Foreclosure Crisis Prime Cause Of Collapse Of Indymac Bank

Posted on August 15, 2008
Filed Under Foreclosure Homes | Leave a Comment

The foreclosure crisis is the main cause for the collapse of IndyMac Bank. Few weeks ago IndyMac collapsed. This should be an eye opener for all, especially now when the foreclosure crisis is dictating matters, to know about banking and be more financially educated.

Putting money in the bank is not the same as hiding it in an old teapot in the kitchen. In the latter case one can take out the money whenever required. But when the money deposited in the bank is not insured, then if the bank fails the depositor cannot withdraw the amount. The insurance limit per depositor, per bank, as set by the feds is $100,000. It is $250,000 for retirement accounts. Beyond this point there is no surety or guarantee that the client will get back the cash until the bank sells its assets.

Living in the midst of the foreclosure tornado this information may unnerve many. But there are no signs that more banks will fail in the near future. In USA there are about 8,500 banks including savings and loan units. Till now 8 have gone under the bridge – with IndyMac being the largest. In 2007 there were three bank failures. In 2006 there were none according to FDIC. The latter backs the deposits of the banks of the nation.

The foreclosure crisis has meant a continuous struggle under the pressure of tightening credit and falling real estate. Before there are any more collapses it is better to be ready with the lifebelt and know how to put it on.

The most worrying factor is that a bank can fail without warning – like what happened to IndyMac. It had been suffering losses and its capital stock was being depleted but it was not even on the watch list of FDIC when the latter took it over. During the first quarter of this year 90 banks were on the watch list. Banking gurus says that about a 100 more are being closely watched as these are potentially at grave risk.

Towards the end of June, at the height of the foreclosure storms, Senator Charles Schumer (D-NY) had voiced concern about IndyMac. The bank had replied that it was working with the regulators to shore up its defenses. But its ‘safety and soundness’ did not stop investors from withdrawing $1 billion. On 11th July the situation became so critical that the federal regulators seized its assets. Photographs of depositors queuing up at the counters were reminiscent of the Great Depression.

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