13 Jul 2008

US mortgage lender goes bust

9:20 am on 13 July 2008

One of the largest mortgage lenders in the United States, the California-based IndyMac Bank, has collapsed due to a liquidity crisis.

Federal regulators seized the bank's assets on Friday, fearing it might not be able to meet withdrawals by depositors.

It is reportedly the second-largest financial institution to fail in US history.

The failure came on a day when shares in the two biggest US home loan institutions - Freddie Mac and Fannie Mae - fell at one stage by almost 50%.

IndyMac had been struggling to raise funds and stay in business in one of the states worst hit by the US housing market slump.

The bank's primary regulator, the Office of Thrift Supervision (OTS), said depositors had withdrawn more than $US1.3 billion in the past 11 days.

The OTS believed IndyMac was unlikely to meet its depositors' demands and transferred its operations to the Federal Deposit Insurance Corporation (FDIC), which will seek a buyer.

People with deposits of up to $US100,000 each are covered by insurers.

But about 10,000 people had uninsured funds over that limit with IndyMac - worth a total $US1b at the time of closing.

It is the fifth financial institution in the United States this year to succumb amid a credit crunch, falling house prices and rising foreclosures.

The move came after rollercoaster trading on Friday for Freddie Mac and Fannie Mae - which are behind half of all US mortgages. They provide funding for home loans by buying mortgages and packaging them as investments.

Shares in the two companies recovered after Treasury Secretary Henry Paulson signalled he was not on the verge of taking Fannie Mae and Freddie Mac into public hands.

After a volatile trading session, Freddie Mac shares closed down 3.1% at $US7.75.

Shares of Fannie Mae ended the day down 22.4% at $US10.25 after sliding as much as 49% to a 19-year low of $US6.68.