World's Largest Mortage Companies Headed for Collapse

Stories about the international stock market collapse are becoming a daily occurrence. Read any of the major financial websites or watch Business Network News on cable and the word from "the street(s)" just keeps getting worse. As in the past small investors are getting wiped out first. In China approximately two trillion dollars (that's 2 x 1012) has disappeared from market valuations in one year. About a quarter of that went down last Thursday in the form of A-share capitalization. Total losses amount to about 56 percent of the entire Chinese GDP. A survey sponsored jointly by Chinese state television and various local websites had received questionnaires from 764,588 investors by 11 a.m. on June 18. The results indicate that 92.5 percent of the investors suffer from losses, 4.3 percent make a profit, and 3.2 percent can break even. Among the investors who lost money this equals on average more than 50 percent of their financial assets. The following item from the UK Independent concerns another American bank collapse and the possibility of another bailout for the "private/public" mortgage firms nicknamed Fannie Mae (Federal National Mortgage Association) and Freddie Mac (Federal Home Mortgage Corporation).

America's regulators were last night shoring up the country's financial defences, after one of the biggest bank failures in US history sparked fears about the viability of the world's largest mortgage providers.

The Northern Rock-style collapse of California's Indymac Bank, which had assets of $32bn (£16bn), came amid speculation that regulators are also preparing to step in to save the two federally-backed finance houses known as Fannie Mae and Freddie Mac, which together have commitments of $5 trillion, amounting to half of America's mortgage book.

Government officials closed down Indymac late on Friday, citing a massive run on deposits by worried customers. All 33 branches of the Pasadena-based bank closed three hours early, locking out hundreds of jittery investors hoping to withdraw their savings before it went under.

Amid chaotic and often angry scenes, it emerged that Indymac will reopen tomorrow as Indymac Federal Bank. According to a two-page notice taped to branch doors, it had been in an "unsafe and unsound condition" and was unable to meet continued demand by customers for their deposits. The Federal Deposit Insurance Corporation, a government regulator, will guarantee all deposits of up to $100,000 – a commitment that may nonetheless leave more than 10,000 savers out of pocket

Indymac, known ironically as a "thrift" bank, becomes the second-largest savings firm in US history to go under, after the Continental Illinois National Bank and Trust Company, which collapsed in 1984. The latest failure was caused by massive losses in the so-called "foreclosure crisis", which has seen huge numbers of property owners defaulting on mortgages taken out at the height of the property bubble.

Many sub-prime borrowers unable to meet their mortgage payments had their homes reclaimed by the banks, who sold them off to the highest bidder. When the housing market was rising, this allowed banks to recoup their losses. But with house prices now down between a quarter and a third from their peak – and still falling as the market becomes flooded by bank-owned properties – the markets are not far from full-scale panic.

The growing crisis is threatening to engulf Freddie Mac and Fannie Mae, both of which halved in value in two days at the end of last week. This sparked rumours that Federal Reserve officials – whose rescue of Bear Stearns earlier in the credit crisis was announced on a Sunday – would undertake a similar operation this weekend.


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