Indymac Out of Mortgage Business

Monday afternoon, Indymac Bancorp, announced it would exit the mortgage origination business and lay off 4,000 exmployees.  The company stated it was unable to raise additional capital or sell assets and had no choice but to shutter its lending operations.  Indymac claimed that no bids existed or bid/ask spreads were too wide on its mortgages so it was unable to raise cash in that manner.  Tuesday, Indymac agreed to sell its retail mortgage branches to Prospect Mortgage.  The company went on to say that it was facing "elevated levels of deposit withdrawals".

Indymac's decline has not been terribly surprising, given that most of its rivals have either gone bankrupt (New Century, American Home Mortgage,) faced near-death (Thornburg) or were forced into a merger (Countrywide.)  What this news triggers should be more fear about what risks remain on the balance sheets of all US mortgages lenders.  If Indymac couldn't sell assets because no bids existed for the mortgages, what does this portend for Washington Mutual and Wachovia, who are stuck with multi-billion dollar portfolios of option arms?  What about Fannie Mae and Freddie Mac?  The issue aggravating the market is not whether Fannie and Freddie will need to raise $75 billion due to an accounting change.  It is whether Fannie and Freddie's assets will deteriorate markedly due to surging defaults.  Do they have adequate capital to cushion against unprecedented levels of stress on their portfolios?  With banks and lenders going belly up at every turn, it's no wonder that the market is starting to panic.  After all, the Fed can't bailout everyone.