The IndyMac Bank failure happened on July 11, 2008, when the Office of Thrift Supervision closed the Pasadena-based lender after a two-week bank run pulled roughly $1.55 billion in deposits from accounts. With about $32 billion in assets, IndyMac ranked among the largest bank failures in U.S. history at the time, and the FDIC stepped in the same day to keep insured depositors whole.1Office of the Comptroller of the Currency. OTS 08-029 – OTS Closes IndyMac Bank and Transfers Operations to FDIC
Why IndyMac Failed
IndyMac’s business was Alt-A mortgages: loans riskier than prime but sold to investors as a step above subprime. Borrowers often qualified with little or no documentation of income or assets. By 2006, IndyMac had tripled its loan volume in three years and was the largest Alt-A lender in the country. The model only worked if home prices kept rising and investors kept buying mortgage-backed securities, and IndyMac leaned heavily on Federal Home Loan Bank advances and brokered deposits to keep the engine running, concentrating its exposure in overheated markets like California and Florida.2Department of the Treasury Office of Inspector General. Material Loss Review of IndyMac Bank, FSB
When home prices turned in late 2007, the secondary market froze and defaults climbed. IndyMac was left holding roughly $10.7 billion in loans it could not sell.2Department of the Treasury Office of Inspector General. Material Loss Review of IndyMac Bank, FSB
The final blow was public. On June 26, 2008, Senator Charles Schumer released a letter to the OTS and FDIC questioning IndyMac’s viability. From June 27 through July 11, depositors withdrew about $1.55 billion. Daily outflows topped $100 million through early July and reached $250 million on the day the bank closed.2Department of the Treasury Office of Inspector General. Material Loss Review of IndyMac Bank, FSB IndyMac was already failing on fundamentals; the run set the clock.
What Happened to Depositors
The OTS declared IndyMac unable to meet depositor demands and operating in an unsafe and unsound condition, then handed it to the FDIC as conservator.1Office of the Comptroller of the Currency. OTS 08-029 – OTS Closes IndyMac Bank and Transfers Operations to FDIC To avoid an abrupt shutdown, the FDIC spun up a temporary successor, IndyMac Federal Bank, F.S.B., and transferred all insured deposits and substantially all assets into it. The successor opened the following Monday, July 14, and customers kept using their existing checks, debit cards, and ATMs without interruption.3Federal Deposit Insurance Corporation. Failed Bank Information for IndyMac Bank, Pasadena, CA
In July 2008, standard FDIC coverage was $100,000 per depositor per insured bank, with certain retirement accounts, including IRAs, insured separately up to $250,000.4Federal Reserve Bank of San Francisco. When Was the Federal Deposit Insurance Corporation’s $100,000 Coverage Implemented Anyone within those limits lost nothing. Their balances moved to the successor bank and stayed fully accessible.
Customers with balances above the cap were in a different position. The FDIC paid them an advance dividend equal to 50 percent of the uninsured portion, based on the estimated recovery value of IndyMac’s remaining assets.5Federal Deposit Insurance Corporation. Question and Answer Guide for IndyMac Bank, FSB, Pasadena, CA Additional payments were possible as the FDIC worked through the asset pool, but full recovery was never guaranteed.
The failure proved expensive. The FDIC’s Inspector General put the cost to the Deposit Insurance Fund at $10.7 billion by December 2008, well above the initial $4 billion to $8 billion estimate.2Department of the Treasury Office of Inspector General. Material Loss Review of IndyMac Bank, FSB
The Sale to OneWest
IndyMac Federal Bank ran under FDIC conservatorship for about eight months. In March 2009, the FDIC sold it to IMB HoldCo LLC, a private investment group that renamed the institution OneWest Bank, F.S.B. OneWest took on roughly $20.7 billion in assets and assumed all deposits.3Federal Deposit Insurance Corporation. Failed Bank Information for IndyMac Bank, Pasadena, CA The deal included a shared-loss agreement in which the FDIC absorbed a significant portion of future losses on the acquired loans, which made the purchase workable while the true value of the mortgage portfolio was still unclear. CIT Group acquired IMB HoldCo and OneWest in July 2015 and later merged OneWest into CIT Bank.6Board of Governors of the Federal Reserve System. Order Approving the Acquisition of a Bank Holding Company
What Changed After IndyMac
IndyMac helped push Congress to raise deposit insurance. The Emergency Economic Stabilization Act temporarily lifted the standard limit to $250,000 in October 2008, and the Dodd-Frank Act made that increase permanent in July 2010.7Federal Register. Deposit Insurance Regulations – Permanent Increase in Standard Coverage Amount FDIC coverage today is $250,000 per depositor, per ownership category, at each insured bank.8Federal Deposit Insurance Corporation. Understanding Deposit Insurance
Dodd-Frank also abolished the OTS, IndyMac’s regulator. Title III moved supervision of federal savings associations to the Office of the Comptroller of the Currency, state-chartered savings associations to the FDIC, and savings and loan holding companies to the Federal Reserve.9Legal Information Institute. Dodd-Frank Title III – Transfer of Powers to the Comptroller of the Currency, the Corporation, and the Board of Governors A Treasury Office of Inspector General review found the OTS had rated IndyMac highly as it grew, took no formal or informal enforcement action until June 2008, and should have moved toward prompt corrective action as early as May 2008 based on IndyMac’s own SEC disclosures.2Department of the Treasury Office of Inspector General. Material Loss Review of IndyMac Bank, FSB
On the lending side, Dodd-Frank created the ability-to-repay rule, implemented by the Consumer Financial Protection Bureau. Mortgage lenders now have to make a reasonable, good-faith determination that a borrower can actually repay the loan, with documented and verified income and assets. The qualified mortgage standard limits risky loan features and generally caps a borrower’s debt-to-income ratio. The rules took effect for applications submitted on or after January 10, 2014.10Board of Governors of the Federal Reserve System. The Effects of the Ability-to-Repay / Qualified Mortgage Rule on Mortgage Lending The no-documentation lending that built IndyMac is effectively off the table for residential mortgages.