A Good Study Of How The Housing Crash Is Changing A Lender

I am not picking on IndyMac, the excerpts below from an article in the WSJ gives a good summary of the steps former big subprime lenders are going through to re-structure their business model to remain profitable. Many of these same steps are taken by other lenders appropriate to their size and percentage of their portfolio in the various mortgage products.

IndyMac Bancorp Inc. posted a wider-than-expected third-quarter loss as surging bad loans forced the company to pump up credit reserves by 47%.

The lender also warned about a "significant cut" in its dividend if it continues to lose money this quarter.

The stock initially rallied, which some analysts attributed to short covering, as some investors who previously borrowed the shares to make a pessimistic bet sought to cover those positions by purchasing the same stock to repay the lender. The stock, which has lost about 70% of its value this year, fell 28 cents, or 2.2%, to $12.49 at 4 p.m. yesterday in New York Stock Exchange composite trading.

IndyMac -- the ninth-largest U.S. home-mortgage lender by volume, according to trade publisher Inside Mortgage Finance -- posted a net loss of $202.7 million, more than five times wider than the Pasadena, Calif., lender had projected two months ago but much smaller than the $1.2 billion third-quarter loss posted by its bigger rival, Countrywide Financial Corp.

IndyMac Chief Executive Michael Perry blamed a sharp jump in past-due loans in September, including both home mortgages and loans to home builders. As a result, the company decided to set aside more money for future loan losses.

"Delinquency trends in September rose sharply versus even August at IndyMac and for the industry," he said, singling out "piggyback" loans, or loans taken out by those who don't come up with a significant down payment and so take out a second loan to cover the purchase price. Some of these second-lien loans are proving worthless as home prices fall. "We're writing them off," Mr. Perry said.

He said the percentage of IndyMac's loans to home builders that are "nonperforming" could rise to around 30% by the end of this year from about 10% as of Sept. 30. Builders have been hurt by plunging sales and prices amid a glut of homes on the market in some areas.

In the third quarter, IndyMac beefed up its credit reserves by $441 million to $1.39 billion. "It still looks like they don't have enough loan-loss reserves," said analyst Manuel Ramirez at Keefe Bruyette & Woods, pointing to the worsening credit quality in IndyMac's construction-loan portfolio and in option adjustable-rate mortgages, which allow borrowers to make minimal payments for the first few years.

Mr. Perry in September forecast that the company would become "solidly profitable" in the current quarter and beyond. He said yesterday that any quarterly losses would be "substantially lower" than the third-quarter loss, but added that a significant dividend cut would be "prudent and warranted if we are not profitable" this quarter.

During the third quarter, IndyMac turned its focus from "Alt-A" mortgages -- or near-prime loans -- intended for sale into the secondary market to mortgages eligible for sale to the two government-sponsored mortgage-finance giants, Fannie Mae and Freddie Mac.

The move raises questions about IndyMac's ability to make money on potentially far fewer -- and less profitable -- loans. Mr. Perry said he expects the company's retooled mortgage-production business to be profitable this quarter, "excluding credit costs from discontinued products and start-up costs from our retail-lending initiative."