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My Experience at IndyMac Bank

     By American Property Research Expert in Commercial Mortgage Fraud and Commercial Real Estate Appraisal

PhoneCall Vernon Martin, M.S.R.E., CFE at (323) 788 1605

This article discusses the conflicts of interest, including executive compensation, that resulted in the eventual failure of IndyMac Bank. It also discusses appraisal issues and the legal issues facing a discharged whistleblower.
IndyMac Bank was declared insolvent and seized by the FDIC in July 2008, at an estimated cost of $9 billion to taxpayers. 53% of its construction loans were in default.

I was the chief commercial appraiser for IndyMac Bank from October 2001 to the end of March 2002. The story of my experience there may provide some instructive examples about the unique conflicts of interest present in mortgage lending institutions and the protections in place for whistleblowing employees.

IndyMac originated as a spinoff from Countrywide Financial Corporation during the 1990s. It was first structured as a “mortgage REIT”, similar to New Century Financial and American Home Mortgage. Mortgage REITs are not depository institutions and must borrow the money that they lend. Wanting to reduce their cost of funds, IndyMac’s management sought a savings and loan charter so that they could start accepting federally insured deposits, which typically pay low rates of interest. The charter was approved in 2000 and IndyMac Bank was born.

Federally chartered savings and loan (“thrift”) institutions are regulated by the Office of Thrift Supervision (OTS) of the U.S. Department of the Treasury.

A chance encounter with OTS examiner Darryl Washington at a jazz concert led me to apply for the position of chief commercial appraiser at IndyMac. I knew Darryl from my days at Home Savings of America, where he examined my appraisal QC department each year. He said that OTS had just completed its first examination of IndyMac and had found a number of problems, including having no commercial appraisers on staff. By dropping his name, I was quickly hired at IndyMac. My experience being subject to his examinations seemed to be what IndyMac valued most in my background and qualifications.

When I started on 10/15/01, I was told that I had a month to familiarize myself with Indymac’s lending practices until the OTS showed up for re-examination. When I called the internal audit department for my former colleagues, I learned that the audit director had already resigned in an ethical disagreement she had with CEO Mike Perry.

At the end of my first week, there was an urgent need to field review an appraisal of a subdivision in the Sacramento area. I went up there on the weekend, but also took along some other recent appraisal reports from the Sacramento area. One of the other appraisal reports concerned me. A residential subdivision had been appraised as “80% complete”, but when I visited it, it had only been rough-graded, probably no more than 15% complete. When I returned to the office on Monday I asked who the construction inspector was for that region. I was told that there were two inspectors for the Sacramento area, Mike Perry’s father and father-in-law. The loan officer on the deal was Mike Perry’s younger brother, who had recently been hired. His previous experience had been as a cop. Thereafter, the chief credit officer advised me to take special care of Mike Perry’s brother.

I reported my Sacramento findings in a private memo to the chief credit officer, who then distributed it to the construction lending subsidiary known as the Construction Lending Corporation of America (CLCA). The response from CLCA was a somewhat chilling phone call from their senior credit officer. He asked “Are you sure you saw what you said you saw?” He said he had been on site with the Perry brother and had seen things differently. After that call, I asked the chief credit officer why CLCA’s senior credit officer would want me to recant my report. He told me that the senior credit officer received sales commissions for every loan made, which seemed like a blatant conflict of interest.

All appraisals were ordered by commission-compensated loan officers from a list of approved appraisers maintained by title company LandAmerica. I was not allowed to order appraisals, but I recognized many names on the LandAmerica list as well known, reputable appraisers. What I began to observe, however, was that loan officers were learning which appraisers were more “flexible” than others. My areas of concern were “extraordinary assumptions”, lack of feasibility analysis, and false information given to appraisers.

As an example, I read an appraisal of a vacant, former Costco warehouse which had been purchased for $2 million several months before, but was appraised for $16 million (without renovation) based on a rent roll composed of multiple tenants who had never signed a lease or letter of intent. I refused to approve this hypothetical appraisal. The loan was funded, any way. Only one tenant actually moved in.

One of the craziest violations of OTS regulations was underwriting loans based on appraised values well above purchase prices. For example, a prominent Sacramento developer purchased a piece of land for $18 million, in line with the market, but it was appraised and underwritten at a value above $30 million, the rationale being that this developer added value to the property just by buying it. This does not satisfy the federally mandated definition of market value, however. The appraisal firm was the same one used for the supposedly 80% complete subdivision.

My only substantive encounter with CEO Mike Perry was in November 2001. I was summoned late to an impromptu meeting of senior executives in the board room. When I arrived, the meeting was already underway. The tone of the meeting was very different than senior executive meetings at other companies I had worked for. Mr. Perry, a man in his thirties, was spinning ideas and executives who were 10 or 20 years his senior seemed to be competing to agree with his ideas. There were lots of raised hands and enthusiastic participation. Perry seemed to be enjoying this in a megalomaniac way.

Then he turned to me with an idea. He asked me if I, as the chief commercial appraiser, had the regulatory authority to change the discounted cash flow models in each subdivision appraisal, which might have the effect of changing appraised values. I said that I could possibly do it, but why? He smiled and said "Don't housing prices always go up?" (Was he really too young to remember the early 1990s?)

I told him that it was’t a good idea, because we were already hiring competent appraisers who had more local knowledge than I had. Unless I could show that their analysis was flawed, it would be inappropriate for me to change the appraisals. That answer seemed to anger him.

I later learned that Mike Perry was hired as CEO of IndyMac at the age of 30. He had previously been an accountant at Countrywide and a protégé of Countrywide founders David Loeb and Angelo Mozilo.

Many mortgage-lending institutions rewarded their CEOs and COOs with incentive-based compensation that dwarfed their annual base salaries and encouraged them to do whatever was necessary to increase the stock prices of those institutions. IndyMac CEO Mike Perry, for instance, had an annual salary of one million dollars per year, but his incentive-based compensation (bonuses and stock options) were many times as high. Perry earned over $32 million by selling IndyMac stock from 2003 to 2007, in addition to performance bonuses which were typically 75 to 100% of his base salary.

An IndyMac press release on September 22, 2006, “IndyMac Signs Long-Term Contract with High-Performing CEO, Michael Perry,” plainly explains the radical difference in future (year 2007) compensation to Perry under various scenarios, with his total compensation limited to $1,250,000 for EPS growth of less than 5%, but compensation of $8,943,000 for EPS growth of 17%.

Making and selling loans would the easiest way of meeting such a financial goal, even if the loans were unsound.

When the OTS arrived mid-November, my appraisal review duties were handed over to LandAmerica and I was to spend full time responding to findings from the OTS examiner. In the ensuing month it became increasingly obvious that the main reason I was at IndyMac was to refute OTS findings and serve as window dressing for an institution that scoffed at or was wholly ignorant of federal regulations. Many, if not most, of the senior executives had come over from Countrywide, which was an unregulated mortgage bank.

I was present at several confrontational meetings between the OTS and FDIC examiners and CLCA executives. It seemed that IndyMac was intent on refuting every finding and using me towards that end. I was criticized for not arguing enough with the examiners.
After the examination was over, there was an unsolicited appraisal report waiting for me on my desk. A piece of land next to an airport had recently been purchased for $24,375,000 and was almost immediately appraised for more than $65 million based on the owner’s plans to build an airport parking lot. This was three months after September 11th, 2001 and average parking lot occupancy at this airport had declined from 73% to the low fifties.

The appraisal lacked a sales comparison approach and its feasibility analysis was based on pre-September 11th data. I was also aware that both the appraiser and the feasibility consultant had caused losses at other institutions, and I suspected bias. The report was also delivered less than a week after it was ordered by the loan officer, leading me to suspect that it had already been completed for someone else, most likely the borrower. I told CLCA executives that I could not accept the report and that I considered it to be biased. I tried to get the appraiser to change the report, but he immediately called the chief lending officer, who then instructed him to ignore my request.

Despite my stated objections to the appraisal report, the chief lending officer told the Loan Committee that I had ordered and approved the appraisal, and they funded a $30 million loan. Thereafter, there was sustained pressure on me to approve the report. I responded that I would have to write my own report, since the original appraiser would not make changes. This bought me time. Meanwhile, the airport, who had previously owned 80% of the parking spaces in the area, was suing the developer and erected a fence to keep people from walking from the parking lot to the terminals.

The chief lending officer also pressured me to accept another unsolicited appraisal of a Sacramento-area subdivision. This report was based on an “extraordinary assumption” that a road led to the subject property. When I went up to Sacramento to see the property, there was no road.

In January 2002 I went to Sparks, Nevada, to review an appraisal of the last phase of a condominium project. The first phase, with condos on the golf course, was a success, but the last phase was on the opposite side from the golf course and actually sloped below grade. The appraiser made an $8000 downward adjustment for each unit, and I questioned whether $8000 was adjusting enough. That provoked warnings from several executives, including the chief credit officer. The developer was buying the land from David Loeb, IndyMac’s Chairman of the Board, and I was warned that challenging this deal could get me fired. Soon after, the chief credit officer came to my office with a representative from human resources to announce that my initial 90-day probation would be extended for another 90 days, as CLCA executives had complained about my lack of cooperation with them. The HR rep had a look of horror on her face the whole time he delivered this message.

I finally finished my own airport parking lot appraisal report in late March, the same week that the Bush Administration laid off most of the OTS examiners. I don’t know which event precipitated my termination. My appraised values were considered insufficient to support the $30 million loan.

Indymac gave me two weeks’ notice of my impending termination and offered me $25,000 severance pay if I turned over all documents and signed a non-disclosure agreement. I told them that state law required me to keep records of all of my appraisals and reviews, and that $25,000 was not enough.

After a few days of seeing that I was not cooperating, I was summoned to a final meeting with the chief legal officer and “chief people officer”. A written statement indicated that I was being terminated for having a “communication problem”. No examples of my communication problem were presented. (I later recounted, during a deposition, that I was left alone with the chief legal officer for a few minutes of awkward silence. I then asked him, “Doesn't’t it bother you that I am being fired for a communication problem without any evidence against me?” He said, “Not at all.” This cracked up my attorney.) After the meeting, I was escorted back to my office by a large security guard to collect my personal belongings, and then I was escorted out of the building.

During these last days I contacted Darrel Dochow at OTS about the abuses going on at IndyMac. He and two colleagues flew in to Burbank to meet and debrief me. Later, the OTS paid a special visit to IndyMac and called for an internal audit to investigate my allegations. The first audit was considered a whitewash, and the OTS called for a re-audit. Interestingly enough, there was even a document produced that supposedly indicated my approval of the appraisal of the “80% complete subdivision”.

The second audit corroborated most of my allegations and the OTS called for certain personnel changes. The president and senior credit officer of CLCA were ousted; the chief lending officer had his loan approval privileges removed. Chairman of the Board David Loeb suddenly and coincidentally retired at the same time. He died 5 months later.

I had an excellent attorney. Besides suing for wrongful termination, he showed me that I could actually sue for discrimination. Many states, including California, have laws that prevent discrimination against employees who are upholding public policy, which was the very reason that got me fired. Other bank employees should take note of this. OTS regulations are public policy, as are the basic Federal fraud statutes in Title 18 of the U.S. Code. (Section 1014 covers willful overvaluation of real estate in loan applications.)

In response to interrogatories sent during the litigation, the only evidence of my “communication problem” provided was a memo from me about a borrower “trying to deceive us” and a memo from a loan officer complaining that I actually called Union Pacific Railroad concerning one of his deals, a subdivision being built close to a railroad right-of-way. I was told by the loan officer that the track was no longer used, but Union Pacific disclosed to me that it was still being used once a day during the evening hours.

Most of this information is already publicly disclosed in my lawsuit, filed 7/15/02 in Los Angeles Superior Court, Case Number BC277619, for anyone wanting further details. As for the results of that lawsuit, the only thing I can legally say is that “the matter has been resolved to the mutual satisfaction of both parties”.

Here are some lessons learned from this experience:

1. The combination of stock markets rewarding rapid growth and the compensation of key officers based on loan commissions and short-term earnings growth creates conflicts of interest. Today’s financial industry meltdown is a product of these conflicts of interest.

2. A mortgage lending institution needs to have appraisal ordering and review done without any interference from commissioned loan salespeople or senior managers dependent upon loan production bonuses.

3. Bank employees should know that “doing the right thing” is the only logical course of action, despite the short-term pain that might result. In September 2008 I was summoned by criminal investigators to the former IndyMac headquarters. I am glad that I could face them as a former chief appraiser who followed the rules than as the current chief appraiser facing the prospect of unemployment, accusations of complicity in fraud, and the stigma of a bank failure on my reputation.

ABOUT THE AUTHOR: Vernon Martin, M.S.R.E., CFE
Vernon Martin, CFE, is the principal and founder of American Property Research, a valuation and advisory firm serving commercial mortgage lenders. He is a Certified Fraud Examiner (CFE) and certified general appraiser in several states and has a Master of Science in Real Estate degree from Southern Methodist University and an undergraduate degree in Urban Geography from the University of Chicago. He has previously functioned as the chief commercial appraiser at Home Savings of America, IndyMac Bank and Velocity Commercial Capital. He teaches part-time at California State University and has published in The Appraisal Journal, The Banking Law Journal, Real Estate Review, The RMA Journal, Fraud Magazine and Mortgage Banking.

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While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer.
For specific technical or legal advice on the information provided and related topics, please contact the author.

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