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As early as March 2007, news stories began mentioning the possibility of massive defaults of Alt-A loans, dubbed "stated income" or "liar" loans, because people who received them often couldn't demonstrate they could pay the interest on the loan, particularly if, after a period of time, the loan reset at a higher rate. In the first quarter of 2007, according to IndyMac's SEC filings, just 21% of the company's total loan production involved "full-doc" (fully documented) mortgages.
A June 2008 report by the Center for Responsible Lending, a foundation-funded nonprofit that reports on abusive financial practices, described an IndyMac corporate culture that emphasized loan volume and short-term growth over careful lending standards. (Among the center's funders is the family foundation of Herbert and Marion Sandler, the principal funders of ProPublica.) It's a characterization the company has disputed.
"It didn't have to happen this way," the report concluded. "Federal authorities -- including the Office of Thrift Supervision -- should have kept a closer eye on IndyMac's business model and practices."
The OTS's Ruberry said the agency disagrees with the center's conclusions. "The Center for Responsive Lending and any other external party doesn't have all the info on what happened," he said. "They can't substitute for the insight of examiners who are in the bank."
Ruberry also noted that the number of consumer complaints about IndyMac was relatively low.
In the fourth quarter of 2007, under OTS supervision, IndyMac moved $10.9 billion in troubled loans intended for sale to the secondary market to the category of "held for investment" -- a polite term for loans that would be very difficult to sell without a huge discount. By that time, those loans were starting to reset and the housing market to decline, with disastrous results that would continue into 2008.
Withholding judgment
In that portfolio of loans held for investment, 9.47% were nonperforming in March 2008, compared with 2.12% for the same period in 2007, according to the company's March 10 quarterly filing. To make matters worse, the company's loans were heavily concentrated in California and to a lesser extent Florida, both hit particularly hard by the collapsing housing market.Yet in March 2008, IndyMac still wasn't on the FDIC's list of problem banks.
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When IndyMac transferred the $10.9 billion to the "held for investment" category, it had to revalue the loans to reflect "market" value. The bank determined the value had dropped by only about $600 million, a little more than 5%. It also freely admitted in its financial filings that because of "the extreme disruption in the secondary market" it would be hard to sell the loans. Any significant further devaluation would have put IndyMac below the required risk-based capital ratios necessary to accept brokered deposits without an FDIC waiver -- deposits on which the bank had become heavily reliant. As IndyMac's primary regulator, OTS still had the power to downgrade the S&L and bring in the FDIC. Instead, the OTS -- optimistically, in retrospect -- approved another course for IndyMac.
In the fourth quarter of 2007, IndyMac changed its business model "in response to market conditions and OTS concerns," according to an agency fact sheet. Rather than continue to push the riskier and higher yielding Alt-A loans, it focused on originating mortgages it could sell to so-called GSEs, or government-sponsored enterprises, like Fannie Mae and Freddie Mac. The OTS hoped that would buy IndyMac enough time to "obtain a significant capital infusion or to find a buyer," according to the agency's narrative. Before that could happen, Schumer's letter appeared, and the bank didn't have enough liquidity to withstand the deposit run that followed.
The senator and his staff didn't respond to multiple calls from ProPublica asking him to explain how his letter to the OTS became public, or what he and his staff were thinking if they were responsible for leaking it. Could someone as financially savvy as Schumer fail to understand that a public airing of his views was almost certain, in the current environment, to drive IndyMac to if not over the brink?
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Whatever role Schumer's actions may have played, OTS's actions reflected a brash if not heroic assumption that the economy would improve and IndyMac's fortunes would brighten. "The predictions of economists were that the market was going to turn around," Ruberry said. "We obviously know in hindsight, but we couldn't see into the future how sustained the downturn would be."
Given the bank's already precarious position in late 2007, those assumptions will likely be strongly challenged when senators turn their attention from crisis management to what went wrong.
This article was written and reported by Jake Bernstein for ProPublica.
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