[GJM] Fw: [globalnetnews-summary] THE HOUSE THAT INDYMAC BUILT

[mary rose]

Along with this interesting article on the role that INDYMAC played in all 
of this, Citigroup issues a grm forecast

House prices could fall for two years: Citigroup
(Agencies)
Updated: 2008-07-19 15:58


LONDON -- Citigroup chairman Win Bischoff has warned that house prices in 
Britain and the United States are likely to keep falling for another two 
years.
The chairman of one of the world's most powerful banks told the BBC in an 
interview that he expects it will take two years for the markets to 
stabilize.

He also said he expected the credit crunch could continue through until 
2009. ******


While at the same time, this news item appeared:

Citigroup posts loss of $2.5-billion in quarter

AP

July 19, 2008

Citigroup Inc. has become the latest big bank to assuage Wall Street's 
worries about a financial sector implosion, posting a $2.5-billion (U.S.) 
second-quarter loss that was smaller than expected. Citi joined JPMorgan 
Chase & Co. and Wells Fargo & Co. in persuading investors that the prognosis 
for the sector, while gloomy, may not be as dire as feared. But it's 
difficult to get too enthusiastic about clearing a low bar. It was Citi's 
third straight quarterly loss and neither JPMorgan nor Wells Fargo managed 
to notch a profit gain compared with last year. Meanwhile, the brokerage 
Merrill Lynch & Co. Inc. reported a wider-than-expected quarterly loss. Next 
week, Wachovia Corp. and Washington Mutual Inc. are expected to reveal 
losses, too, with Bank of America Corp. expected to report a steep profit 
decline. Citigroup lost the equivalent of 54 cents a share in the April-June 
period. In the same time frame last year, the bank earned $6.23-billion, or 
$1.24 a share. C (NYSE) rose $1.38 to $19.35. ********

Obviously we are on our way down, down, down and the the question now 
appears to be: "Just exactly where is the bottom? with this question being 
as speculative as the stock markets themselves.  But, wherever it is you can 
bet your bottom dollar that any bail out is going to be paid for by the U.S. 
American citizen.  And the winners are: people like Freddie Mac CEO Syron, 
who was paid nearly $19.8-million last year.

Freddie Mac chairman and chief executive officer Richard Syron pocketed 
nearly $19.8-million (U.S.) in compensation last year, according to a 
Securities and Exchange Commission filing yesterday, even though the 
mortgage company's stock lost half its value in 2007. If Mr. Syron stays at 
the helm of Freddie Mac through the end of next year, he will receive nearly 
$20-million in stock awards if the board says he has met certain goals. This 
year, he is guaranteed to get $8.8-million in stock grants regardless of 
performance. For 2007, Syron received a $1.2-million salary, a $3.45-million 
bonus, including $1.25-million to remain at the company, and $771,585 in 
other compensation. He also received stock and options valued at 
$14.3-million. FRE (NYSE) rose 85 cents to $9.18.  From Print Edition, 
19/07/08

mary rose

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Sent: Sunday, July 20, 2008 9:42 AM
Subject: [globalnetnews-summary] THE HOUSE THAT INDYMAC BUILT
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THE HOUSE THAT INDYMAC BUILT
In the low-rate days of 2003, big pension and hedge funds were hungry for 
higher yields - and upstarts like IndyMac were only too eager to please. 
Their creations became time bombs that still threaten the financial system

DAVID EBNER and TARA PERKINS AND SINCLAIR STEWART

July 19, 2008

LOS ANGELES, TORONTO, NEW YORK -- Patricia Ramirez's home, which sits on a 
ragged dead-end street at the edge of East Los Angeles in the shadow of an 
elevated freeway, cost $445,000 (U.S.) when she and her husband bought it in 
February, 2007.

Mrs. Ramirez, an office manager at a tortilla maker, and Mr. Ramirez, a 
truck driver, together make $48,000 a year. When a relative of theirs bought 
a house a few years ago, his real estate agent told the Ramirezes they could 
afford a house too. They had dreamed of owning a home for years, and jumped 
at the chance, scraping together a $5,000 down payment, or 1 per cent.

They moved into the one-storey, three-bedroom beige house in a working-class 
neighbourhood that was bid up in value during the boom, because while it's 
on the edges of the rougher parts of town, it's not too far from downtown or 
the ocean. A pleasant green cemetery is half a block away and the nearby 
main streets are colourful, lined by eclectic shops and strolling families, 
most of whom are Hispanic.

Today, the Ramirez home, with its rusted basketball hoop in the driveway and 
yellowed lawn, is worth just $360,000 - a drop of 20 per cent in less than a 
year and a half.

Yet their monthly mortgage payments have moved rapidly in the opposite 
direction, escalating to $4,500 from the $2,500 payment they originally 
made - a sum they believed was fixed for five years.

Their mortgage, a type known as an Alt-A that became hugely popular in the 
U.S., allows borrowers to secure financing without providing proof of their 
incomes.

It may sound like a foolish business model, but for IndyMac Bancorp Inc. of 
Pasadena, Calif., it has been a catalyst for spectacular growth. Or at least 
it was, until eight days ago, when the bank was seized by the federal 
government.

It was the second-largest banking failure in U.S. history, and its collapse 
can be viewed as a cautionary tale: Not just of how America recklessly 
embraced subprime mortgages, but of how these questionable home loans have 
ripped through the wider economy, shredding confidence in the markets and 
inciting a global credit crisis.

Much of the problem dates to 2003, a pivotal time for both IndyMac and the 
credit markets in general. Unusually low interest rates had made large 
investors, like pension and hedge funds, hungry for higher-yielding 
products. At the same time, banks were more aggressively pursuing a new 
business model - one in which they originated loans, like mortgages, and 
then immediately sold them in products such as collateralized debt 
obligations, or CDOs, to these big investors to limit their risk.

IndyMac, seeing an opportunity, headed straight for this intersection. It 
developed new, custom types of mortgages such as the Alt-A, whose lax credit 
standards opened the door for a flood of potential new home buyers like the 
Ramirezes.

IndyMac could provide these mortgages to people with sketchy credit 
histories, and then pass off the risk by selling the loans to investment 
banks. The banks then packaged these loans with others of higher quality, 
and in turn sold chunks of these packages to large investors.

"IndyMac and others helped pioneer that market to bring those people into 
the fold and to allow them to buy homes, buy second homes, do a whole bunch 
of other stuff," says Guy Cecala, publisher of Inside Mortgage Finance.

The problem is, because each party was passing on the risk to someone else, 
the level of diligence and scrutiny suffered. That was fine as long as 
housing prices continued to climb, but when they reversed, the results were 
disastrous. Major banks and broker-dealers have already written off more 
than $300-billion worth of bad loans, and have been savaged in the equity 
markets. New lending has slowed to a crawl, threatening economic growth and 
forcing U.S. regulators to orchestrate several rescue plans for Wall Street.

Now, with IndyMac's failure - and news of a probe by the Federal Bureau of 
Investigation - there are fresh concerns. For one thing, many of the 
securities it backed are still lurking in investment portfolios - potential 
ticking time bombs.

As painful as this will be for some investors, the size of the bank's 
holdings aren't large enough to threaten the entire economy. But the 
replayed image of hundreds of customers, lining up outside IndyMac's 
branches in a classic run on the bank, just may be.

Confidence is the underpinning of the markets, and IndyMac's failure shows 
just how fragile this underpinning is - no sooner had it collapsed than 
shock waves reverberated, pounding the shares of regional banks, investment 
dealers, and government-chartered mortgage giants Fannie Mae and Freddie 
Mac.

Bank of Nova Scotia chief executive officer Rick Waugh, who helped spearhead 
an international report this week on reforming the financial system, says 
the real issue is contagion, and how, in such an interconnected market, one 
small problem can quickly beget a larger one, leading to calamitous effects 
the world over.

"Last year, the issue was subprime mortgages, which in the scheme of things 
was not a very large asset class. But then, of course, it built from that 
into CDOs, and other derivatives, and what have you," he explained. "The 
issue at IndyMac should be contained but we're in a globalized market - 
funding is global, investing is global," Mr. Waugh said in an interview this 
week. "And because we're in this period of uncertainty, we can't be 
complacent."

This uncertainty extends to IndyMac's customers, like the Ramirezes.

Facing payments they couldn't afford, they tried to keep up, paying $4,000, 
for two months. On April 15, a letter threatening imminent foreclosure came 
in the mail. Fearing the inevitable end, they stopped paying. They waited. 
And then: Nothing.

"We called the bank, there was no answer," Mrs. Ramirez, 43, who moved to 
the U.S. from Mexico in the late 1980s, said in Spanish in an interview at 
her workplace. "We are not getting any bills. We don't know how much longer 
we'll be there."

The Kindling

IndyMac prospered during a time of deregulation, low interest rates and a 
willingness by investors to shoulder greater risks.

In 1985, the firm that became IndyMac Bancorp - a contraction of 
International National Mortgage Corp. - was created as an arm of Countrywide 
Financial Corp., and evolved into a lender with a thrift charter that 
allowed it to take in deposits as a source of cheap funds.

The bank started small. Michael Perry, the company's long-time chief 
executive who was ousted this month when the government took over, joined 
IndyMac in 1993 when "we had four employees, had no business and were losing 
money."

But Mr. Perry had big ambitions. In 2000, when IndyMac ranked as the 
28th-biggest lender in the country, the CEO called his bank a "leading 
Web-based consumer lender." He drew a salary of more than $750,000, with an 
allowance for club dues and a car. Already, the bank was making a name for 
itself in the new custom mortgage market; these mortgages didn't rely on the 
standard credit scores that are a core part of the traditional mortgage 
application.

Conditions were flourishing for the bank's growth. The bursting of the tech 
bubble led Federal Reserve chairman Alan Greenspan to slash the benchmark 
interest rate toward 1 per cent, and with rates that low, institutions such 
as pension funds that depended on conservative investments like Treasury 
bonds suddenly found themselves in a difficult place.

Wall Street, seeing an avenue of demand, used existing tools and rushed to 
package new products for their customers, buying up mortgages, securitizing 
them and selling them as asset-backed securities. Odd initials were stamped 
on the packages, such as CDOs. But mass securitizations didn't really 
explode in popularity until after the dot-com meltdown. The crucial 
difference this time was that banks actively worked with credit agencies to 
design products that could be stamped with a stellar triple-A rating, even 
though they contained some riskier subprime loans.

Record-low interest rates made borrowing and buying homes more affordable 
than ever. The American Dream of owning one's own home was suddenly in reach 
of tens of millions of people that would have never qualified for a mortgage 
before.

Mr. Perry's aggressive push to transform the bank into a big name from a bit 
player started to show results. IndyMac produced $30-billion worth of loans 
and earned a record profit of $171-million in 2003, claiming a 0.8 per cent 
stake in the U.S. mortgage business. Mr. Perry's pay rose to $7,163,410 in 
2003, including a $5-million deferred compensation credit as his old job 
contract expired.

That year, mortgage interest rates hit a 50-year low and virtually every 
borrower who could refinance a mortgage did so that year, says Mr. Cecala, 
the Inside Mortgage Finance publisher. In 2003, U.S. house prices had their 
biggest one-year jump in more than two decades, pricing many lower-income 
Americans out of the market. Mortgage lenders faced a challenge: They needed 
to find new borrowers.

For banks such as IndyMac, one option was to find borrowers who had never 
traditionally qualified for mortgages, such as people who couldn't document 
their income. Alt-A looked like the answer.

IndyMac - "raise your expectations" was its slogan - made this category its 
niche. Alt-A loans are mortgages for home buyers who have better credit than 
subprime borrowers but don't have fully documented income, such as pay 
stubs.

Alt-As were originally conceived for wealthy people with erratic incomes, 
such as the self-employed, small-business owners or the rich who had low 
base salaries but large bonuses. Over time, the product aimed increasingly 
at lower-income borrowers like the Ramirezes, who would otherwise have taken 
out subprime mortgages.

IndyMac had hit a sweet spot. In 2001, Alt-A claimed 2 per cent of the 
overall U.S. mortgage market with $55-billion in loan production; but by 
2006, with the target market expanding, it was 13 per cent, worth 
$400-billion annually, according to Inside Mortgage Finance.

In the three years after 2003, despite the forecast of an industry slowdown, 
IndyMac grew by leaps and bounds. "Much of its rapid growth since 2003 was 
based on the fact that they were very much in the hottest area of the 
residential mortgage market, which was the Alt-A market," Mr. Cecala said.

And by 2006, IndyMac was the most prolific, ranking as the No. 1 lender in 
the category at $70-billion in Alt-A volume - almost 80 per cent of its 
business. The bank's total market share rose rapidly to 3.3 per cent by the 
height of the housing bubble in 2006 - $90-billion in new loans.

The bank continued to bundle and sell the majority of its mortgages, which 
worked their way through the financial system into the hands of debt 
investors around the world. In this way, bond investors became exposed to 
the company's lending standards.

When a $650-million offering of triple-A-rated bonds backed by roughly 3,000 
IndyMac mortgages - many of which were interest-only mortgages - came to 
market in June of 2005, more than a dozen investors from Europe, Asia and 
the U.S. stepped up. The bonds typically yield 0.75 to 1.15 percentage 
points more than comparable Treasuries.

"There's this insatiable appetite for mortgage-backed securities worldwide," 
Andrew Sciandra, who was a senior vice-president at IndyMac, told The Wall 
Street Journal. He said he'd met with investors from Germany to Abu Dhabi, 
and that Asian investors accounted for about 10 to 20 per cent of mortgage 
securities sold by IndyMac.

Spreading the risk

Investors in Abu Dhabi and Germany had little knowledge of the assets in 
California, Florida and elsewhere backing their securities. They didn't know 
that IndyMac's mortgage application software allowed borrowers to fill out 
an online form that could be analyzed within minutes.

IndyMac and its rivals, such as Countrywide and Washington Mutual, were 
creating ever-more-exotic customized mortgages, luring buyers with low 
introductory interest rates (that would shoot up after a year), or sometimes 
the option to skip payments, paying interest only, at least up front, and 
handing out mortgages without confirming incomes.

Alt-As aren't necessarily a disaster. A lender, instead of requiring a tax 
return, can ask for at least a bit of proof of income, like one pay stub.

But as the boom intensified, they came to be called "liar's loans" - with 
the Mortgage Asset Research Institute finding that almost all borrowers 
exaggerated their incomes by at least a little bit and half of prospective 
homeowners raised their numbers by more than 50 per cent.

Among IndyMac's most popular offerings was the FlexPay, an ARM 
(adjustable-rate mortgage) with various payment options, where the bright 
shiny lure in 2005 was a 1 per cent starting rate - generating a third of 
its business that year. The Ramirezes bought their $445,000 house with such 
a mortgage. FlexPay, an IndyMac website advertised, was "about choices." 
Beyond actually paying the normal amount, there was a minimum payment 
option - "which saves you the most cash" - and interest-only payments - 
"keeps your payment low but still pays all interest due."

All of this helped drive housing prices higher with added demand, and 
delivered ever-more mortgages in packages to Wall Street to resell.

As investors clamoured for more of these highly rated, high-yielding 
securities backed by mortgages, the investment banks needed more product. 
That created a vicious circle, inciting lenders like IndyMac to burrow 
further down the risk chain in search of home buyers.

Indeed, the total value of CDOs issued in 2004 ballooned to $157-billion. 
The following year it had almost doubled to $271-billion. And in 2006, it 
soared to $552-billion, according to the Securities Industry and Financial 
Market Association. New issuance was on pace for a record once again in the 
first half of last year, before the carnage coursed through the subprime 
sector and CDO sales ground to a halt.

A primary lender wouldn't normally give away money to a person unlikely to 
pay it back. But that didn't seem to matter when a chain of financial 
players passed the buck down the line. "The securitization requirements were 
less rigid than a traditional bank would have for loans on its balance 
sheet," said Craig Emrick, a vice-president at Moody's Investors Service in 
New York, "The banks knew that they could essentially move the risk."

Although some were already warning in early 2005 that the property bubble 
was nearing the bursting point, the entire industry raced on.

IndyMac continued to churn out residential mortgage-backed securities. In 
May of 2005, IndyMac priced an $834.7-million home equity deal led by Morgan 
Stanley and UBS. In September, UBS Securities led a $686-million IndyMac 
home equity deal.

The packaged mortgage pools IndyMac sent to Wall Street weakened. Out of a 
$354-million pool in June, 2006, more than 90 per cent of the value was 
Alt-A stated income loans, according to a regulatory filing. In the first 
quarter of 2007 - when the Ramirez family bought their home - four out of 
five loans IndyMac sold were Alt-A. The percentage of Alt-A mortgages of the 
total sold in the U.S. peaked at 18.4 per cent between April and June of 
2007.

The fire

By 2006, as real estate values flattened out, any house that could be 
refinanced had already been and anyone with relatively good credit already 
had a mortgage with a great rate. Lenders like IndyMac had to hunt harder. 
In its quest for more mortgage buyers, IndyMac, according to lawsuits filed 
in California and New York, went beyond simply pursuing the poor, the 
elderly and minority groups and engaged in predatory lending.

In a report issued on June 30 this year, a North Carolina advocacy group, 
the Center for Responsible Lending, chronicled IndyMac activity in cases 
similar to the Ramirez situation in detail by an investigative journalist, 
criticizing the bank's Alt-A odyssey as "unsound and abusive" lending.

Then, last summer, the credit crisis began. The Alt-A market quickly began 
to dry up, falling by more than half to 8.8 per cent in July-September from 
its height of more than 18 per cent in the spring.

By January-March this year, Alt-As were at 0.1 per cent of the total 
mortgages sold. IndyMac, scrambling for survival and having abandoned its 
niche business, tried to remake itself as a traditional lender.

Mr. Perry remained upbeat. "Talk of the 'subprime contagion' spreading to 
the Alt-A sector of the mortgage market is, in our view, overblown," he said 
in March of 2007. In August, as credit markets melted down, he said IndyMac 
had "limited exposure" to the crisis.

As recently as May 12, IndyMac said it was trying to raise new capital. "I'm 
confident IndyMac will be a survivor," Mr. Perry said as about 4,000 layoffs 
were announced, more than half the remaining work force.

But not everyone was convinced. On June 26, a letter written by Democratic 
Senator Charles Schumer of New York to regulators, expressing concern that 
IndyMac "could face a failure," was leaked.

Thus began a walk-run on the bank, with $1.3-billion withdrawn by the time 
the U.S. government, through the Federal Deposit Insurance Corp., took over 
IndyMac as the sun set on Friday, July 11, listing assets as of March 31 of 
$32-billion and deposits of $19-billion, most of them insured by Washington.

The failure will cost American taxpayers $8-billion.

"There was likely nothing that could have saved them," said Gary Townsend, 
CEO of Hill-Townsend Capital LLC. Without Mr. Schumer, "maybe the timing 
would have been different."

Who's Next?

The failure of IndyMac has already spawned a sort of death watch among 
banking analysts, who quickly amassed lists predicting which bank might be 
next. Some other large players in the mortgage market, like Washington 
Mutual, National City Corp. and Wachovia Corp., were particularly hard hit 
in markets - so much so that some officials were forced to make public 
statements to nervous investors, insisting that their financial health 
remained sound.

While the full impact of IndyMac's collapse on financial confidence and the 
greater economy has yet to be measured, the trail of debris it left in 
California is easy to follow.

The bank was reopened last Monday by federal officials to long lines and 
angry, agitated customers, sweating under the summer sun.

For Mrs. Ramirez, the dream of home ownership that so hypnotized her and her 
husband a couple of years ago now seems like a terrible trap.

She has four children at home, one of whom is soon to go to the hospital for 
an operation on his pancreas. Her husband is struggling with diabetes. "I 
feel tricked," Mrs. Ramirez said. "We are so stressed. We feel betrayed."

By the numbers

$12-trillion

Approximate value of the U.S. mortgage market.

2.5 million

Number of U.S. homes that could be hit with foreclosure this year, according 
to U.S. Treasury Secretary Henry Paulson.

1 in 501

Number of U.S. households that received a foreclosure filing in June, up 53 
per cent from a year earlier.

0.99 per cent

Number of U.S. loans that entered the foreclosure process in the first three 
months of 2008, compared to 0.58 per cent a year earlier.

400

Number of U.S. real estate industry players that have been indicted since 
March following investigations of mortgage fraud.

53,000

Number of suspected mortgage fraud cases reported by U.S. banks last year, 
up from 37,000 a year earlier and about 10 times the level of reports in 
2001 and 2002, according to the U.S. Treasury Department.

Mortgage Bankers Association, RealtyTrac, AP, Reuters