IndyMac Bancorp Inc. will shed 1,000 employees, or about 10 percent of its workforce, in the next several months as it limits loan production to those eligible for repurchase by government-sponsored mortgage repurchasers Fannie Mae and Freddie Mac.
IndyMac announced today it could post third-quarter losses of 50 cents per share, or $38 million, because of illiquidity in the secondary markets and widening spreads for all mortgages not eligible for sale to the government-sponsored entities (GSEs) Fannie and Freddie.
“We do anticipate that this quarter will represent the trough for our earnings during this current down cycle, as we have largely converted our mortgage production to a GSE-eligible model,” IndyMac Chief Executive Officer Michael Perry said in a letter to investors.
Perry said IndyMac is not in danger of losing its ability to fund loans, and expects to return to profitability in the fourth quarter and into 2008.
IndyMac was “only minimally exposed to subprime lending,” he said, and the company’s conversion into a thrift charter helped it avoid selling assets at heavy discounts, “in stark contrast to many other mortgage lenders and investors.”
This week, National City Corp., Countrywide Financial Corp. and Lehman Brothers announced plans to lay off more than 3,000 workers.
In the first quarter of 2007, IndyMac began tightening guidelines and reducing the number of risky loans on its books. Guidelines were tightened on piggyback second mortgages, closed-end seconds and subprime loans, reducing second-quarter loan production by about 31 percent.
IndyMac was able to reduce the percentage of loans delinquent by 30 days or more from 5.35 percent to 3.97 percent. Standard & Poor’s recently reaffirmed its ratings on 99.8 percent of Alt-A bonds issued in 2005 and 2006, as industry losses on subprime loans are about 12 times greater than Alt-A loans, IndyMac said, citing data from First American Loan Performance.
“In a rational, well-functioning market, (the actions IndyMac took) would have been sufficient,” the company said in a Securities and Exchange Commission filing updating investors. “However, in panicked and illiquid markets, additional tightening was necessary.”
With private investors shying away from all but the safest mortgage loans, IndyMac decided to eliminate all subprime loans, with the exception of those it could sell to Fannie Mae and Freddie Mac, stopped funding any piggyback and closed-end second loans, and “significantly curtailed” home-builder construction lending.
In 2006, IndyMac sold 77 percent of its $82 billion in loan production through whole loan sales or private-label securitizations, disposing of another 19 percent through Fannie and Freddie and retaining just 4 percent of loans in its own portfolio.
In the third quarter, IndyMac forecasts it will be forced to hold 32 percent of the loans it originates, and that it will sell just 20 percent of loan production to private investors through whole loan sales and private-label securitizations. IndyMac plans to make no whole loan sales or private-label securitizations at all during the fourth quarter, instead retaining 15 percent of its loans for investment and selling the remaining 85 percent through the GSEs.
The company estimates that 51 percent of loan production will be Alt-A loans eligible for purchase by the GSEs, while another 24 percent will be conforming GSE loans, including FHA- and VA-backed loans.
About 9 percent of fourth-quarter loan production is expected to be reverse mortgages — most FHA-backed — and another 8 percent of loan funding in the fourth quarter is expected to be prime jumbo loans. IndyMac expects to pare consumer construction loans to 7 percent, and home equity line of credit (HELOC) loans will constitute just 1 percent of loan production.
IndyMac got two “big things” right, Perry said in his letter to investors. The thrift was only “minimally exposed” to subprime lending, and converted to a thrift charter and put 100 percent of the company’s assets, liabilities and operations into the thrift, “substantially reducing our liquidity risk,” Perry said.
Perry said the value of IndyMac’s thrift charter “can not be underestimated,” and the company has been keeping its primary federal regulator, the Office of Thrift Supervision, “fully up to date on our operations, financial positions and prospects.” So far, he said, “we have not been asked by our regulators to change our business or financial position.”
Perry said the underlying fundamentals of the mortgage and housing markets are much tougher today than in 1993 and 1998, but that the company “is much better positioned today than we were back then.”
In 1998, IndyMac was structured as a mortgage real estate investment trust (REIT), and had to shrink its balance sheet from $7.4 billion to $5.7 billion as a result of a global liquidity crisis, Perry said. The company reorganized as a savings and loan, converting its mortgage production from a high-volume, low-margin conduit platform to a broker-based, wholesale platform built around an automated loan underwriting, pricing and rate-lock system.
During the current downturn, Perry said IndyMac has built a retail lending group of almost 1,500 employees, despite having “virtually no retail lending presence” a year ago.
IndyMac announced in August that it was hiring hundreds of former American Home Mortgage Investment Corp. employees as part of its expansion of its retail lending group.