MercoPress. South Atlantic News Agency

US government moves into collapsed top mortgage lender

One of the largest United States mortgage lenders, the California-based IndyMac Bank, has collapsed amid a growing credit crisis. Federal regulators seized the bank's assets, fearing it might not be able to meet withdrawals by depositors. It is the second-largest financial institution to fail in US history, regulators say.

The failure came on a day when shares in the two biggest US home loan institutions - Freddie Mac and Fannie Mae - fell at one stage by almost 50%. IndyMac had been struggling to raise funds and stay in business in one of the states worst hit by the US housing market slump. The bank's primary regulator, the Office of Thrift Supervision (OTS), said depositors had withdrawn more than 1.3 billion in the past 11 days. "This institution failed today due to a liquidity crisis" OTS Director John Reich said. The OTS believed IndyMac was unlikely to meet its depositors' demands and transferred its operations to the Federal Deposit Insurance Corporation (FDIC), which will seek a buyer. People with deposits of up to 100,000 US dollars each are covered by insurers. But about 10,000 people had uninsured funds over that limit with IndyMac - worth a total one billion US dollars at the time of closing. The FDIC said it would pay those people an advance dividend equal to half of their uninsured deposit. It is the fifth US financial institution this year to succumb amid a credit crunch, falling house prices and rising foreclosures. The move came after rollercoaster trading on Friday for Freddie Mac and Fannie Mae - which are behind half of all US mortgages. They play an important role in the financial markets in providing funding for home loans by buying up mortgages and packaging them as investments. As mortgage backers, the companies have had to pay out when homeowners have defaulted on their loans. Both firms defended their finances, saying they had enough capital to weather the housing slump. Shares in the two firms recovered after US Treasury Secretary Henry Paulson signaled he was not on the verge of taking Fannie Mae and Freddie Mac into public hands. "Our primary focus is supporting Fannie Mae and Freddie Mac in their current form as they carry out their important mission" he said. President George W Bush was briefed on Fannie Mae and Freddie Mac earlier on Friday. Mr Bush said Mr Paulson assured him he and Federal Reserve Chairman Ben Bernanke "will be working this issue very hard". After a volatile trading session, Freddie Mac shares closed down 3.1% at 7.75 US dollars. Shares of Fannie Mae ended the day down 22.4% at 10.25 after sliding as much as 49% to a 19-year low of 6.68 US dollars. US Senator Christopher Dodd said the Federal Reserve was considering allowing Fannie Mae and Freddie Mac to borrow directly from the central bank, which also helped the shares to recover. Some media reported the Treasury was planning some kind of government-led rescue but Mr Paulson said only that they were "maintaining a dialogue with regulators and with the companies". FDIC chairman Sheila Blair said on a conference call that institution intends to sell IndyMac within 90 days, preferably as a single entity. If that doesn't work, the lender will be sold off in pieces, she said. After peaking at 50.11 US dollars on May 8, 2006, IndyMac shares lost 87% of their value in 2007 and another 95% this year. The stock fell 3 cents to 28 cents on Friday. IndyMac came under fire last month from Schumer, the Democrat from New York, who said lax lending standards and deposits purchased from third parties left it on the brink of failure. During the 11 business days after Schumer explained his concerns in a June 26 letter, depositors withdrew more than 1.3 billion US dollars, the OTS said. "This institution failed due to a liquidity crisis" OTS Director Reich said in the statement. "Although this institution was already in distress, I am troubled by any interference in the regulatory process". Schumer blamed IndyMac's own actions and regulatory failures for the bank's seizure. "If OTS had done its job as regulator and not let IndyMac's poor and loose lending practices continue, we wouldn't be where we are today" Senator Schumer said in an e-mail yesterday. "Instead of pointing false fingers of blame, OTS should start doing its job to prevent future IndyMacs". The failure will cost the federal deposit insurance program about 4 to 8 billion US dollars according to FDIC. Some one billion of uninsured deposits are held by about 10,000 customers but those depositors will get an "advance dividend" equal to half the uninsured amount, according to the FIDC statement.