Indymac Redux: The Panic Before the Foreclosure Machine

By Llewellyn Hinkes Jones

When it was recently revealed that Cesar Sayoc—the person accused of sending bombs to George Soros, the Clintons, and others—had his home foreclosed by mortgage servicer Indymac/OneWest, the foreclosure crisis was back in the news for a brief moment.

Was Sayoc an honest man driven to rage by foreclosure abuse? Or an example of the kinds of people who were given outrageous mortgages with little proper vetting?

Indymac would eventually be criticized for being a “foreclosure machine,” but Steven Mnuchin, current Treasury Secretary and previous head of Indymac’s successor OneWest, defended the bank’s actions, claiming that the foreclosures were necessary because the loan portfolio was particularly bad.

Was Sayoc an example of the bank’s bad lending or its eventual foreclosure abuse?

While Sayoc’s loan may or may not have been bad, analysis of the bank’s loans at the time showed the portfolio in respectable shape and that it was investor panic more than mass delinquency that would sink the mortgage lender.

OneWest would eventually pick up the pieces of Indymac, foreclosing on borrowers by the thousands. The bank evaded the same kinds of fines levied on other lenders during the foreclosure crisis, although a recent lawsuit found the bank liable for foreclosure abuses.

Short Sellers, Ratings, and Bank Panics

Financial filings for the bank showed that the bank was producing loans at a record rate in 2006, almost 50 percent more than the previous year to a combined total of $90 billion.

The growing financial crisis was beginning to eat into the company’s revenues because of a decline in revenue from mortgage-backed securities and delinquencies began to grow. By January 2008, the company’ stock price fell by almost 85 percent after financial analyst Jim Cramer said the bank had “liquidity issues.” Cramer’s affiliated investment site, TheStreet.com, said Indymac was in particular trouble for its use of Alt-A loans.

Indymac’s Alt-A portfolio—loans similar to subprime but with higher credit ratings—performed better than industry average, but it started receiving bad credit ratings on some of its holdings, like a mortgage-backed security and a residential asset securitization trust by ratings agencies like Moody’s and S&P.

But while the ratings were bad, the actual loans were doing relatively well, sometimes one-fifth the industry average for Alt-A losses. When delinquencies did rise in 2007, it was only at 5.56 percent—only slightly above industry average.

According to a paper in the University of North Carolina School of Law by Jason Moran-Bates, it was Senator Charles Schumer’s letters to the FDIC and others, worrying about the bank’s solvency, that would cause a run on the bank’s deposits, with depositors removing $1.3 billion in a matter of weeks.

Then-director of the Office of Thrift Supervision, John Reich, blamed Schumer for Indymac’s downfall.

Published: November 7, 2018