FDIC Comments Imply a Big Haircut for IndyMac's Loans

The following items are from this WSJ article about the IndyMac failure:

• IndyMac had roughly $19 billion of deposits. Nearly $1 billion of those deposits were uninsured, affecting about 10,000 people, the FDIC said.
• The Pasadena, Calif., thrift was one of the largest savings and loans in the country, with about $32 billion in assets.
• The collapse is expected to cost the Federal Deposit Insurance Corp. between $4 billion and $8 billion, potentially wiping out more than 10% of the FDIC's $53 billion deposit-insurance fund.

We know from a recent Reuters article how big IndyMac's Federal Home Loan Bank advances were: "The loans, or "advances" -- totaling more than $10 billion as of March 31 by the San Francisco FHLB -- are backed by mortgages pledged by IndyMac."

We also know that "the FHLBs have a 'super lien' when institutions fail. To protect their position they have a claim on any of the additional eligible collateral in the failed bank. In addition, the FDIC has a regulation that reaffirms the FHLBs priority and the FHLBs can demand prepayment of advances when institutions fail."

Using what we know, we can infer the percentage haircut that the FDIC is placing on Indymac's assets. It's not pretty:


Now we see that these assets are every bit as bad as bearish bloggers have been saying.

Now we see that there is not a "liquidity crisis" or a "subprime crisis", but a housing crash and a solvency crisis.

Today's Charts

• Market Share of Cars vs Light Trucks (1976-2008)
• House Price to Income Ratio [from Where should house prices really be and how did they get so high?]
• Perot Charts

The Walking Away Trade

Some Buy a New Home to Bail on the Old
Wall Street Journal, June 11, 2008; Page A3

Meanwhile, Mr. Hawks, the Las Vegas broker, says he receives one to two dozen inquiries every week from individuals inquiring about a buy-and-bail. "People are starting to ask how much their good credit is worth," particularly when their home is underwater by hundreds of thousands of dollars.

Stop the Housing Bailout

People are getting organized to Stop The [incipient] Housing Bailout. Here's an email I got yesterday:

"We have created a website www.StopTheHousingBailout.com (currently hosted on NationalBubble) that is designed to be a clearinghouse of information for a movement against the bailout. The website is in its infancy, but currently consists of a statement why the bailout is wrong and several links to efforts to stop the bailout."

I don't think the Federal Government can afford to bail out the housing crash - it is too big - but that doesn't mean they won't try.

Buyers' Revenge: Trash the House After Foreclosure

In today's Wall Street Journal, an article pertaining to loss severity: Buyers' Revenge: Trash the House After Foreclosure.

Vandals who break into empty houses often smash windows and paint graffiti on the walls, he says. But it takes an enraged, delinquent mortgagor to indulge in a frenzy of destruction, such as the one that took place recently in a three-bedroom, 1,949-square-foot house in a residential and industrial area northeast of the casinos on the Strip.

Light switches, outlet covers and thermostats were smashed. There was what looked to be crowbar damage along the staircase. A large pool of paint had hardened on the living-room carpet. It appeared that someone had dripped motor oil in a trail that wound its way through every carpeted room. The appliances were gone, as were most light fixtures. A cabinet door had been removed and left soaking in a full tub of water. Not a wall was left without a hole the diameter of a closet rod, including the pink child's room once carefully decorated with a floral wallpaper stripe. It's damage that Mr. Carver described as "a vengeance-type thing."

This is a phenomenon that we first observed a year ago. Another important principle regarding loss severity: default rates and recovery rates are inversely correlated.

Shiller on Long Term Home Prices

Here's an amazing chart from a Robert Shiller paper (Long-Term Perspectives on the Current Boom in Home Prices) that has been making the rounds.

This is a chart of real home price indexes for the U.S. 1890-2005, Amsterdam 1628-1973, and Norway 1819-1989.

Note that the price indexes for Amsterdam and Norway end well before the U.S. data series, and so their current real estate bubbles not visible in the chart.