Last year “was a terrible year for our industry, for Indymac and for you, our owners,” IndyMac Bancorp Inc. Chief Executive Officer Michael Perry said today in a letter to shareholders as the alt-A lender reported a $509 million fourth-quarter loss.

Increased provisions for future credit losses drove IndyMac’s fourth-quarter loss, with credit reserves growing 71 percent from the previous quarter, to $2.4 billion — a more than four-fold increase from a year ago. IndyMac also reported losing $321.8 million on the sale of $13.4 billion in loans during the fourth quarter.

“As I write this note, over 225 independent mortgage companies have failed and over 100,000 jobs have been lost in our industry,” Perry said in the letter, which also noted the pending sale of Countrywide Financial Corp. to Bank of America, and billions of losses at Fannie Mae and Freddie Mac.

IndyMac’s losses for the year totaled $609 million, the first annual loss in the company’s 23-year history. Although the company expects to return to profitability in the second quarter, it must raise capital and downsize to survive the downturn.

To raise capital, IndyMac will eliminate dividends to shareholders and shrink its balance sheet, Perry said. Having already raised $676 million in capital during the fourth quarter, he said the company remains adequately capitalized for now.

After implementing a hiring freeze in 2006, IndyMac laid off 382 workers in July, with another 1,165 employees accepting voluntary severance packages in September. That was followed by the announcement last month that IndyMac was closing six regional mortgage centers and eliminating 2,563 positions (see Inman News story).

IndyMac said it has stopped making the loans that accounted for 90 percent of 2007 net losses, including home equity, subprime, conduit and builder construction loans.

Perry said IndyMac will no longer make adjustable-rate mortgage (ARM) loans with initial fixed terms of less than five years, loans with negative amortization, or limited-documentation loans unless borrowers have $50,000 in liquid assets or $250,000 in net worth.

Some 87 percent of IndyMac’s loan production in the fourth quarter included loans backed by FHA or VA loan programs or eligible for purchase by Fannie Mae and Freddie Mac, compared with 26 percent during the first quarter.

Tightened underwriting standards and reduced demand for loans helped push single-family mortgage loan production down 53 percent in the fourth quarter, to $12.1 billion, compared with $25.9 billion a year ago and $16.8 billion for the third quarter of 2007. The pipeline of mortgage loans in process ended the year at $7.5 billion, down 37 percent from a year ago.

Restructuring costs and losses on the loans IndyMac has stopped making are expected to keep the company in the red during the first quarter, but the company projects it will turn a modest profit in the remaining three quarters and recoup a projected $38 million first-quarter loss post net income of $13 million for 2008.

Nonperforming assets totaled $1.51 billion at the end of the year, or 4.61 percent of assets, and aren’t expected to peak until the second half of 2008, at 7.5 percent to 8 percent of assets.

IndyMac is using forecast models that assume an additional 8 percent to 10 percent decline in home prices from today’s levels, in line with forecasts by Moody’s If losses are higher than projected, IndyMac could lose money for the year and see its risk-based capital fall below the “well capitalized” 10 percent limit, the company warned.

But 2008 could also turn out to be a better year for IndyMac than projected, as the company’s loss mitigation efforts improve and if low interest rates spark a refinancing boom. IndyMac also expects to benefit from an agreement by Congress and the Bush administration to give Fannie, Freddie and FHA the go-ahead to back bigger loans that formerly exceeded their limits (see Inman News story), and the potential for investors to return to the secondary market for private-label mortgages.

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