The Housing Bubble and Indy Mac Bank

Many borrowers could not pay the loan back, as Indy Mac bank did not check the authenticity of the borrower before disbursing the loans. So the bad loans accumulated with the bank. The bank had no such provision to sell the property and pool money because the purchasing power of the buyers in the market had reduced considerably and no one was willing to buy a property. This was the situations which like the other bank Indy Mac Bank also faced, which led to its failure. Finally, it was acquired by FDIC and Indy Mac became Indy Mac Federal Bank. According to CNN Money, July 13 2008, the fall of the Indy Mac Bank, the most important mortgage lender, was the most expensive collapse in history. This proved again that crisis still existed. The Indy Mac Bank was acquired by the Federal Regulators. It was said that about 95 per cent of the bank deposits were insured. This means about $1billion were not covered under the FDIC cover or guarantee. This could have affected about 10,000 customers of the bank and they could have lost half of their deposits. However, the failure of the IndyMac would charge the Insurance Funds around $4-$8 billion. This was regarded as one of the most costly failures ever (Clifford, and Isidore “The Fall of IndyMac”). INTRODUCTION Bank failures are not a new phenomenon. There were just two years from 1934 to 2007, when none of the banks collapsed or failed. During the 1990s when the world economy was going through extreme loan and savings crisis, at an interval of 1.38 days 1 bank failed. However, during the 2007 crisis, this rate slowed down to 2 banks. Around thirty-two bank collapsed during this time as stated by Federal Deposit Insurance Corporation (FDIC). However, in July 2008, Indy Mac Bank, which was the third largest bank in the USA, failed. Though during 2007, the bank showed signs of survival by focusing on a growth-based business model and maintaining capitalization level high to face the storm. Indy Mac grew swiftly during the boom of real estate and housing. The customers or buyers were asked for few or no pieces of evidence of their earnings and allowed loans to buy property such as houses. Since the house prices were increasing, so when a buyer could not pay back his/ her loan, the bank took possession of the home and found investors for it to pool money. However, when this housing bubble burst, the price of the real estate began to fall and the losses for the bank begin increasing. The loans that were taken became bad and the bank had to suffer losses because there were not enough buyers in the market to buy those properties and pool money for the bank. Indy Mac lost about $184.2 million in its first quarter of 2008 and it was expecting higher loses in their second quarter. The bank also lost about $614 million in 2007 by focusing on the Alt-A sector of the mortgage. However, finally, the bank authorities accepted that it could no longer accept the deposits that were brokered as they were no longer thought to be well capitalized.