortgage lender reported losses totaling near 800 million dollars. Countrywide is continuing to be hit hard by the fall out in the real estate markets and their is little hope that the market will improve any time soon. There is a strong possibility that the U.S. housing market will continue deteriorating at record paces as the number of foreclosed homes on the market grows. RealtyTrac today announced that foreclosed home filings are now at the largest level in history and that they were up over 25% from the fourth quarter of 2007.
It is becoming more apparent that the U.S. housing market will not rebound simply based on lower mortgage rates. This puts the government in a tough position as they are going to be left with two choices allow the market to continue to fall until all of the bad loans have worked their way through the system (potentially 2-3 years from now) or offer a true stimulus package that will provide the necessary components to help the market. If the government offers a stimulus package it will need 3 key ingredients. Financial incentives for lenders to offer loan programs for lower qualified applicants (increase demand base), tax incentives for purchasing foreclosed homes, and a true strategy for dealing with home owners facing foreclsoure.
Mortgage rates continue to trend around six percent and the balance of the economy is still producing above expectations, but one is left to wonder how long this can last.
Credit Squeeze
You can not open a newspaper without hearing the term credit crunch and falling home prices. The financial mess is going full circle, first from main street down to wall street and now back to main street…
The worst time to borrow money is when you really need it desperately, and as many American home owners are finding out, even if they had planned for tough times, lenders are now pulling in their options. This past week Wachovia made headlines for freezing open lines of credit on home equity loans. Large lenders such as Indymac and Countrywide began doing this earlier in the year. The default rates on second mortgages have spiked to such high levels that most lenders are no longer offering second lien products. This puts homeowners in a difficult spot, already banks are being flooded with calls from customers who are trying to pull out all of the equity they can from the home equity lines in fear that the lender could freeze them out.
Complicating matters is most mortgage lenders have now also reduced the amount of equity a home owner is eligible to reifnance. In years past it was not uncommon for home owners to refinance at 95 to 100% of their homes value. Those options are long gone, most lenders now cap the loan amount at 90% of the homes value and even lower if your zip code is categorized as being in a “declining market”. The only option a home owner has to cash out refinance above 90% is through an FHA backed mortgage.
Many economists are predicting the limited access to home equity will result in a dramatic rise in the default of consumer credit cards. Homeowners who have historically used their homes equity to pay off their revolving debt have run out of options and will be stuck to make difficult financial decisions if the market does not improve in the near future.