IndyMac Raises Fear of 2nd U.S. Mortgage Crisis

The U.S. Federal Deposit Insurance Corporation has suspended service at IndyMac Bank, one of the largest U.S. mortgage originators, after a bank run from depositors.

The stock prices of two leading mortgage companies, Fannie Mae and Freddie Mac, are dropping every day, sounding an alarm bell to mortgage issuers who play a key role in the housing market.

Banking service at IndyMac was suspended after the bank ran out of cash due to mass withdrawals by scared customers.

IndyMac, a bank with 32 billion U.S. dollars in assets in late March, is the third-largest U.S. bank to fail, following Continental Illinois National Bank and Trust in 1984 and American Savings and Loan Association of Stockton in 1988.

The U.S. government normally guarantees deposits up to 100,000 dollars per person, so Washington apparently will need four billion to eight billion dollars for IndyMac’s collapse, the Wall Street Journal said.

IndyMac once reaped large profits by granting loans to borrowers with low credit ratings without verifying their incomes. The slowdown of the U.S. real estate market, however, exposed the bank’s reckless lending.

With talk of an emergency fund injection by Washington due to fears of a liquidity crisis, Fannie Mae and Freddie Mac are seeing their stock prices plunge.

The two companies own or guarantee almost five trillion dollars of mortgage, or almost a half of the U.S. mortgage debt. Fannie Mae has suffered a 30-percent drop in share prices and Freddie Mac 45 percent, with their share prices closing at 10.25 and 7.75 dollars Friday, respectively.

The U.S. government is reportedly coming up with emergency measures for the liquidity crisis that the two mortgage guarantors are facing.

The Wall Street Journal said whether Freddie Mac can raise three billion dollars in short-term capital Monday will be a watershed, and that the federal government could intervene in the market as early as Monday.

Washington is considering extending support to stabilize the housing market but in a way not to cause losses to shareholders of the two companies and avoid moral hazard, the daily said.

The two mortgage guarantors buy mortgage debts from mortgage issuers and resell them to investors, propping up the mortgage market.

If the two companies go bankrupt, the entire U.S. market for housing mortgages could collapse. Therefore, experts say Washington has no option but to intervene if the two face a liquidity crisis.