YET ANOTHER LEVEL OF GREED & STUPIDITY IN REAL ESTATE LENDING

Thanks to DailyKos for the tip on this great site and this story ...

It looks like yet another level in America’s Real Estate lending house of cards is getting ready to take a dive. It turns out that “Alt-A” lender IndyMac is going under.

Without getting into the details “Alt-A” simply means that IndyMac lent to customers who were not the worst borrowers (i.e. the sub-prime category), but were not the best borrowers (i.e. with great credit scores). Put another way, IndyMac niether dined in the good restaurants (prime lenders), nor were forced to live like seagulls at the city dump (sub-prime lenders). They were good Dumpster Divers (I know, poor analogy, but you get the picture).

But why were they such good Dumpster Divers? While many of the poor performing loans in the sub-prime market had Wall Street and private investors backing their loans, IndyMac was able to get the federal government to help them fund or underwrite their contracts.

How much, you ask? By March 31, 2008 the federal government was technically (if not legally) on the books for 94% of IndyMac’s liabilities.

Executives at IndyMac see the looming disaster and are circling the wagons, effectively saying “Don’t blame us … what’s happening lies with forces outside of our control” (p. 4)

IndyMac is currently being sued, with one lawsuit quoting from a Feb. 2006 IndyMac document advertising that IndyMac “will accept” as “Verification of Employment for a full documentation loan” contracts with “no pay stubs or W2s” (p.8).

Hmmm ... the plot thickens.

MORAL OF THE STORY (from the CRL report): “IndyMac’s story offers a body of evidence that discredits the notion that the mortgage crisis was caused by rogue brokers or by borrowers who lied to bankroll the purchase of bigger homes or investment properties. CRL’s investigation indicates many of the problems at IndyMac were spawned by top-down pressures that valued short-term growth over protecting borrowers and shareholders’ interests over the long haul.

Put another way, greed and stupidity were endemic in the industry. See it all here, or here (PDF) in the Center for Responsible Lending’s report.

- Mark