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Monday, September 21, 2009

Inspector General: FDIC saw risks at IndyMac in 2002

by Calculated Risk on 9/21/2009 11:59:00 PM

From the Inspector General Report:

Between 2001 and 2003, [Division of Insurance and Research] DIR risk assessments and quarterly banking profiles identified concerns about a number of issues, including:
• consumers’ ever-increasing debt load, the expansion of adjustable rate mortgages, and a potential housing bubble;
• subprime and high loan-to-value (HLTV) lending as a risk in the event that the United States economy suffered a significant recession; and
• pricing and modeling charge-off risk with respect to the originate-to-sell model of the mortgage business.
In January 2002, DIR noted that non-recession-tested lending programs such as subprime lending and HLTV lending may pose the biggest threat to consumer loan portfolio credit quality in a slowing economy. In May 2003, DIR reported that there was a concern about the extent to which lenders’ scoring models under-predicted losses during the 2001 recession. DIR noted that many subprime lenders experienced loss rates higher than their models predicted and that some consumer lending business models had been found to be inadequate, including those that relied on the securitization market for funding and were, therefore, sensitive to market pricing changes.
Matt Padilla at the O.C. Register has the story: FDIC saw risks at IndyMac in 2002 but failed to act
The FDIC noted issues at IndyMac as early as 2002, but did not stop the bank’s risk taking, the report says.

“It was not until August 2007 that the FDIC began to understand the implications that the historic collapse of the credit market and housing slowdown could have on IMB and took additional actions to evaluate IMB’s viability,” the report says.
Despite these risks, the FDIC switched to relying on examinations from the OTS from 2004 to mid 2007, a period in which Indymac “continued to rely heavily on volatile funding sources such as brokered deposits and (Federal Home Loan Bank) advances to fund its growth.”
IndyMac’s failure is expected to cost the FDIC’s insurance fund $10.7 billion.
Clearly the FDIC DIR was on the right track in 2001 to 2003. Just like with the Federal Reserve failure of oversight, we need a clear explanation why no significant action was taken.