Mortgage lender IndyMac Bancorp Inc. will miss its fourth-quarter earnings target, Chief Executive Officer Michael W. Perry said in a letter to shareholders, because of increased credit costs, lower net interest margins, and a decline in return on equity.

Pasadena, Calif.-based IndyMac reported earnings of $86.2 million, or $1.19 per share, for the third quarter of 2006 — results driven by record mortgage production of $24 billion for the quarter, a 41 percent increase from the third quarter of 2005. Most of those loans — 62 percent — were so-called “exotic” interest-only and pay-option adjustable-rate mortgages. IndyMac was able to sell 81 percent of the loans it produced.

The company had expected to continue posting similar numbers, having previously estimated that earnings per share for the fourth quarter would fall between $1.30 and $1.40 per share. But Perry said the company now expects to report earnings of 97 cents per share when it files its quarterly results on Jan. 25.

Perry blamed the failure to meet projected earnings on an increase in credit costs related to the loan loss provision, and a reduction in net interest margin related to loans held-for-sale and the thrift investment portfolio due to yield curve inversion. Perry said IndyMac’s loan production mix also shifted more toward fixed-rate and intermediate-term fixed-rate loans — products that accounted for only 27 percent of third-quarter loan production.

Fourth-quarter profits were also hurt by a decline of the servicing and interest-only securities portfolio return on equity from a high level of 30 percent in the third quarter “to a more normalized level,” Perry said, and the forecasted sale of some securities (at a gain) that did not occur.

“This shortfall reflects the challenging times being faced by the mortgage and housing industries and the difficult nature of forecasting earnings in our business,” Perry said. “I have stated many times before that Indymac is not immune to deteriorating mortgage industry conditions, and it is clear now that during the fourth quarter industry conditions continued to erode.”

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