Investment News - The Leading News Source for Financial Advisors

IndyMac may not be last bank to fail, analysts say

Others are at risk, as is housing market's recovery, they contend

• 
• 
• 
• 
• 

By Janet Morrissey

July 21, 2008 6:01 am ET

The collapse of IndyMac Bancorp Inc. and the government prop-up of mortgage giants Fannie Mae and Freddie Mac have led to speculation about which other banks are most at risk and how the fallout may affect the battered housing market.

"There's a crisis of confidence out there. A couple of months ago, we thought the turmoil in the credit markets was abating, but now it looks like it's anything but," said Bob Bach, chief economist with Grubb & Ellis Co., a commercial-real-estate services and investment company based in Santa Ana, Calif.

"The current events [are] ... indicative of the underlying problems and how deep they go," said Geoffrey VanderPal, a certified financial planner at Elite Financial Planning Group of America Inc. in Las Vegas, which manages more than $100 million in assets.

He said he expects that IndyMac of Pasadena, Calif., won't be the last bank to implode.

"I suspect there will be more firms that will have significant issues similar to IndyMac, and I think you'll see some smaller banks as well that were heavily involved in those markets probably go out of business as well," Mr. VanderPal said. "We're not out of the woods yet — we have a ways to go."

Indeed, the Federal Deposit Insurance Corp. of Washington said that eight banks, including IndyMac, have collapsed since February 2007. At the end of the first quarter of this year, it listed 90 "problem institutions" on its watch list.

However, FDIC spokesman Andrew Gray noted that just 13% of institutions on the watch list have failed on a historical basis. Also, the list now is far shorter than the 2,165 names it had in 1987 prior to the savings-and-loan crisis.

Gerard Cassidy, an analyst in the Portland, Maine, office of Toronto-based RBC Capital Markets, is more bearish. He estimated that as many as 300 of the country's 8,494 banks and thrifts are likely to fail over the next three years.

Mr. Cassidy's prediction, issued in a July 9 research report, doubled a projection he had made in a May 21 research report that 150 banks would implode.

CREDIT DETERIORATION

"We continue to believe that we are in the third or fourth inning of this down leg in this credit cycle," he wrote in the report. "We have yet to see the level of bank failures that we believe are necessary to begin cleansing the system of the hubris lending that began with the residential-real-estate pricing bubble in 2000."The biggest issue that the banking industry will confront over the next 12 to 18 months will be credit deterioration, Mr. Cassidy wrote in the May 21 report. Other observers are more sanguine."The system is not anywhere near the danger that existed in the late 1980s and early 1990s, despite all of the whining by public officials," Richard Bove, an analyst in Lutz, Fla., with New York-based Ladenburg Thalmann & Co. Inc., wrote in a research report early last week, prior to IndyMac's failure.

More than 2,300 banks and thrifts went up in smoke during the S&L crisis 20 years ago, according to the FDIC. Mr. Bove tracked the 107 banks and thrifts that hold at least $5 billion in assets, and came up with 12, including IndyMac, that he said are at risk based on the amount of non-performing assets they hold as either a ratio of outstanding loans or as a ratio of reserves and equity. They are Downey Financial Corp. (DSL) of Newport Beach, Calif., Corus Bankshares Inc. (CORS) of Chicago, Doral Financial Corp. (DRL) of San Juan, Puerto Rico, FirstFed Financial Corp. (FED) of Santa Monica, Calif., Oriental Financial Group Inc. (OFG) of San Juan, BankUnited Financial Corp. (BKUNA) of Coral Gables, Fla., BFC Financial Corp. (BFF) of Fort Lauderdale, Fla., First BanCorp (FBP) of San Juan, Flagstar Bancorp Inc. (FBC) of Troy, Mich., Santander BanCorp (SBP) of Hato Rey, Puerto Rico, and Washington Mutual Inc. (WM) of Seattle.

BANK COLLAPSED

Federal regulators seized IndyMac this month after the bank buckled under the pressure of mounting consumer loan delinquencies and depleting capital reserves. The fall of IndyMac, which had about $32 billion in assets, marked one of the largest bank meltdowns in U.S. history. The news sent shockwaves down Wall Street as investors dumped banking stocks and nervously wondered which bank might collapse next.

Fannie Mae of Washington and Freddie Mac of McLean, Va., meanwhile, are facing their own woes. Surging foreclosures over the past six months made investors jittery about the two mortgage agencies, causing a massive sell-off of the companies' stocks.

Shares of the two government-sponsored enterprises have lost at least 85% of their value in the past year. The falling share prices made it tougher for them to raise capital, which sparked market fears that they might be unable to cover losses among the trillions of dollars of loans that they own or guarantee.

The Federal Reserve stepped in to calm investor jitters by opening its discount window to the two agencies.

In addition, the Bush administration unveiled plans for the government to buy billions of dollars in Fannie Mae and Freddie Mac shares over the next two years and to boost their credit lines at the Department of the Treasury. The moves aim to reassure stock and bond investors that the two companies will have the liquidity to weather the crisis.

As a result of all this turmoil, industry experts are recalculating the time it will take for the housing sector to bottom and rebound. Many think that the IndyMac collapse hurt consumer confidence more than the housing industry itself and that the Fannie Mae/Freddie Mac situation poses a bigger housing threat.

"The IndyMac issue is a psychological issue because people are becoming more and more hesitant to look at the mortgage banking industry as a solid opportunity either for investment or to solve problems," said Nicholas Bratsafolis, chairman and chief executive of Refinance.com of Syosset, N.Y.

Bob Curran, managing director and lead home-building analyst at Fitch Ratings Ltd. of New York, doesn't expect IndyMac's implosion to affect the housing rebound.

"That's one bank," he said.

If a wave of banks closed down, which would affect loans being made for both mortgages and builder construction loans, "then yes, that would be a blow to the housing sector," Mr. Curran said. He said it would be "premature" to think this will happen based on IndyMac's collapse.

THE GREATER THREAT

Mr. Curran sees the health of Fannie Mae and Freddie Mac, the two largest government-secured enterprises, as the industry's biggest threat.

"About 80% of the mortgage loans are, in one form or another, going through the GSEs this year," he said. "If something were to happen in their ability to function, then that could make things worse this year and stretch [the housing turmoil] out further next year and maybe into 2010."

The latest housing data indicate that "the spring selling season was a bust," Mr. Curran said. As a result, he predicted that falling home prices, tighter mortgage standards, poor buyer psychology, high inventories and surging foreclosures will likely continue into at least next year.

If the economy slides into a sharp recession, "then the downturn could easily extend another year or more beyond our forecast," Mr. Curran said.

David Goldberg, an analyst with UBS Securities LLC in New York, expects the housing sector to bottom in the second half of next year.

Mr. VanderPal predicts that the housing market will bottom in the spring or summer of next year. From there, the recovery will take anywhere from two to eight years to rebound to 2005 values, with markets that took the biggest hit taking the longest to recover, he said.

Mr. Bratsafolis thinks that it will be late 2010 before the sector bottoms unless the government introduces better initiatives, such as profit-sharing mortgages, where the lender and homeowner share in the appreciation when a home is sold in exchange for a more affordable mortgage rate now.

There is another round of interest rate resets on adjustable mortgages on the horizon that will push more homeowners into foreclosure, he said.

E-mail Janet Morrissey at -jmorrissey@investmentnews.com.

• Email
• Print
• Share
• RSS
• Reprint