The housing bubble and Indy Mac bank Essay Example | Topics and Well Written Essays - 1750 words

The housing bubble and Indy Mac bank - Essay Example Moreover, many borrowers could not pay the loan back, as the bank did not check the authenticity of the borrower before disbursing the loans. So the bad loans accumulated with the bank. The bank had no such provision to sell the property and pool money because the purchasing power of the buyers in the market had reduced considerably and no one was willing to buy property. This was the situations which like the other bank Indy Mac Bank also faced, which led to its failure. Finally it was acquired by FDIC and Indy Mac became Indy Mac federal Bank. Table of Contents Executive Summary 2 INTRODUCTION 4 ANATOMY OF THE FAILURE 6 The Subprime Mortgage crisis 6 Subprime Spill and Indy Mac Bank 7 Initial Signs of Warning 7 THE AFTER EFFECTS OF FAILURE 8 CONCLUSION 9 Work Cited 11 Date: November 19, 2012 To: **************** From: **************** RE: Analysis of the failure of Indy Mac bank with respect to housing bubble of 2008. According to CNN Money, July 13 2008, the fall of the Indy Mac B ank, the most important mortgage lender, was the most expensive collapse in the history. This proved again that crisis still existed. The Indy Mac Bank was acquired by the Federal Regulators. It was said that about 95 percent of the bank deposits were insured. This means about $1billion were not covered under the FDIC cover or guarantee. This could have affected about 10,000 customers of the bank and they could have lost half of their deposits. However, the failure of the IndyMac would charge the Insurance Funds around $4-$8 billion. This was regarded as one of most costly failures ever (Clifford, and Isidore â€Å"The Fall of IndyMac†). INTRODUCTION Bank failures are not new phenomenon. There was just two years from 1934 to 2007, when none of the banks collapsed or failed. During the 1990s when the world economy was going through extreme loan and savings crisis, at an interval of 1.38 days 1 bank failed. However during 2007 crisis this rate slowed down to 2 banks. Around thi rty-two bank collapsed during this time as stated by Federal Deposit Insurance Corporation (FDIC). However, in July 2008, Indy Mac Bank, which was the third largest bank in USA, failed. Though during 2007, the bank showed signs of survival by focusing on a growth based business model, and maintaining capitalization level high to face the storm. Indy Mac grew swiftly during the boom of real estate and housing. The customers or buyers were asked for few or no evidences of their earnings and allowed loans to buy property such as houses. Since the house prices were increasing, so when a buyer could not pay back his/ her loan, the bank took possession of the home and found investors for it to pool money. However, when this housing bubble burst, the price of the real estate began to fall and the losses for the bank begin increasing. The loans that were taken became bad and bank had to suffer losses because there were not enough buyers in the market to buy those properties and pool money f or the bank. Indy Mac lost about $184.2 million in its first quarter of 2008 and it was expecting higher loses in their second quarter. The bank also lost about $614 million in 2007 by focusing on Alt-A sector of mortgage. However, finally the bank authorities accepted that it could no longer