Mortgage Softness Hits Indymac Bank

Indymac Bank, an Indianapolis-based thrift that had a large business that depended on being able to sell loans to the secondary market, has seen a business downturn as a result of the problems in the subprime mortgage market, Executive Vice President and Chief Financial Officer Scott Keys said today at the Lehman Brothers Financial Services conference in New York.

“We started seeing indications of the [mortgage market] problems in the first quarter,” Keys said. IndyMac began tightening its lending guidelines during that quarter by restricting piggyback loans, closed-end secondary mortgages, and subprime loans. As a result, second quarter loan production was 31 percent lower than in the first quarter, Keys said.

The actions helped Indymac to eliminate more than 90 percent of its production credit costs and reduce delinquencies from 5.35 percent to 3.97 percent. But the unusual conditions in the mortgage market this year meant more needed to be done, said Keys. “In a rational, well-functioning market, the above actions would have been sufficient,” Keys said. “However, in panicked and illiquid markets, additional tightening was necessary.”

Indymac soon eliminated its lending conduit, all subprime loans except those saleable to Fannie Mae and Freddie Mac, all closed-end secondary mortgages and piggyback loans, and all other non-conforming loan production. Keys said further cuts are necessary, because the secondary market for even good loans has shrunk considerably.

Still to come are “significant” staffing cuts to “right-size” the business to better reflect the new, much lower expectations for loan production, Keys said. Keys foresees more risk sharing in the future, with loan originators and loan investors sharing the risk if a loan goes bad.