IndyMac: Significant Seizure Chatter – Is This the End? Finally!

Posted on July 6th, 2008 in Daily Mortgage/Housing News - The Real Story, Mr Mortgage's Personal Opinions/Research

Note: At this point in time this story is RUMOR as is has not been made official by IndyMac or regulators. I am reporting it from what I have been personally told by people familiar with the matter. And I am not short this stock or trying to start rumors to drive down the price. How much further can it drop! Its at 67 cents. Just remember that when stories like this have come out in the past, there is a flurry of positive spin and in the end, 99.9% are true.

My sources put regulators at IndyMac this weekend doing the deed. I am being told an announcement will come tomorrow first thing, that IndyMac is no more and at least their wholesale operation is gone effective immediately. I would make sense that retail would be included as well, but I wholesale was the only operation referred to. Apparently wholesale sales and operations will get pink slips, no new loans will be locked and all existing loans in the pipe must be closed by the end of July.

I can’t imagine a ‘buyer’ would step up to the plate at this point in time, as in the case of Countrywide, because there is not another Gov’t shill as large as BofA to take her over. IndyMac sits atop 10s of billions in the most toxic of all loans, Pay Option ARMs, HELOCs and subprime. Much of these are on lines or have been borrowed against from the likes of the Federal Home Loan Bank of Atlanta, which in a fit of generosity and stupidity in Q3/Q4 2007 took Pay Option ARMs as collateral before Schumer made a stink. They got suckered into the Pay Option ARMs ‘investment grade’ ratings as well. CONTINUED…

It’s truly unbelievable how Pay Option ARMs fooled the smartest guys in the room for the longest period of time. The easiest trade in the entire mortgage implosion universe was to short the Pay Option lenders when the subprimes were initially collapsing. They included but are not limited to: AHM, IMB, CFC, WM, WB, DSL, BKUNA and FED. Look at the 12-month charts.

Pay Options were hoarded by banks trying to drive profits due to the fact that borrowers with better than average credit score had an effective rate as high as 10% when the underlying indices surged and remained elevated until recent quarter. Then as these loans became virtually worthless in the marketplace mid 2007, lenders were stuck with unusually large percentages of these vs other loan types on the books. The big sucker punch with these loans is that approx 80% of borrowers make the minimum monthly payment of 1% to 3.95% depending on the lender. The difference between the real interest rate and the minimum payment rate is called ‘negative amortization’, which the lender gets to book as revenue.

So, for example the lender is booking the fully indexed payment of $5k per month but 80% of borrowers only make a payment of $2500 per month. This phantom income (called deferred interest, CINA etc) is booked as revenue because in theory banks get it back when they foreclose and sell the property. NOT! This was fine and dandy until property values in the bubble states where these loans are most prevalent crashed 30% in the past 12 months. Now, lender can’t get it back so eventually there will be massive earnings restatements for income booked that was never received and will never be received. This is one most don’t talk about. This is why the stock prices of the ones that hold the most Pay Option ARMs (listed above) have crashed. Now, these loans are defaulting at a significantly accelerating pace. Due to the negative amortization and crashing values the cure rate from Notice of Default to Trustee Sale is the lowest among all long types, even subprime. 

If this rumor turns out to be true, I have to give a hat-tip to Mike Perry who managed to skate by for a long time by managing the stock price and not the company by doing things such as: he and his CFO buying $1 mil stock each at $30 last year to stabilize the stock price; consistently missing earnings and guiding higher in upbeat conference calls; the many analogies regarding how ’safe’ Alt-A loans are and how they are much closer to Prime than subprime’. As a matter of fact in Q3 2007 he said ’Alt-A is between Prime and Subprime kind of like Pasadena is between LA and Riverside. We all know that Pasadena is much closer to LA than Riverside’.  

Well Mike, you were wrong and we all knew it when you were spewing it a year ago. There is also the IMB blog called ‘The IMB Report’, which immediately spins all news about the company into a positive the day it comes out in order to manage the stock price. If the blog wasn’t meant to manage the stock price why name it with the ticker symbol (IMB), which very few know? Why not name it ‘The IndyMac Report’? Check it out. Check out the most recent posts.

The latest ‘big news’ (smoke and mirrors) that came out of IndyMac was in Jan 2008 when they made a big deal about locking $1 billion in loans on a single day. This jammed the stock price from about $4 to $10 in a couple of weeks. The Street assumed Indy was back on track and somehow locking $1 bil per day, which would be incredible especially given that Countrywide barely did that at the height of the bubble in 2005! 

They did in fact lock $1 bil in loans in one day, but what they failed to tell you was they probably lost that many loans that were already locked, in process or very close to funding on which their staff had already performed a lot of physical work. A sudden spike in rate locks on a day when rates fall suddenly can come at a significant expense.

When rates spike down in a very short period of time very few new loan applications are taken at that time. In Jan 2008 rates fell hard for two-days and spiked right back up. What happens on days like this is bank’s locked and in-process mortgage pipelines shift from one bank to another as borrowers and brokers re-lock the loan with the bank with the lowest rate on that day. They then pull the loan from the original lender.

This significantly HURTS the banks because they lose all the business on which they performed countless hours of processing labor in exchange for new business on which they have to perform the same job over again. In addition, all the loans they lose are locked at higher rates, which is preferable. All of the new business comes at much lower rates; rates that did not exist a few days afterward in the case of Jan. One last thing, when rates drop that fast it is impossible to hedge. How do you hedge against $1 bil in loans locked in 48-hours at very low rates and the loss of much of your existing pipeline in higher rate loan locks? Come to think of it, perhaps it was this event 5-months ago, which the company used to pop its stock price, that was the nail in their coffin.

As you can tell, I have no love-lost for Indy. They used to be a great company and at the top of my list. As a matter of fact they are one of the more aggressive lender right now. But last year when things fell apart seeing Perry immediately resort to what seems to me as stretching the truth, doing everything possible to manage the stock price and not the company, blaming short sellers, always guiding higher after earnings and missing, releasing fluff press releases in order to drive the stock price higher etc, it showed me his true colors.

One thing is for certain, if the banks had come out from the beginning and admitted things were bad and started to take corrective measures, this ‘crisis of confidence’, which has now turned into something much greater, may not have gotten near this bad. -Best Mr Mortgage

Other Related Mr Mortgage Stories

The Pay Option Implosion – Subprime’s Big Brother

Look Out! Here Comes the ALT-A Implosion!

Mr Mortgage on Mortgage Modifications – You May Qualify!

Mr Mortgage: Mortgage Modifications Part 2 – Being Forward Thinking

57 Responses to “IndyMac: Significant Seizure Chatter – Is This the End? Finally!”

  1. Friday, July 11 @ 1:30 PST

    The FDIC is in charge” was the verbal announcement ringing through the halls of IndyMac’s Pasadena offices. “Everyone show up for work on Monday.”
    2008-07-11 —

  2. […] IndyMac: Significant Seizure Chatter – Is this finally the end? […]

  3. The only thing keeping the indymac train on the rails was ability to borrow at the fed instead of relying on lines of credit…otherwise, they would have gone the way of the other mortgage bankers long ago. The company started as a REIT and Mike Perry was hired by Angelo Mozilo because of his inspired vision of removing those pesky underwriters from the underwriting process and applying manufacturing processes to a service industry. (such as outsourcing functions of underwriting to India…thus the nickname “Indiamac”) I underwrote loans that went to nearly all the major players and once worked for Indymac….those were by far the worst deals around.

  4. […] IndyMac: Significant Seizure Chatter – Is this finally the end? […]

  5. […] IndyMac: Significant Seizure Chatter…Is the End Near? Finally! […]

  6. […] IndyMac: Significant Seizure Chatter…Is the End Near? Finally! […]

  7. […] – bookmarked by 1 members originally found by ussoccerdotcom on 2008-08-16 IndyMac: Significant Seizure Chatter – Is This the End? Finally! […]

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