MORTGAGE INDUSTRY UPDATE

Over the past several days the sub-prime crisis has created more turmoil in the banking and mortgage industry. In the biggest bank failure of the housing downturn to date, federal banking regulators closed IndyMac Bank FSB last Friday, naming the Federal Deposit Insurance Corp. as conservator.

The FDIC said it will transfer insured deposits and "substantially all the assets" of IndyMac Bank, to a newly created successor, IndyMac Federal Bank, which will be operated by the FDIC. Insured depositors and borrowers will automatically become customers of IndyMac Federal, FSB and will continue to have uninterrupted customer service and access to their funds. This is exactly the way the FDIC system is supposed to work.

IndyMac was one of the nation's largest independent mortgage lenders, and had been hard hit by delinquencies and foreclosures. Parent company IndyMac Bancorp Inc. announced Monday that it was no longer considered "well capitalized" by regulators and had stopped making most mortgage loans.

This failure has led to speculation that Fannie Mae and Freddie Mac may also be in trouble. However, Washington won’t let Fannie Mae or Freddie Mac fail. But there will be a cost. Policymakers’ choices are agonizing: They could do nothing and risk free fall in both the financial and housing markets or bail out the mortgage giants, eroding free market integrity and saddling taxpayers with a huge liability. For decades, the two companies operated under different rules than rivals, enjoying unspoken but openly accepted government backing. That will soon change as lawmakers and regulators insist on tough reforms. Fast action by the Federal Reserve and Treasury Department will avert a meltdown.

Senate lawmakers signed off on a bill on Friday that would modernize the Federal Housing Administration and expand FHA loan guarantee programs by $300 billion, create a new regulator for Fannie Mae and Freddie Mac, and create an $8,000 tax credit for first-time home buyers. Stay tuned for more details as this legislation moves through Congress.