It should be clear that the bank that issued the original mortgage in many cases no longer owns the investment; they only service the debt.  They accept payments from the homeowner, pay taxes and other obligations, and forward the remainder to the debt owner. 

 However, for mortgages owned by the two government homeowner-financing agencies, Fannie Mae and Freddy Mac, the Treasury Department started a Making Homes Affordable initiative with two components, the Home Affordable Refinance Program (HARP), and the Home Affordable Modification Program (HAMP). 

HARP allows homeowners relief who have remained current on their mortgages by allowing them to refinance their mortgage up to 125 percent of the appraised value of their home at current mortgage rates. 

HAMP encourages any investor or servicing company to participate with financial incentives for loan modified through reduction of interest, extension of term to a maximum of 40 years, and forgiveness of balloon payments.  The goal is to bring principal, interest, insurance, association dues and PMI to below 31 percent of the verifiable household income.  There is a 90-day trial period before permanent modification is granted. 
 

Now, Fannie Mae has announced a new program for those homeowners on the brink of foreclosure who do not qualify for the HAMP plan.  In exchange for transferring ownership to Fannie Mae, the homeowner will be allowed to rent their homes and lessen the credit rating impact of foreclosure.  Fannie Mae will make available to the homeowner a 12-month lease with month-to-month extensions when it expires and will not market the house until after the initial 12 months. 

Rents will be determined by a private management company and market conditions.  Former homeowners will have to qualify to stay with rent set at 31 percent of their pre-tax income or less.

Freddie Mac already has a similar program in place, but foreclosure must be completed and only month-to-month leases are offered.

Both these programs are designed to allow the homeowners to stay in their homes for a reasonable period and stabilize neighborhoods.  The thinking is that it is difficult to market homes in neighborhoods with scores of empty and sometimes vandalized homes.   Even though people are renting, they will tend to care for the home they used to own.

IndyMac Bank was founded as Countrywide Mortgage investment as a means of handling single family mortgage loans too big to be handled by Freddie Mac and Fannie Mae. 

In 2007, IndyMac suffered significant losses, mostly because it was unable to sell mortgages due to the decline in the secondary market.  IndyMac reported that it had nearly $2 billion in non-performing loans, increasing more than 40% from the previous quarter.

The bank’s risk-based capital reserves reported for March 31 dropped within a fraction of the minimum required by regulatory guidelines.  A rating downgrade reduced the value of assets held by InyMac so it could not meet the June 30 requirements.

In June 2008, several letters from Senator Charles Schumer (D-NY), a member of the Senate Banking committee were released, stating his opinion that “The possible collapse of big mortgage lender IndyMac Bancorp Inc. poses significant financial risks to its borrowers and depositors, and regulators may not be ready to intervene to protect them.”

The effect of these letters caused a run on the bank.  In the 11 days following the disclosing of the letters, depositors withdrew $1.3 billion in deposits.  Shares on the New York Stock Exchange went to $0.31 from a 2006 high of $50.  This was compounded by an alleged fraud issue where an $18 million cash injection from its parent company was backdated to seem like the bank met requirements.  The fraud issue is being investigated by the FBI. 

IndyMac is one of the largest bank failures in American history.

The FDIC stepped in, seized the bank and its remaining assets and placed the bank into conservatorship.  Depositors were assured of continuing access through ATMs, existing checks and debit cards, telephone and Internet.

The FDIC sent two of its top officials to run the bank.  Slashing CD rates and expensive management rewards reduced operating costs and high-priced artworks spread throughout the offices were sold.    Attention was then turned to analyze risky mortgages made in California where home prices had fallen sharply.  IndyMac modified the loans of more than 10,000 borrowers to decrease the option of foreclosure and keep people in their homes.

With the turnaround of IndyMac in a relatively short period, the government has shown it can rescue a bank through nationalization and return it to the private sector rapidly.  The IndyMac exercise was costly ($11 billion) and should be used only in certain cases. 

Since early in 2008, the FDIC has seized 41 failed banks, but normally has a buyer lined up before the takeover occurs.  Failed banks are generally closed on Friday and reopen Monday with new owners and a new name.

With the stress testing proceeding at the largest banks in the country, the outcomes could result in more nationalizations.  The IndyMac example is important to the Obama administration as a “how-to” example of how takeovers can work.

A number of prominent Republicans and fiscal conservatives, including former Federal Reserve chair Alan Greenspan have joined those who support nationalization or at least increased control of troubled banks.

Many Americans and economists are against the idea of nationalization as fundamentally against American tradition.  A recent USA Today-Gallup poll found that 57% of Americans are against “temporarily nationalizing U.S. banks,” but when the word “nationalization” is changed to a less threatening version of “taking over” only 44% oppose the concept.

Examining the example of IndyMac against the other three institutions of Freddie Mac, Fannie Mae and AIG, shows IndyMac is the only bank that has been returned to private ownership.  The others seem to be far from privatization.