IndyMac

IndyMac
Company type	Public (former)
Industry	Banking, Mortgage lending
Founded	1985
Founder	David S. Loeb, Angelo Mozilo
Defunct	July 11, 2008
Fate	Taken over by the Federal Deposit Insurance Corporation; assets sold to IMB HoldCo LLC (OneWest Bank)
Headquarters	Pasadena, United States
Area served	United States
Key people	Mike Perry (CEO until 2008)
Products	Alt-A mortgages, reverse mortgages, single-family home loans, secondary mortgages, consumer credit products
Number of employees	3,800 (laid off in 2008)

IndyMac, an abbreviation for Independent National Mortgage Corporation, was a U.S. bank based in California that failed in 2008 and was subsequently taken over by the Federal Deposit Insurance Corporation (FDIC).

Prior to its downfall, IndyMac Bank held the position as the largest savings and loan association in the Los Angeles region and ranked seventh among mortgage originators nationwide. Its collapse on July 11, 2008, represented the fourth largest bank failure in U.S. history and the second largest failure involving a regulated thrift institution at that time. Although the term "Mac" often denotes "Mortgage Corporation," as with government-sponsored entities like "Freddie Mac," IndyMac operated as a private entity without any government ties.

IndyMac focused primarily on Alt-A mortgages and reverse mortgage products, which spurred its rapid expansion but also played a significant role in its demise during the U.S. subprime mortgage crisis from 2007 to 2009, due to elevated default rates linked to these higher-risk loan categories.

After the FDIC took control, IndyMac’s assets were put up for auction, with most being purchased by IMB HoldCo LLC, which formed OneWest Bank. The FDIC retained certain assets and liabilities that could not be sold under the entity IndyMac Federal Bank, designed to manage a gradual resolution process.

History

Originally established in 1985 as Countrywide Mortgage Investment by David S. Loeb and Angelo Mozilo, IndyMac was created to securitize loans from Countrywide Financial that were too large to be sold to government-sponsored enterprises such as Freddie Mac and Fannie Mae. In 1997, Countrywide separated IndyMac into an independent firm, with Mike Perry serving as CEO until its failure in July 2008.

Expansion and acquisitions

In July 2000, IndyMac Mortgage Holdings acquired SGV Bancorp—the parent company of First Federal Savings and Loan Association of San Gabriel Valley—rebranding itself as IndyMac Bank and becoming California’s ninth largest banking institution. Functioning as both a thrift and mortgage lender, it concentrated on financing single-family home purchases, development projects, home improvements, alongside offering secondary mortgages and consumer credit products.

Based in Pasadena, California, IndyMac Bancorp grew through several acquisitions including:

Financial Freedom, a company specializing in reverse mortgage origination and servicing (July 2004);
New York Mortgage Company, an East Coast mortgage lender (April 2007);
Barrington Capital Corporation, a West Coast mortgage lender (September 2007).

Downturn

The collapse of IndyMac was largely due to its aggressive approach of originating and securitizing substantial volumes of Alt-A loans, which accelerated growth but created a portfolio heavily weighted toward high-risk assets. By 2006, it ranked seventh among savings and loans and ninth among mortgage originators nationally, having originated more than $90 billion in mortgages that year.

The bank’s downfall was influenced by its heavy concentration in Alt-A and other nontraditional loan products, lax underwriting practices, geographic focus on California and Florida real estate markets, and reliance on expensive funding sources such as Federal Home Loan Bank borrowings and brokered deposits—all factors exacerbated by the mortgage market downturn starting in 2007.

IndyMac regularly issued loans without adequate verification of borrower income or asset documentation, targeting borrowers with subpar credit profiles through risky option-adjustable-rate mortgages (option ARMs), subprime loans, and layered 80/20 loan structures. Its business model depended heavily on selling these loans into secondary markets. Despite mounting risks, the institution resisted regulatory efforts aimed at strengthening lending standards.

Turning point

In its final 10-Q filing prior to entering receivership, dated May 12, 2008, IndyMac revealed that it was no longer considered well-capitalized and was facing insolvency. Throughout April 2008, Moody's and Standard & Poor's downgraded numerous Mortgage-backed security (MBS) bonds, including $160 million of IndyMac-issued securities held in its portfolio. These downgrades adversely affected the bank’s risk-based capital ratio. If these ratings had been applied as of March 31, 2008, IndyMac’s total risk-based capital ratio would have stood at 9.27%. The institution cautioned that dropping from the "well capitalized" threshold (10%) to the "adequately capitalized" range (8-10%) could limit its ability to utilize brokered deposits, necessitating asset reductions and curtailment of lending operations. Comparable liquidity pressures were also experienced by other Southern California banks such as Pomona First Federal and Vineyard Bank.

Senator Charles Schumer pointed out that brokered deposits made up more than 37% of IndyMac’s total deposits—exceeding $7 billion out of the $18.9 billion reported on March 31. The loss of access to new brokered deposit funding threatened approximately $500 million monthly.

IndyMac recorded its third straight quarterly loss, with nonperforming loans increasing by 40.56% quarter-over-quarter to reach $1.85 billion as of March 31. The company expected these figures to rise further due to ongoing market instability.

To conserve capital, IndyMac postponed interest payments on certain preferred securities and had already suspended common stock dividends for Q1 2008 after reducing them by half in the previous quarter. Nevertheless, it had yet to secure a substantial capital injection or find a buyer.

The bank’s risk-based capital ratio fell from 10.81% to 10.26% as of March 31—only $47 million above the regulatory threshold for being considered well-capitalized—although part of this amount was overstated.

Collapse

Following the downturn in home prices in late 2007 and the collapse of the secondary mortgage market, IndyMac was burdened with $10.7 billion in loans that could not be sold. Its liquidity situation deteriorated sharply in June 2008 when depositors withdrew $1.55 billion, roughly 7.5% of total deposits, spurred by public concerns raised by Senator Charles Schumer. While this bank run accelerated IndyMac’s collapse, underlying unsafe operational practices were the fundamental cause.

On June 26, 2008, Senator Schumer publicly cautioned regulators about financial risks posed by IndyMac to both borrowers and depositors, triggering additional withdrawals. By July 7, IndyMac announced it had failed to raise capital since its May earnings report and was no longer classified as “well-capitalized” by regulatory authorities. The institution shuttered its retail lending and wholesale divisions, stopped accepting new loan applications, and eliminated 3,800 jobs.

On July 8, IndyMac sold its Retail Lending Group to Prospect Mortgage Company. Its stock price plummeted more than 99% from a peak of $50 in 2006 down to $0.44. Analysts downgraded the shares to “Underperform” with price targets approaching zero. Standard & Poor’s reduced IndyMac’s credit rating to “CCC,” just above default status, signaling extreme financial distress.

On July 11, citing liquidity concerns, the FDIC placed IndyMac Bank into conservatorship and created IndyMac Federal Bank as a bridge institution to manage assets and insured deposits. Depositors retained access to insured funds up to $100,000, with a special dividend guaranteeing repayment of 50% on uninsured amounts beyond that limit. However, roughly 10,000 uninsured depositors suffered losses exceeding $270 million. In response, Congress retroactively increased FDIC insurance limits to $250,000 for banks failing since January 2008 under provisions of the Dodd-Frank Act.

With assets totaling $32 billion, IndyMac’s failure ranks among the largest U.S. bank collapses after Continental Illinois National Bank ($40 billion in assets) and American Savings and Loan Association due to losses related to mortgage-backed securities.

IndyMac Bancorp filed for Chapter 7 bankruptcy on July 31, 2008.

Allegations Against US Senator for Triggering Bank Run

The decline of IndyMac and regulatory shortcomings sparked a bank run after Senator Charles Schumer publicly cautioned depositors, prompting withdrawals amounting to roughly 7.5% of total deposits. This action drew swift condemnation from regulators and industry leaders, who argued that Schumer’s disclosure exacerbated the bank’s instability.

John M. Reich, then head of the OTS, was a leading critic, stressing that the Federal Deposit Insurance Corporation (FDIC) and OTS “do not provide commentary on operating institutions” and denouncing the “spread of partial or inaccurate information.” Subsequently, Reich dismissed OTS western regional director Darrel W. Dochow for allowing five banks to backdate capital infusions. Reich himself resigned in February 2009 amid a Treasury Department inquiry into OTS misconduct. His replacement, Scott Polakoff, was also placed on administrative leave pending further review. A report by the Treasury Office of Inspector General in February 2009 determined that IndyMac’s failure was inevitable by May 2008 and rejected assertions that Schumer’s letters precipitated the collapse.

Capital Backdating Controversy

IndyMac engaged in backdating an $18 million capital injection from its parent company to retain its “well-capitalized” classification. Dochow authorized recording this capital as if received by March 31, although the actual transfer occurred on May 9, just prior to submitting the quarter’s 10-Q report. Without this retroactive entry, IndyMac’s capital levels would have dipped below regulatory thresholds, threatening $6.8 billion in brokered deposits—representing 37% of total deposits—and restricting its capacity to attract new depositors with competitive rates. In the final two months before receivership, IndyMac secured at least $90 million in uninsured deposits under these circumstances.

This backdating practice masked that the risk to brokered deposits had already become evident months before Schumer’s public statements. Comparable backdating tactics were uncovered at four additional financial institutions.

Dochow’s regulatory record showed a pattern of leniency, notably overruling recommendations to seize Lincoln Savings during the Savings and Loan crisis of the 1980s—a bank that later collapsed amid fraud convictions involving owner Charles Keating.

Bank regulator William K. Black criticized Dochow’s methods as indicative of the OTS’s persistent failure to regulate major nonprime lenders effectively, which contributed to what the FBI described in 2004 as a widespread mortgage fraud epidemic.

Treasury Department Inspector General Investigation

On February 26, 2009, the Treasury Department's inspector general reported that federal regulators overlooked warning signals prior to IndyMac Bank's failure. The Pasadena-based savings and loan pursued a rapid expansion strategy characterized by inadequate borrower income verification and dependence on expensive deposit sources. Although the Office of Thrift Supervision (OTS), IndyMac’s regulator, identified these risks, it failed to take firm corrective action.

The investigation noted that OTS was aware of numerous issues, including poor-quality nontraditional mortgage products, yet did not aggressively intervene to stop these practices. It also largely dismissed criticism aimed at Senator Charles Schumer (D., N.Y.), acknowledging his public letter as a “contributing factor” in the timing but not the root cause of the collapse. The thrift was already on an irreversible decline before the letter was made public.

On March 27, 2009, following removal of its acting director amid revelations concerning backdated capital injections by banks, the Treasury Inspector General examined OTS’s conduct. The agency had permitted five banks—including IndyMac Bancorp Inc.—to retroactively adjust first-quarter capital reports upward after period-end filings to avoid regulatory constraints. John Bowman was appointed acting director in response to these developments.

Additional inquiries

On June 30, 2008, the Center for Responsible Lending published a report highlighting lawsuits filed by former IndyMac clients and employees. These claims asserted that management exerted pressure on personnel to approve loans, threatening job termination for non-compliance. Prior to its failure, IndyMac refuted these accusations.

By July 16, 2008, the FBI had initiated an investigation into potential fraudulent activities involving IndyMac. This inquiry seemed to target the institution itself rather than specific individuals and may have commenced before the FDIC assumed control.

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