What IndyMac's Meltdown Means for Consumers

CRUMBLING UNDER THE weight of the subprime mortgage crisis, major home lender, IndyMac Bank (IMB), became the fifth bank to fold this year. On Friday, the Federal Deposit Insurance Corp. seized the Pasadena, Calif.-based bank's $32 billion in assets.

IndyMac, which has 33 branches in California, is one of many small and regional banks that have struggled to raise capital in order to cover losses from defaults on Alt-A mortgages. As was the case at IndyMac, those mounting losses eventually spilled over into the consumer banking division, leaving account holders in a precarious situation.

"If you look at previous years, you won't find very many bank closings," says Jamie Peters, equity analyst covering regional banks for Morningstar. "[Five in seven months] is not normal. You're looking at large mortgage providers who are having problems."

IndyMac showed signs of trouble in late June, when New York Senator Charles Schumer sent a letter to the Treasury Department's Office of Thrift Supervision and the FDIC that raised concerns about the bank's financial viability. In the days that followed, depositors withdrew more than $1.3 billion from accounts, according to the OTS. "People started questioning if [IndyMac] had enough capital [to cover its losses]...and it created a situation where people started withdrawing their money out of fear," says Peters.

Eventually, the bank was unable to meet the run-up in withdrawals. After taking control of its assets, the FDIC will now operate the bank under the name IndyMac Federal Bank until it gets sold. According to Janet Frank, a spokesperson for the OTS, it should take about four months "until the FDIC can sell it or sell pieces of it."

From June 2005 to March 2008, IndyMac's asets grew from approximately $18.3 billion to $32 billion, according to the OTS, making it the seventh largest savings association and the ninth largest mortgage servicer. Most of its success came in the form of Alt-A mortgage loans — many of which were jumbo loans that the bank didn't require full verification of the borrowers' income or assets. As the subprime crisis picked up steam, investors abandoned the market, making it difficult for the bank to sell its mortgage products.

Chances are IndyMac won't be the last regional bank to run into trouble this year. Other contenders will likely include those that played a substantial role in underwriting subprime and Alt-A mortgages in areas hit hardest by the real estate meltdown, such as California, Arizona and Florida, says Peters.

"If you look today at the market you'll see smaller regional banks like National City [Corporation] (NCC), First Horizon National [Corp] (FHN)...[and] FirstFed Financial [Corp] (FED)...who've shown a lot of credit problems," she says.

So what should consumers do if their bank folds? Here's what account holders need to know: