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IndyMac buyers hope to profit from its loan-modification expertise

The private equity group says it wants to have the Pasadena lender sell its services to other financial firms that are struggling with troubled mortgages.

February 13, 2009|E. Scott Reckard

The investors who are buying failed IndyMac Bank want to exploit its experience in dealing with a mountain of troubled mortgages by having the thrift sell loan-modification services to other financial firms.

The Pasadena mortgage lender, which collapsed under the weight of bad loans in July, has been run since then under the name IndyMac Federal Bank by the Federal Deposit Insurance Corp.

Under a widely praised mortgage-modification program initiated by the FDIC, IndyMac has been helping some struggling borrowers by extending loan terms to 40 years, reducing interest rates and in some cases indefinitely suspending interest payments on a portion of each loan's principal.

The private equity group that agreed last month to buy IndyMac wants to build on that effort to "play a crucial role in resolving the current mortgage crisis" by providing "loan modification and workout services to owners of distressed mortgage portfolios," the investment group said in a purchase application filed in December with the U.S. Office of Thrift Supervision, IndyMac's regulator.

But that goal and the investors' interest, stated in the filing, in acquiring additional banks struck banking consultant Bert Ely as somewhat ambitious.

"One must crawl before one can walk, and one must walk before one can run. Are these folks getting ahead of themselves?" Ely said in an e-mail.

The investors, led by Steve Mnuchin of Dune Capital Management, include billionaire hedge fund operators George Soros and John Paulson, along with J. Christopher Flowers, a specialist in buyouts of distressed banks.

An IndyMac spokesman said the buyers would decline to comment on their plans until the transaction is completed "in the next few weeks." Officials at the Office of Thrift Supervision also declined to comment. FDIC officials couldn't be reached for comment.

The sale agreement calls for the buyers to provide $1.3 billion in new capital to IndyMac and includes a provision for the FDIC to absorb a share of the institution's future loan losses. The agency estimates that in the end IndyMac's failure will cost the federal deposit insurance fund as much as $9.4 billion.

In their filing, the investors said IndyMac, whose name they intend to change, would specialize in making jumbo mortgages, which carry higher interest rates because government-backed mortgage giants Fannie Mae and Freddie Mac can't buy them. The lender would keep the loans in its portfolio.

Jumbos, which were a core business for IndyMac, are currently defined as loans of more than $625,500 in designated high-cost areas such as coastal Southern California.

The filing also says the investors would look to expand IndyMac's 33-branch network while providing "high-quality, personalized" banking services suited to the tastes of affluent jumbo-mortgage customers.

IndyMac collects payments on about 650,000 residential first mortgages, some of which it owns but most of which it sold as fodder for mortgage-backed securities. About 10% of the loans are in foreclosure or at least 60 days in arrears.

As of Feb. 1, the lender had extended invitations to modify 38,205 loans and had completed modifications on 9,901 of the mortgages, an IndyMac spokesman said.


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