Articles | US mortgage lender goes bust

US mortgage lender goes bust

Published: Saturday, 12 July 2008, 2:28PM

IndyMac Bank has become the latest mortgage lender in the US to succumb to the pressures of the credit crunch.

Regulators said the bank is the largest government-regulated savings loan to fail and the second largest financial institution to close in US history.

The Office of Thrift Supervision, the bank's primary regulator, said it transferred IndyMac's operations to the Federal Deposit Insurance Corporation (FDIC) because it did not think the lender could meet its depositors' demands.

The lender's failure came the day financial markets dropped when investors tried to work out whether the government would have to save mortgage giants Fannie Mae and Freddie Mac. Shares of Fannie and Freddie dropped to a 17-year low before the stocks recovered.

Wall Street believes the government will have to bail out the country's biggest mortgage financiers, whose failure could deal a tremendous blow to the troubled economy.

Pasadena, California-based IndyMac Bancorp, the holding company for IndyMac Bank, has been struggling to raise capital as the housing slump deepens.

Customers with deposits of up to $100,000 (£50,556) each are covered by insurers.

But about 10,000 people had uninsured funds over that limit with IndyMac - worth a total $1bn (£505 million) at the time of closing.

The FDIC said it would pay those people an advance dividend equal to half of their uninsured deposit.

The bank's customers were also limited to taking out money via cash machines over the weekend, debit card transactions or cheques, regulators said.

IndyMac customer Steve Knieerein said: "I'm very angry, very upset about this. I wanted to withdraw my money."

Other bank services, such as online banking and phone banking, were scheduled to be made available on Monday.

In a statement on Friday, Senator Charles Schumer, a New York Democrat, said IndyMac's failure was due to long-standing practices by the bank, not recent events.