INDYMAC EXECS SUED BY THE FDIC

Well you have to give credit to Sheila Baer> She gets it. Here she is going after the IndyMac executives for making loans to developers that they knew would not be repaid. It is the first time that an important agency has recognized the link between the malfeasance of the originating lenders, the securitization intermediaries and the developers.

It is central to the issue of appraisal fraud. Anyone who moved into a new development knows that the developer was raising prices like crazy to create a a sense of urgency on the part of borrowers. Those prices from the developers were used an excuse to inflate the appraisals ona continual basis, so that a house of exactly the same model and features would be appraised one month for $350,000 and then a month later for $375,000 or more.

The developers knew they could do this because they knew the “lender” would approve it. It was a classic dysfunctional dance in which everyone was lying to everyone else. And everyone, except the borrower and the investor-lender knew it. Thus suits against the developer, especially those with mortgage offices on premises, can be expected to rise by both private actions and public actions from regulatory agencies and law enforcement. It was fraud.

INDYMAC EXECS SUED BY THE FDIC
Posted on July 13, 2010 by Foreclosureblues
latimes.com/business/la-fi-indymac-fdic-20100714,0,4893259.story

latimes.com
FDIC sues four former IndyMac executives
The agency accuses the managers of the defunct bank’s Homebuilder
Division of acting negligently by granting loans to developers who
were unlikely to repay the debts.
By E. Scott Reckard, Los Angeles Times

July 14, 2010

Launching a new offensive against leaders of failed financial
institutions, federal regulators are accusing four former executives
of Pasadena’s defunct IndyMac Bank of granting loans to developers and
home builders who were unlikely to repay the debts.

The lawsuit by the Federal Deposit Insurance Corp. alleges that the
IndyMac executives acted negligently and seeks $300 million in
damages.

It is the first suit of its kind brought by the FDIC in connection
with the spate of more than 250 bank failures that began in 2008.
Regulators said it wouldn’t be the last.

“Clearly we’ll have more of these cases,” said Rick Osterman, the
deputy general counsel who oversees litigation at the agency.

The FDIC has sent letters warning hundreds of top managers and
directors at failed banks — and the insurers who provided them with
liability coverage — of possible civil lawsuits, Osterman said. The
letters go out early in investigations of failed banks, he added, to
ensure that the insurers will later provide coverage even if the
policy expires.

The four defendants in the FDIC lending negligence case, who operated
the Homebuilder Division at IndyMac, collectively approved 64 loans
that are described in the 309-page lawsuit.

They are:

•Scott Van Dellen, the division’s president and chief executive during
six years ending in its seizure;

•Richard Koon, its chief lending officer for five years ending in July 2006;

•Kenneth Shellem, its chief credit officer for five years ending in
November 2006;

•William Rothman, its chief lending officer during the two years
before the seizure.

Through their attorneys, they vigorously denied the allegations.

“The FDIC has unfairly selected four hard-working executives of a
small division of the bank … to blame for the failure of IndyMac,”
said defense attorney Kirby Behre, who represents Shellem and Koon.
“We intend to show that these loans were done at all times with a
great deal of care and prudence.”

Defense attorney Michael Fitzgerald, who represents Van Dellen and
Rothman, said no one at the company or its regulators foresaw the
severity of the housing crash before it struck, and that IndyMac was
one of the first construction lenders to pull back when trouble struck
the industry in 2007.

Fitzgerald added that the FDIC thought Van Dellen trustworthy enough
that it kept him on to run the division after the bank was seized.

The suit naming the IndyMac executives was filed this month in federal
court in Los Angeles, two years after the July 2008 failure of the
Pasadena savings and loan. The bank is now operated under new
ownership as OneWest Bank.

IndyMac, principally a maker of adjustable-rate mortgages, was among a
series of high-profile bank failures early in the financial crisis
that were blamed on defaults on high-risk home loans and the
securities linked to them.

But the majority of failures since then have been at banks hammered by
losses on commercial real estate, particularly loans to residential
developers and builders — and IndyMac had a sideline in that business
as well through its Homebuilder Division.

The suit alleges that IndyMac’s compensation policies prompted the
home-building division to increase lending to developers and builders
with little regard for the quality of the loans.

“HBD’s management pushed to grow loan production despite their
awareness that a significant downturn in the market was imminent and
despite warnings from IndyMac’s upper management about the likelihood
of a market decline,” the FDIC said in its complaint.

An investigation of IndyMac’s residential mortgage lending practices
could lead to another civil suit, potentially naming higher-up
executives, attorneys involved in the case said.

Separately, a criminal grand jury investigation into the actions of
IndyMac executives continues, according to a knowledgeable federal
official who was not authorized to publicly discuss the investigation.

The bank, known mostly for providing home loans without requiring
proof of income from borrowers, had operated its builder-loan division
since 1994.

The lawsuit said IndyMac had about $900 million in land acquisition,
development and construction loans on its books when the bank
collapsed. Losses on the portfolio are expected to total $500 million
— minus whatever the FDIC can recover through litigation.

The FDIC’s Osterman said the government recovered about $5.1 billion
from former bank and thrift executives and their outside professional
advisors after the last major financial crisis devastated the savings
and loan industry in the 1980s. Most of the money came from insurers
that had written policies covering bank directors and officers against
negligence or other misdeeds.

Because the warnings of possible lawsuits are mailed out during the
early stages of investigations, it’s frequently decided later that the
cases aren’t strong enough to bring or aren’t likely to be
cost-effective and so are dropped, Osterman said.

FDIC spokesman David Barr said the agency generally had three years
from the date of a failure to file civil cases.

Tags: appraisals, developers, FDIC, INDYMAC, Sheila Bair
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