Citing continued weakness in the U.S. residential mortgage market and the “virtual absence of a private, secondary mortgage market,” analysts at Fitch Ratings today downgraded the long-term issuer default rating of Indymac Bancorp Inc. to junk status.
Indymac, which posted a $202.7 million third-quarter loss, announced last week that it would lay off 2,403 workers, or about one in four employees. The alt-A lender has been hard hit by the reluctance among secondary market investors to buy mortgages unless they are eligible for guarantee or purchase by Fannie Mae and Freddie Mac.
In a press release, Fitch analysts said Indymac’s return to profitability “will be challenging as changes in mortgage industry dynamics, once viewed as temporary, become more permanent.”
Indymac saw loan production fall 30 percent in the third quarter, to $16.8 billion, after fears about rising mortgage defaults and falling home prices disrupted the market for securities backed by mortgages and other debt in August. In announcing the layoffs, Indymac officials said they expect to make about $43 billion in loans this year, less than half the business booked in 2006.
Although home sales have slowed, another reason Indymac is projecting such a dramatic reduction in loan originations is that, like other lenders, the disruption of the secondary mortgage market has forced the company to concentrate on originating loans that are eligible for purchase by the government-sponsored enterprises Fannie Mae and Freddie Mac.
Fannie and Freddie have tightened their underwriting guidelines, and capital constraints limit the number of higher-yielding, nonconforming loans Indymac can keep on its own books, Fitch analysts said.
About 75 percent of the $4 billion in loans Indymac originated in November were GSE-eligible. Prime, jumbo loans exceeding the GSEs’ $417,000 conforming loan limit accounted for a more modest $600 million in originations (see Inman News story).
Although Indymac is working to “right-size costs” and maintain adequate capital, and has “taken decisive steps to address credit quality and improve profitability,” it may take some time for the results to show up in the company’s bottom line, Fitch said.
Fitch analysts downgraded Indymac Bancorp and Indymac Bank FSB’s long-term issuer default ratings two notches, from BBB- to BB, and took action on several other ratings at both companies affecting $440 million in debt.
Additional downgrades are possible “should credit quality worsen beyond Fitch’s expectations or continue to materially impact profitability.
Moody’s Investors Service, which had previously lowered its issuer rating for Indymac Bancorp to B1, said Wednesday it was withdrawing its ratings on Indymac Bancorp and Indymac Bank “for business reasons.”
In a statement, Indymac spokesman Grove Nichols said Moody’s withdrew its ratings at the company’s request. Indymac does not rely on corporate debt markets for funding, Nichols said, and “the presence of the ratings and the actual level of ratings has no impact on our ability to access deposits or Federal Home Loan Bank advances” — the primary sources of the company’s $6 billion in liquidity.
When staff time to supply information to Moody’s is included, Indymac spends about $350,000 a year to obtain ratings from the rating service, Nichols said. As the company looked at ways to cut costs, “we concluded that maintaining ratings with all ratings firms does not make business sense, and their continual downgrades created more perception risk than reality. Since our relationship with Moody’s was approximately a year old, we chose to terminate this relationship.”
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