IndyMac's solution to nobody wanting to buy their Alt-A liar's loan cancer? Hold on and pray.

A bit wonkish, but follow me...

So a mortgage company like IndyMac pays mortgage brokers to get suckers (oops, Home Debtors) to sign up for toxic "liar's loans", then repackages the hot potatoes and sells them off to the market (China, hedge funds, etc) as CDO's (collaterized debt obligations).

It was good business the past few years, when home prices were going up and it was tough to lose on a home.

Not anymore.

Now those toxic liar's loan Home Debtors (i.e. the Casey Serins and failed flippers of the world), with home prices plummeting, stop making the payments, and eventually just turn in the keys.

So the market that was buying up the junk got wise, that the loans ain't gettin' paid back, and now IndyMac has a choice - sell the hot potatoes on down the stream for significantly less than face value, or hold 'em and hope things turn around (yeah, right!).

An honest and ethical company if they chose Option B would increase their reserve for bad debt, and reflect the market value of their junk paper on their balance sheet. But IndyMac thinks they're above that. And we all know how this ends.

Yup, I'm short IndyMac via October put options. I'm betting they'll have to come clean by then (they do have auditors, don't they?)

This article spells it all out. Enjoy. One word: Enron.

Lending's next tsunami? Borrowers in the credit niche above subprime are missing more home loan payments. Another crop of lenders is trying to regroup and stem loan losses.

Michael Perry, chief executive of IndyMac Bancorp, is stubborn when it comes to delinquent loans.

He refuses to ditch them, even as they expand rapidly on the books of Pasadena-based IndyMac, which has two units based in Irvine and is the largest U.S. lender in a credit category dubbed "Alt-A," which is one level above the risky subprime niche. It turned in a company record of $90 billion in loans last year.

During an April 26 conference call with analysts, Perry said the company didn't sell a single dud loan in the first three months of the year because no one wanted to pay what he thinks they're worth. No way is IndyMac selling to a hedge fund for "pennies on the dollar," Perry said.
In that time, IndyMac's sour loans and foreclosed real estate ballooned 75 percent to $324 million.

"We are not going to fire-sell when we have the intent and ability and expertise to work through those loans and sell them ourselves," he said.

But Indymac and others who deal in Alt-A loans, such as Impac Mortgage Holdings of Irvine and Downey Financial of Newport Beach, may not have time to wait. The same problems shaking up the subprime market are now emerging in the Alt-A industry.

What's more, a Register analysis shows reserves for loan losses by these companies are not keeping pace with delinquent loans. Analysts say the same problem bedeviled New Century Financial of Irvine last year – and that helped send the once-top U.S. subprime lender into bankruptcy court after its financial backers lost faith in its accounting and liquidity.