The encyclopedia · Finance & Accounting · Financial decision · 2008
IndyMac was the fourth-largest US bank failure — a preview of what was coming
IndyMac lent to borrowers with no income verification. It failed on 11 July 2008 with $32B in assets. The FDIC estimated the cost to taxpayers at $12.3B.
IndyMac Bancorp · FDIC · 2008-07
What happened
IndyMac Bancorp, founded in 1985 as a subsidiary of Countrywide Financial, was one of the largest mortgage lenders in the United States. It specialized in 'Alt-A' loans — mortgages given to borrowers with little or no income documentation. At its peak, IndyMac originated over $90 billion in loans per year.
When the housing market turned in 2007, IndyMac's no-documentation loans defaulted at catastrophic rates. Borrowers who had never verified their income could not make payments. IndyMac's loan portfolio collapsed. On 11 July 2008, the Office of Thrift Supervision seized IndyMac — the fourth-largest bank failure in US history at that point, with $32 billion in assets.
The FDIC estimated the cost to the Deposit Insurance Fund at $12.3 billion. Taxpayers bore the loss. IndyMac's failure was a preview of the September 2008 crisis: the same no-documentation lending practices, the same housing market dependence, the same regulatory failure to intervene before the losses became systemic.
Why it happened
- No-documentation ('Alt-A') loans meant IndyMac had no idea whether its borrowers could repay — the underwriting was performative, not analytical.
- IndyMac's business model depended on rising home prices; when prices fell, borrowers walked away and the collateral was worth less than the loan.
- The Office of Thrift Supervision, IndyMac's regulator, was underfunded and did not intervene until the bank was already insolvent.
- IndyMac's failure was a warning that the rest of the banking system ignored for two more months — until Lehman Brothers made it systemic.
The lesson
If you lend without verifying income, you are not a bank — you are a bet on home prices. IndyMac's $90B in no-doc loans were a gamble called a mortgage.
Aftermath
IndyMac was seized by the FDIC on 11 July 2008 and operated as IndyMac Federal Bank before being sold to OneWest Bank (later acquired by CIT Group). The failure accelerated the creation of the Consumer Financial Protection Bureau. The case is cited as the canary in the coal mine for the 2008 financial crisis.
Sources
- IndyMac Bancorp — Wikipedia (founded 1985 as Countrywide subsidiary; Alt-A/no-doc loans; $90B+ annual originations; seized 11 July 2008; $32B assets; FDIC cost $12.3B; 4th-largest US bank failure at the time)
- FDIC — IndyMac Bank, F.S.B. failed bank page (closed 11 July 2008 by Office of Thrift Supervision; FDIC named conservator/receiver; insured deposits transferred to IndyMac Federal Bank FSB; uninsured depositors received 50% advance dividend)
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