IndyMac Seized; Concerns Deepen For Fannie Mae, Freddie Mac

For many people, home ownership is equivalent to the American Dream. But in the past 12 months, the continuing downturn in the U.S. housing market - the worst since the Great Depression - has made that dream more and more elusive.

Now, with the financial health of housing finance giants Fannie Mae and Freddie Mac being called into question, an already bad situation for homeowners could deteriorate even further.

Shares of both Fannie Mae and Freddie Mac plunged to new lows on Friday, July 11, following a devastating crisis of confidence over concerns that rising mortgage defaults would drain the companies’ reserves and leave them unable to finance current operations. Reports of a forced government takeover only added to their troubles. If such a takeover were to occur, it would likely leave shareholders with nothing, and taxpayers footing the bill for the losses on the home loans owned or guaranteed by Fannie Mae and Freddie Mac.

Fannie Mae and Freddie Mac - which own or guarantee more than $5 trillion of the country’s mortgages - play a central role in the housing market because they provide a major source of funding for banks and home lenders. In the aftermath of the subprime crisis and the credit crunch, their role became even more imperative as they were the only major players to package pools of mortgage loans into securities for sale to investors.

As reported July 12 by CNNMoney.com senior writer Chris Isidore, if Freddie Mac and Fannie Mae were no longer able to perform this function, it could significantly raise the cost of mortgage loans, as well as restrict their availability. In turn, even more turmoil in the housing and credit markets would result.

Former U.S. Treasury Secretary John Snow had harsh words for the way in which Fannie Mae and Freddie Mac have funded their businesses over the years. As reported July 11 in an article by Brendan Murray on Bloomberg.com, Snow said the mortgage companies relied on leverage to fund their businesses in the same fashion as a hedge fund, and that the government should avoid taking them over.

“Congress ought to be embarrassed for years of delays in passing legislation aimed at strengthening regulation of the two companies,” said Snow, now chairman of New York-based buyout fund Cerberus Capital Management LP, in the Bloomberg.com article.

The next big hurdle in the Fannie Mae-Freddie Mac saga will be on July 14 when Freddie Mac is scheduled to sell $3 billion of short-term debt. An unsuccessful sale will strike yet another blow to already-bruised and battered investor confidence.

IndyMac Seized

Meanwhile, IndyMac Bancorp Inc., once one of the nation’s largest home lenders, has been seized by federal regulators.

The shutdown means customers who have traditional bank accounts will be insured up to at least $100,000. Other accounts, however, such as annuities or mutual funds, are not insured.Â

Pasadena-based IndyMac specialized in Alt-A mortgages, a type of mortgage that required minimal documentation from borrowers regarding their incomes or assets. IndyMac was founded in 1985 by David Loeb and Angelo Mozilo, who also were the founders of Countrywide. Countrywide was taken over last week by Bank of America Corp.

The failure of IndyMac marks the largest collapse of an FDIC-insured institution since 1984, and is the fifth U.S. bank to fail this year. The demise of IndyMac and the apparent struggles of Freddie Mac and Fannie Mae, as well as those of nearly every major firm on Wall Street, highlights the new reality that’s been created by the nation’s ongoing credit crunch. Moreover, it serves as a grim but crystal-clear reminder to investors that regardless of how large the entity or how strong it is perceived to be, no one is 100 percent safe.

Our affiliation of lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage-related investment losses.

This entry was posted on Monday, July 14th, 2008 at 9:12 amand is filed under Alt-A Securities, Fannie Mae, Freddie Mac, IndyMac Bancorp. You can follow any responses to this entry through the RSS 2.0 feed. You can skip to the end and leave a response. Pinging is currently not allowed.