Will HUD Face “Demand Claims” Because Of The IndyMac Closing?

by Peter G. Miller
July 16th, 2008

Last Friday IndyMac Bank was closed by the Office of Thrift Supervision and the Federal Deposit Insurance Corporation (FDIC) was named as the conservator. The firm had total assets of $32.01 billion and total deposits of $19.06 billion as of March 31st.

This is the fifth bank to fail this year and the potential cost is considerable. The FDIC says that “based on preliminary analysis, the estimated cost of the resolution to the Deposit Insurance Fund is between $4 and $8 billion.”

A major question is this: IndyMac owns Financial Freedom, one of the nation’s largest reverse mortgage lenders. What happens if someone has a reverse mortgage with Financial Freedom and money has not been paid to you? For instance, imagine if you have a line of credit and have the right to an additional $100,000.

The answer is that HUD is on the hook for the money. That’s the deal, that’s why you pay those hefty insurance premiums.

As we reported with Realty Times, at the start of the year the FHA had issued roughly 375,000 reverse mortgages and had just 1,609 losses. Not one claim was from a borrower — all claims were from lenders.

“There have been between 5,000 to 6,000 ‘assignment claims’ from lenders. Under HUD’s plan, lenders can make a claim when a loan has reached 98 percent of its maximum claim amount but is not yet due and payable. Of these assignment claims, only 109 resulted in losses to the FHA. Another 1,500 reverse loans simply went sour. Burns says there have been no ‘demand claims’ from borrowers as a result of lenders who have not fulfilled reverse mortgage obligations.”

At this early point no one knows what will happen to Financial Freedom. The view here is that the company is a valuable IndyMac asset and will be sold. As to the FHA-backed reverse mortgages it’s issued, if you’ve got one you’re fine.

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One Response to “Will HUD Face “Demand Claims” Because Of The IndyMac Closing?”

  1. Larry Morris Says:

    It will be iteresting to see what happens with their portfolio Jumbo loans. Since they are privately insured, they might not be as attractive to a buyer of Financial Freedom. When it’s all said and done, their brand might be their only real asset.