A Pig Through a Snake

The carnage and destruction of the mortgage industry continues – with no end in sight. Just days after Countrywide became part of Bank of America on July 1, Indymac Bancorp, the 11th largest producer of US home mortgages, suspended their lending operations yesterday and immediately stopped accepting any new retail or wholesale mortgage applications.


The company posted the first annual loss in it’s 23-year history last year, and it’s stock price, having been as high as $31.50 during the past year, closed at 71 cents yesterday. (The chairman, feeling the heat, asked the board of directors to cut his salary in half to a razor thin $500,000 per year. Who says executives are out of touch?)


The real issue though, is the reason that Indymac was forced into this course of action.


They have been unable to raise any new money to lend.


In fact they saw a substantial net outflow in assets.


And unfortunately, both of these are looking more and more like trends in the industry rather than isolated incidents.


And it gets worse. Lenders get funds to lend in three ways – by accepting deposits, by issuing debt, and by selling more stock in the company.


As we talked about, many lenders are seeing decreases in deposits, which leads to less money to lend.


The mortgage “crisis” has also whacked the credit ratings of most lenders. And you know how hard it is to get more debt when you have bad credit. And when you get it it’s unbelievably expensive. So this was of getting funds to loan out isn’t practical.


And finally, these lenders could sell more stock and raise money that way. But – just about all of their stock prices are trading at or near historical lows, which is the worst possible time to sell stock (even if they could convince people to buy it). So this is not an option.


So all we’re left with is – waiting.


This problem is kind of like the pig-through-the-snake. We just have to wait for the market to digest all that has happened. And until then, the housing market is going NOWHERE.


Because like it or not, the lenders are really the ones in control of the housing market.