IndyMac stock at $3-and-change as loan portfolio worsens

Wall Street continues to show no mercy to IndyMac Bancorp, even as other depressed financial stocks attract buyers.

The Pasadena-based mortgage lender’s shares fell for a seventh straight session today, to an 18-year low. The stock ended at $3.25, down from $3.39 on Monday.

While the average financial stock in the Standard & Poor’s 500 index is up 7.4% since March 31, IndyMac has slumped 34%. Shares of Southland-based lenders Downey Financial Corp. and FirstFed Financial Corp. also continue to be trashed.

IndyMac is the second-largest independent U.S. mortgage lender and long specialized in so-called alt-A loans, which on a quality scale were considered to be between prime and sub-prime. But the real estate biz has come to attach another label to alt-A: "liars’ loans," because borrowers often couldn’t document their income even though they typically had decent credit scores.

IndyMac has been reeling from soaring defaults on its alt-A portfolio since last summer. And the numbers are getting worse: In a report today, investment bank Keefe, Bruyette & Woods said its study of payment data on securitized IndyMac loans showed that 10.6% of the lender’s alt-A loans were delinquent 60 days or more this month, up from 9.5% in March and 7.7% three months ago.

And within the portfolio, option-ARM loans -- which give borrowers a choice of monthly payments, including so little that their loan balance rises -- "have shown the greatest deterioration over the past several months," Keefe said.

IndyMac isn’t discussing its portfolio status ahead of its first-quarter earnings report May 12, a spokeswoman said.

Meanwhile, the investment firm that had been IndyMac’s biggest shareholder voted with its feet last quarter: L.A.-based Capital Guardian Trust, which owned 9.2% of the shares as of Dec. 31, sold them all in the quarter, according to a filing with the Securities and Exchange Commission. Cap Guardian declined to discuss the sale. That kind of exit tends to speak for itself.

Photo: Nick Ut/Associated Press

Posted April 29, 2008

Comments

[silk road]

That data is for loans that indy securitized and sold off to investors. They are typically very high loan to value loans. Like other Thrifts, the loans which Indy chooses to retain for its own investment are much more conservative and much lower Loan To Value. Average Loan to Value was 76% for Indymac's loan portfolio held for investment.

[IMB Grunt]

The silence from inside the bank is deafening. In the past when there has been bad news we have had confident words from senior execs in the bank. Stay the course...things will get better...we have a great team and we're confident about our opportunities...keep plugging away. Now we hear nothing.

My poorly informed speculation is that the bank's executives are trying to find capital, but no one will invest in the bank without getting a substantial ownership interest. Current execs are not willing to give that up.

One interesting thing about the organization is that there don't appear to be any senior execs. older than 50. I don't think the people running the bank have ever been through a serious financial meltdown. Their worldview and business model are based on an assumption that the future is simply an upward trajectory. Some people gain a little wisdom as they age.

In my little corner of the bank I work with a lot of younger people who have never been through a serious downturn. They often express shock at how difficult the deals are to make "pencil" these days. One innocent youngster asked me, "Have you ever seen anything like this?" I said, "Oh yes...and I've seen much worse."

[GRL]

I am an individual investor who owns stock in Indymac.

I don't know who "IMB Grunt" is, if he or she works for Indymac, or what, but I wish to take issue with some of the things asserted in his or her 7:07 a.m. posting.

First of all, regarding the experience of management, the fact is they have been though tough times, or at least Perry has. As Perry has mentioned in numerous conference calls, back in the early '90's, Indymac was a mortgage REIT and had to change its capital structure to a bank holding company to avoid a "near death experience" in the form of having its repo credit lines pulled (kind of like what has just happened to Thornberg). Furthermore, Perry, at least, seems to be one of the more competent banking and thrift CEOs around.

Second, regarding the stock price, that it is down so much IS painful (I should know, I've owned it since 2002), but not the fault of management, in my view. In my view, the stock price is down because the business model the company is based on is under extremely severe stress for two reasons, which are related: (a) the secondary market for MBS has become essentially non-existent, which means they have to keep any loans they generate on their books (though they did recently do a sale to "reduce their balance sheet" per their discussion in their last conference call of how they were going to improve their capital ratios -- which in my view is quite an accomplishment in the current environment); and
(b) they recently had to change their product line from Alt-A to GSE-eligible mortgages only, because Alt-A can no longer be sold into the secondary market at all.

I shudder to think what would be happening if someone less able than Perry were in charge But, if you own the stock and you don't like Perry, you probably already know that you have the opportunity to voice your displeasure by voting to boot him off the board of directors at the annual meeting on May 12. For the record, I voted to keep him.

Third, regarding the need to raise capital, on the last conference call, they said that Indymac made the decision NOT to try to do so at this time because the market is so unfavorable, they don't really need it, and it would be EXTREMELY dilutive to existing shareholders. My understanding is that they cannot do what Citibank did (i.e., ask the sovereign wealth funds for an investment) because Indymac is not a "brand name" bank like Citi. So, they opted to stop the dividend and shrink the balance sheet instead.

If they had to raise more capital, one thing they could do is a "rights offering" to existing shareholders -- say the right to buy one new share at a set price for each share owned. That would also be extremely dilutive, but at least shareholders would have a choice.

On a related issue, Lehman just issued a report which says Indymac will need to do something like 1.6 billion in additional write downs over the next two years or so (they have already taken ~870 million, if my memory serves).

This report (and everything else I have read) seems to be of the view that, although things are and will continue to be tough for Indymac, it will be a survivor. For what it is worth, I agree with that assessment.

Hence, even though everyone thinks I am crazy, and despite the financial pain, I continue to own (and add to my position in) the stock, despite the horrible drop in price over the last several years. (Note: this is not a recommendation.)

So, for what it is worth, that is my view on Indymac.

[GRL]

Correction to above comment: The annual meeting is May 1, at 9:00 a.m. May 12 is the conference call.

[jeff]

I agree that this bank looks to be built like a survivor that will likely weather the current storm, thanks primarilly to strong management. Unfortunately, irrational market forces sometimes come into play in these situations, and the bank can easily get swept up in a reactionary frenzy. Each month that So Cal real estate prices decline, the bank's value will seem to decline in the eyes of investors. Unfortunately, we still have a LONG way to go before we hit the bottom, and this makes it VERYy important for Indymac Bank to begin identifying its strengths and diversification outside of this local R.E. market to its investors. If the bank fails to establish an impression that it can continue operations with another 20-50% drop in real estate values, then it will remain vulnerable to reactionary market forces.